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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For fiscal year ended December 31, 1996
[ ] TRANSITION REPORT UNDER 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
INDUSTRIAL SERVICES OF AMERICA, INC.
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(Exact name of registrant as specified in its charter)
Florida 59-0172746
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
7100 Grade Lane, P.O.Box 32428, Louisville, Kentucky 40232
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(502) 368-1661
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Securities registered pursuant to Section 12(b) of the Act: None
Title of each class: Name of each exchange on which registered:
Not Applicable Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
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(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. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the Registrant is $7,040,588 as of March 20, 1997.
The number of shares outstanding of the Registrant's class of common
stock is 1,929,600 shares as of March 20, 1997.
DOCUMENT INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Shareholders to be held on May 23, 1997, are incorporated by reference
into Part III of this report.
PART I
ITEM 1. BUSINESS
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GENERAL
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Industrial Services of America, Inc. (the "Registrant") is
an integrated solid waste management consulting company engaged
in the business of retail and industrial waste management and
waste handling equipment sales and service. The Registrant is
able to offer a "total package" concept to retail and industrial
clients to cover their waste management 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 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. By carrying limited
inventory, the Registrant reduces overhead and passes the savings
to the customer. The waste management services offered by the
Registrant include locating a hauling company at a reasonable
cost for each respective location for any retail customer chain
on the management program. Because the Registrant is not a
"waste transporter," it is able to maintain a neutral position.
The proprietary computer software designed and developed by the
Registrant for information throughout the United States puts
relevant customer information within reach of Registrant
personnel. The Registrant also manages a recycling operation for
an affiliated company, for which it retains a percentage of the
operating profits.
The Registrant plans to grow by expanding its marketing base
and seeking future joint ventures and acquisitions of companies
in related businesses. The Registrant continues to target
industrial customers throughout the United States for the purpose
of increasing its industrial clientele. Although the number of
locations of each customer will generally be less than with large
retail chains, the Registrant believes that it can provide
substantial savings for each industrial location, thereby
justifying larger management fees. With industrial clients,
there is also a greater possibility of large equipment orders as
the solid waste output for each individual industrial location is
generally greater than for retail clients and the corresponding
need for appropriate equipment is greater.
The Registrant has developed nationwide coverage through its
computer system designed to integrate information pertinent to
its waste management services throughout the country. This
system provides the Registrant access to hauling and disposal
rates as well as equipment, installation, and shipping costs.
The Registrant has the ability to estimate cost savings to
potential customers by reviewing their current waste hauling
invoices nationwide or a regional sampling thereof.
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 on a federal, state and local level. These
more stringent regulations continue to drive prices higher
throughout the industry. With these ever-increasing costs
relating to solid waste disposal, retail and industrial customers
are realizing that waste disposal is quickly becoming one of
their biggest expense items and perhaps the most difficult to
contain. The Registrant believes these increased costs will
enhance the value of the Registrant's services. Through the
retention of the Registrant's services, customers will be able to
"outsource" their in-house waste needs to an independent source
capable of lowering and containing waste disposal costs.
In April 1992 the Registrant entered into a management
agreement with K & R Corporation ("K & R") a Kentucky
corporation. K & R is an affiliated company of the Registrant
and solely owned by the Registrant's principal stockholder, Harry
Kletter. Under this management agreement, the Registrant is
responsible for the management of the scrap and corrugated paper
recycling for K & R and in addition purchased certain rental
equipment and scrap metal inventories from K & R. For its
management efforts, the Registrant retains 80% of the profits
generated from the K & R operation(s) pursuant to an amendment to
this management agreement, dated as of October 30, 1995, and
effective as of January 1, 1996. From July 1, 1994 to December
31, 1995, the management agreement provided that the Registrant
was to retain 60% of such profits. During 1996, 1995 and 1994,
revenue derived under this arrangement resulted in income before
provision for income taxes to the Registrant totaling $712,765,
$728,391 and $141,798, respectively.
REGISTRANT BACKGROUND
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The Registrant was incorporated in October 1953 in Florida
under the name Alson Manufacturing, Inc. From the date of
incorporation through January 5, 1976, the Registrant was
involved in the designing and manufacturing 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 President of the Registrant, acquired 419,500 share 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 operates primarily through WESSCO and CWS,
which work 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 has attracted some customers planning
expansion programs. Some of these 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 1000 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 derives a significant portion of its revenues
from two primary customers. 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
lessened by the Registrant's expansion of its customer base.
However, there can be no assurance that if the Registrant were 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
consulting services relating to recycling and waste stream
analysis. The main advantage to offering consulting 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 consulting and/or any
subsequent implementation is complete. By offering consulting
services, the Registrant is able to pursue additional customers.
The Registrant's sales/marketing emphasis has shifted from
traditional management services offered to multi-location retail
customers to industrial/manufacturing customers. The Registrant
believes that the profitability of its operations will be
enhanced through the procurement of these accounts. Once a new
system or methodology has been initiated, the need for the
Registrant's traditional services continues. These services can
be offered on a discounted basis since the consulting "retainer"
is usually substantial. There is also an opportunity to sell new
equipment since many industrial clients have obsolete or
inappropriate systems in place.
During 1996, the Registrant committed approximately
$1,000,000 towards capital improvements with respect to its
operating facilities. A significant portion of such funds was
used to purchase a scrap metal baler, a waste paper baler with
related conveying equipment, a mobile hydraulic crane and
additions to the rental/lease fleet of equipment. The
acquisition of these new materials processing equipment has
enhanced operating efficiencies and created additional capacity
for new and expanded business opportunities.
EQUIPMENT LEASING/WESSCO
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The Registrant leased approximately 55 pieces of solid waste
and recycling equipment to customers in 1996 with a subsequent
increase in monthly rental income to the Registrant of 46% as
compared to the same period in 1995. 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,
Registrant 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.
MOROS JOINT VENTURE
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In May 1996, the Registrant entered into a joint venture
known as Moros N.A., LLC ("Moros North America") with Klempner
Bros., Inc., a scrap metal operation located in Louisville,
Kentucky, providing for the two companies to jointly serve as an
agent in North America for the sale of solid waste processing
equipment manufactured in Spain under the name "MOROS." MOROS
North America entered into an agreement with Industrial
Hidraulicas providing for MOROS North America to serve as the
exclusive distributor of MOROS products in North America for a
period of 5 years. Through December 31, 1996, the Registrant has
incurred a loss equal to $29,142 in connection with this
investment. See Note 5 of Notes to Financial Statements included
herein.
INDUSTRY BACKGROUND
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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 solid
waste collection and disposal industry. The solid waste
collection and disposal industry is a multi-billion industry.
The size of this industry has increased for the past several
years and should continue to increase as landfill space becomes
more scarce, thereby reducing the supply of ultimate disposal.
Although society (and industry) has developed an increased
awareness of the environmental issues and recycling has
increased, waste production 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 believes that the landfill shortage will
become a greater national problem in the future.
The rising costs associated with solid waste disposal have
created additional opportunities for the Registrant. Because
waste disposal has begun to take 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 never paid attention to the
costs associated with waste disposal in the past are now looking
for ways to reduce expenses in this area. The Registrant is able
to offer 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. Most
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. Most states already have 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 increasingly burdensome task.
COMPETITION
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On a commercial/industrial waste management level, the
Registrant has competition from a variety of sources. Much of it
is from companies which concentrate their efforts on a regional
level. Some of these companies may be able to handle a small
national account, but most do not have the resources available to
handle accounts of national significance.
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 raising 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.
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
companies 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.
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
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The Registrant has approximately 87 full-time employees and
approximately 6 independent consultants which provide
professional services.
EFFECT OF STATE AND FEDERAL ENVIRONMENTAL REGULATIONS
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Any environmental regulatory liability relating to the
Registrant's operations is generally borne by the customers with
which 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, in any event, the
Registrant uses 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 1995 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 materially
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.
ADVISORY AND MARKETING AGREEMENTS
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On February 14, 1996, the Registrant entered into a Stock
Option Agreement (the "Chu Option Agreement") with Ernest D. Chu
("Chu") in consideration for Chu's services as a consultant to
the Registrant, such services including general business,
research management and business opportunity evaluation. The
agreement granted Chu the option to purchase up to 50,000 shares
of Registrant's Common Stock at a price of $5.00 per share.
Chu's options are to be exercised, in whole or in part, at any
time prior to December 31, 1997. To date, Chu has not exercised
his option to purchase any shares under the Chu Option Agreement.
A related agreement for financial services between the Registrant
and Chu was terminated.
On February 23, 1996, R. J. Falkner & Company, Inc.
("Falkner, Inc.") entered into a contract (the "Falkner, Inc.
Contract") with the Registrant for a period of not less than one
year, commencing April 1, 1996, to provide certain financial and
advisory services to the Registrant. As a part of the
consideration for these services, the Registrant was to grant by
April 30, 1996 to Falkner a 10-year option (the "Falkner Option")
to purchase 20,000 shares of Common Stock of the Registrant at an
exercise price of $5.00 per share, with 10-year options (the
"Additional Falkner Options") to purchase an additional 10,000
shares of Common Stock of the Registrant exercisable at the
market price of such securities on their date of issuance, to be
granted on April 1, 1997, and on each April 1 thereafter so long
as the Registrant retains the services of Falkner, Inc. Falkner
and the Registrant entered into the Stock Option Agreement (the
"Falkner Option Agreement") on June 11, 1996 to satisfy the
Falkner Option requirement of the Falkner, Inc. Contract. It
expires on June 11, 2006. To date, Falkner has not exercised his
option to purchase any shares.
The Registrant and Douglas I. Maxwell, III ("Maxwell")
entered into an Independent Consulting Services Agreement -
Maxwell (the "Maxwell Consulting Agreement"), a Confidential
Information and Non-Competition Agreement Independent Contractor
- - Maxwell (the "Maxwell Non-Compete Agreement") and Stock Option
Agreement - Maxwell (the "Maxwell Stock Option Agreement"), each
dated as of March 31, 1995, although executed on June 26, 1996,
in connection with professional business consulting services to
be provided to the Registrant. The term of the Maxwell
Consulting Agreement will continue through March 31, 1997 unless
sooner terminated as provided therein. As part of the
consideration for such services, the Registrant issued to Maxwell
an option (the "Maxwell Option") to purchase an aggregate of
100,000 shares of the Registrant Common Stock at $.50 per share.
The underlying securities relating to the Maxwell Option were
registered on a Form S-8 Registration Statement filed with the
Securities and Exchange Commission on June 26, 1996. Maxwell
exercised the Maxwell Option during June 1996, purchasing 100,000
shares of the Registrant's Common Stock.
The Registrant and Neil C. Sullivan ("Sullivan") entered
into an Independent Consulting Services Agreement - Sullivan (the
"Sullivan Consulting Agreement"), a Confidential Information and
Non-Competition Agreement Independent Contractor - Sullivan (the
"Sullivan Non-Compete Agreement") and Stock Option Agreement -
Sullivan (the "Sullivan Option Agreement"), each dated as of
March 31, 1995 although executed on June 26, 1996, in connection
with professional business consulting services to be provided to
the Registrant. The term of the Sullivan Consulting Agreement
will continue through March 31, 1997 unless sooner terminated as
provided therein. As part of the consideration for such
services, the Registrant issued to Sullivan an option (the
"Sullivan Option") to purchase an aggregate of 100,000 shares of
the Registrant Common Stock at $2.00 per share. The underlying
securities relating to the Sullivan Option were registered on a
Form S-8 Registration Statement with the Securities and Exchange
Commission on June 26, 1996. Sullivan exercised the Sullivan
Option during June 1996, purchasing 100,000 shares of the
Registrant's Common Stock.
ITEM 2. PROPERTIES
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The Registrant leases its corporate office facilities which
consist of approximately 4000 square feet of usable office space
for $3,750 per month. The leased office space is located at 7100
Grade Lane in Louisville, Kentucky.
The Registrant manages the scrap recycling operations of
K & R, an affiliate of the Registrant, and pays $6,250 per month
for the facilities used in this operation. This property is
located at 7100 Grade Lane in Louisville, Kentucky in the same
"industrial complex" as the Registrant's corporate offices.
Effective January 1, 1997, the Registrant began leasing from
K & R, an affiliate of the Registrant, an additional 23,000
square foot office/warehouse building located adjacent to the
Louisville, Kentucky headquarters facility of the Registrant.
The lease payments are $20,000 per month representing a per month
rental less than the rental paid by the previous non-affiliated
tenant of this space. The Sales and Marketing Group, operational
management of the Leasing division and the WESSCO division of the
Registrant occupy the office space.
The additional warehouse and shop has allowed the Registrant
to expand the operational capabilities of its WESSCO equipment
division and created space for the processing, storage, and sale
of additional recyclable materials such as plastics, high grade
paper, and aluminum cans.
Physical improvements made by K & R to existing facilities
utilized by the Registrant during 1996 also included the addition
of approximately 20,000 square feet of new "under roof" space for
the processing of recyclable materials. By placing these
existing areas "under roof" the quality of the recovered
recyclable materials sold to secondary mills and processors has
been enhanced. Management of the Registrant believes that these
improvements should allow the Registrant to maintain premium
pricing levels, be considered as a preferred supplier, and open
new markets for the sale of recovered materials.
Certain of the property and equipment of the Registrant is
subject to liens securing payment of portions of the Registrant's
indebtedness. See Note 6 of Notes to Financial Statements
included herein for information with respect to debt on these
properties. The Registrant also leases certain of its offices
and equipment. See Notes 7 and 8 of Notes to Financial
Statements included herein for information with respect to leased
properties. For additional information regarding properties
owned and operated by the Registrant, see "Business."
ITEM 3. LEGAL PROCEEDINGS
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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.
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Served as an Position with the
Executive Registrant and Other
Name Officer Since Age Principal Occupations
---- ------------- --- ---------------------
Peter V. Cullinan 1997 44 Vice President of
Management Services of
the Registrant since
January 1997; Director
of Store Planning and
Construction for
Learningsmith, Inc. from
May 1994 to December
1995; Director of
Administrative Services
of Ames Department
Stores from May 1986 to
December 1993
Charles J. Hulman -- 41 Manager of CWS division
of the Registrant since
December 1991, and a
sales representative of
the WESSCO division of
the Registrant prior to
that date
Harry Kletter 1983 70 President and Chief
Executive Officer from
July 31, 1992 to
present, from January
1990 to July 1991, and
from October 1983 to
January 1988. Mr.
Kletter is Chairman of
the Board of the
Registrant. Mr. Kletter
is also Chairman and
sole shareholder of
K & R Corporation, a
real estate holding and
materials processing
company, and an
affiliate of the
Registrant
Matthew L. Kletter 1994 37 Vice President of Legal
Affairs and Secretary of
the Registrant since
1997; Director of Legal
Affairs from 1996 to
1997; Director of the
Registrant from 1994 to
present and from 1990 to
1991; Attorney, New
York, New York; Nephew
of Harry and Roberta
Kletter
Roberta F. Kletter 1983 63 Vice President of
Shareholders Relations
and Corporate
Communications since
1995, and Secretary and
Marketing Director of
the Registrant prior to
1995; Director of the
Registrant; Wife of
Harry Kletter and Aunt
of Matthew Kletter
Timothy W. Myers 1990 45 Senior Vice President
and Chief Operating
Officer of the
Registrant since 1996.
Mr. Myers has served as
President of K & R
Corporation, an
affiliate of the
Registrant, since 1996.
Alan L. Schroering 1994 32 Director of Finance and
Treasurer since 1994
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 1997 Annual Meeting of
Shareholders as incorporated herein by reference at Item 11.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
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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." During the fourth quarter of 1995 until 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"). For the seven years prior to
the fourth quarter of 1995, the stock was traded on a secondary
market basis and as a result, the Registrant did not believe it
could provide a meaningful range of high and low bid information
for the Registrant's stock. The following table sets forth, for
the periods indicated, the high and low closing sales prices for
the Registrant's common stock as quoted on the Small Cap Market
or the OTCBB, as applicable.
Quarter Ended 1996 1995
- ------------- ------------------ ------------------
High Low High Low
March 31 8 1/2 5 1/2
---- ----
June 30 18 7 1/4
---- ----
September 30 15 3/4 8 1/4
---- ----
December 31 12 1/2 8 3/8 9 4
There were approximately 500 shareholders of record as of
March 20, 1997.
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.
ITEM 6. SELECTED FINANCIAL DATA
- ------ -----------------------
SELECTED FINANCIAL DATA
1996 1995 1994 1993 1992
(Amounts in Thousands,
Except Per Share Data)
Year ended December 31:
Total revenue $34,277 $30,545 $23,380 $23,056 $19,268
======= ======= ======= ======= =======
Net income $461 $704 $489 $189 $68
==== ==== ==== ==== ===
Earnings per common share:
Primary $0.24 $0.41 $0.28 $0.11 $0.04
===== ===== ===== ===== =====
Fully Diluted $0.24 $0.38 $0.28 $0.11 $0.04
===== ===== ===== ===== =====
Cash dividends declared
Per common share - - - - -
At year end:
Total assets $9,439 $6,209 $4,093 $3,870 $3,232
====== ====== ====== ====== ======
Long-term notes payable $5 $367 $13 $29 $12
== ==== === === ===
RECLASSIFICATIONS
The Registrant provides waste management consulting services
to its customers. Prior to 1994, the Registrant's service and
consulting revenue was derived principally from management fees
paid by its customers. The Registrant collected funds from its
customers for services rendered, retained its management fee, and
remitted the remaining funds to third party vendors who performed
the waste removal and maintenance services. In 1994, because of
certain market dynamics, changes in the industry and changes
related to the Registrant's operations, management reevaluated
the Registrant's manner of conducting business. Based on this
reevaluation, the Registrant's pricing process was modified. As
a result, the majority of the Registrant's customers pay a
negotiated fee for their waste service needs, and in turn the
Registrant subcontracts the necessary work to third party vendors
and pays those vendors for their services. Accordingly, the 1993
and 1992 total revenues have been increased approximately
$17,837,000, and $15,717,000, respectively, and total assets as of
December 31, 1993 and 1992 have been increased approximately
$1,475,000 and $1,391,000, respectively, from amounts previously
reported. These reclassifications are necessary to restate the
1993 and 1992 selected financial data and had no effect on net
income.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATION
----------------------------------
Liquidity and Capital Resources
-------------------------------
As of December 31, 1996 the Registrant held cash and cash
equivalents of $1,371,435.
The Registrant derives its revenues from a variety of
sources, including customer services, equipment sales, consulting
fees and from its scrap metal and recycling operations. The
scrap metal and recycling operations comprised approximately 85%,
60% and 18% of the Registrant's income before provision for
income taxes for the years ended December 31, 1996, 1995 and
1994, respectively. In the event the Registrant was to operate
without revenue derived from its scrap metal and recycling
operations, the Registrant's liquidity would be significantly
decreased but would not materially impair the Registrant's
ability to continue its operations and business.
The Registrant currently maintains a working capital line of
credit with the Mid-America Bank of Louisville and Trust Company
(the "Bank") in the amount of $750,000. Outstanding principal
under this credit facility (the "Credit Facility") bears interest
based on one-half percent in excess of the Bank's prime rate as
promulgated from time to time. The maturity date under this
Credit Facility is June 30, 1997. As of December 31, 1996,
approximately $600,000 was outstanding under this Credit Facility
as compared to approximately $350,000 as of December 31, 1995.
Results of Operations
- ---------------------
The following table presents, for the years indicated, the
percentage relationship which certain captioned items in the
Registrant's Statements of Operations bear to total revenues and
other pertinent data:
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995 1994
---- ---- ----
STATEMENTS OF OPERATIONS DATA:
Total Revenue......................100.0% 100.0% 100.0%
Costs of Sales..................... 86.6% 81.5% 86.3%
Direct expenses applicable to
rental income...................... 0.4% 0.4% 0.4%
Selling, general and administrative
expenses........................... 9.5% 11.6% 11.1%
Expenses to related parties........ 1.3% 2.7% 1.5%
Income from operations............. 2.2% 3.8% 0.7%
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31,
- ----------------------------------------------------------------
1995
- ----
Total revenue increased 12% from $30,545,142 in 1995 to
$34,277,216 in 1996. This increase in total revenue is the
result of (i) an increase of $3,634,766 in CWS operations and
(ii) an increase in volume related to the scrap recycling
operations and corrugated paper recycling operations, which
offset the decrease in market prices in 1996 as compared to 1995.
Rental income increased 45% from $296,682 in 1995 to $430,908 in
1996 due to an increase in the number of equipment units leased
by the Registrant to customers. Net equipment and scrap sales
decreased 4% from $6,742,988 in 1995 to $6,490,915 in 1996.
Cost of sales increased $4,789,448 or 19%, from $24,891,092
in 1995 to $29,680,540 in 1996. As a percentage of total
revenue, these costs were 81.5% and 86.6% in 1995 and 1996,
respectively. This increase was primarily related to an increase
in CWS costs of $4,010,825. Equipment and scrap cost of sales
increased 13% from $4,366,918 in 1995 to $4,953,493 in 1996.
Direct expenses applicable to rental income increased 32%
from $116,571 in 1995 to $153,823 in 1996, primarily due to the
increase in the units of equipment leased by the Registrant to
customers. As a percentage of rental income, these costs were
39.3% and 35.7% in 1995 and 1996, respectively.
Selling, general and administrative expenses decreased 8%
from $3,544,061 in 1995 to $3,271,246 in 1996. These expenses
decreased from 11.6% to 9.5% of total revenue in 1995 and 1996,
respectively. This decrease was due primarily to (i) reduced
costs in maintenance and leasing of equipment in connection with
the purchasing of new equipment in the recycling operations, and
(ii) the Chief Executive Officer of the Registrant electing not
to receive a salary in 1996, compared to a salary of $100,000
taken in 1995. Depreciation expense increased 41% from $329,481
in 1995 to $465,838 in 1996 due to the purchase of new
operational and rental fleet equipment totaling $1,156,839.
Interest expense increased 45% from $36,760 in 1995 to $53,268 in
1996 due to increased financing related to the purchase of new
equipment.
Expenses to related parties decreased 93% from $831,223 in
1995 to $430,000 in 1996. This decrease was primarily due to the
change in the management agreement between the Registrant and
K & R Corporation allowing the Registrant to retain 80%
(commencing in 1996) rather than 60% (prior to 1996) of the
profits generated from the K & R operations. The commissions
expense related to this agreement decreased 64% from $485,124 in
1995 to $177,000 in 1996. Rent expense decreased 31% from $268,279
in 1995 to $184,000 in 1996, primarily due to the Registrant
purchasing operational equipment (partially funded through the
Bank Credit Facility) rather than leasing such equipment from
K & R Corporation.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
- ---------------------------------------------------------------------
Total revenue increased 31% from $23,379,994 in 1994 to
$30,545,142 in 1995. Net equipment and scrap sales increased 51%
from $4,471,924 in 1994 to $6,742,988 in 1995. Service and
consulting revenue increased 26% from $18,702,528 in 1994 to
$23,505,472 in 1995. These increases were primarily due to
higher market prices in the corrugated and scrap market, and to
an increase in volume in the Registration's operations. Rental
income increased 44% from $205,542 in 1994 to $296,682 in 1995,
primarily due to the increase in the number of equipment units leased
by the Registrant to customers.
Cost of sales increased $4,711,450 or 23%, from $20,179,642
in 1994 to $24,801,092 in 1995. As a percentage of total revenue,
these costs were 86.3% and 81.5% in 1994 and 1995, respectively.
Equipment and scrap costs increased 51% from $2,897,582 in 1994
to $4,366,918 in 1995. Service and consulting costs increased
19% from $17,282,060 in 1994 to $20,524,174 in 1995. These
increases were directly related to an increase in the volume of
the Registrant's operations.
Direct expenses applicable to rental income increased 37%
from $84,853 in 1994 to $116,571 in 1995, primarily due to the
increase in the units of equipment leased by the Registrant to
customers. As a percentage of rental income, these costs were
41% and 39% in 1994 and 1995, respectively.
Selling, general and administrative expenses increased 35%
from $2,614,735 in 1994 to $3,544,061 in 1995. This increase was
attributable to the promotion of sales growth and the increased
cost associated with the continued improvement of the computer
systems of the Registrant. These expenses increased from 11.1%
to 11.6% of total revenue in 1994 and 1995, respectively.
Interest expense increased $34,424 from $2,336 in 1994 to $36,760
in 1995 due to increased borrowing to finance operating equipment
acquisitions during 1995.
Expenses to related parties increased 141% from $343,893 in
1994 to $831,223 in 1995. Commissions expense increased $390,592
from $94,532 in 1994 to $485,124 in 1995. These significant
increases were primarily due to higher market prices paid for
corrugated materials. Consulting fees of $52,820 and legal fees
of $25,000 were paid to related parties in 1995.
FINANCIAL CONDITION AT DECEMBER 31, 1996 COMPARED TO DECEMBER 31,
- -----------------------------------------------------------------
1995
- ----
Accounts receivable-trade increased from $3,241,290 as of
December 31, 1995 to $3,300,728 as of December 31, 1996. The
Registrant received a payment of $1,264,920 prior to the year-end
for a December billing, which reduced accounts receivable-trade
from $4,565,648 to $3,300,728 for year ended December 31, 1996.
The increase in accounts receivable-trade of $1,324,358 from
$3,241,290 as of December 31, 1995 to $4,565,648 was due to
higher volumes related to the scrap recycling operations,
corrugated paper recycling operations, CWS operations and WESSCO
operations.
Accounts payable-trade increased $1,324,170 from $3,466,540
as of December 31, 1995 to $4,790,710 as of December 31, 1996.
This increase was due to higher volumes in the Registrant's
operations.
Working Capital increased $905,749 from $62,315 as of
December 31, 1995 to $968,064 as of December 31, 1996. This
increase was related to an increase in (i) income tax refunds
receivable of $970,000 in connection with the exercise of non-
employee stock options, and (ii) inventories totaling $294,600
from $138,503 as of December 31, 1995 to $433,103 as of December
31, 1996. This working capital increase was reduced on account
of current maturities of long-term debt of $611,774 as of
December 31, 1996 being used to finance acquisitions of new
equipment for the recycling operations as compared to $367,431 as
of December 31, 1995 which debt then was classified as long-term debt.
This reclassification to current liabilities was necessary
because the related Credit Facility matures in June 1997.
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.
SUBSEQUENT EVENTS
- -----------------
Effective March 24, 1997, K & R, the sole shareholder of
which is Harry Kletter, has entered into a binding letter
agreement (the "MGM Letter Agreement") with MGM Services, Inc.,
headquartered in Dallas, Texas. MGM is engaged in the business
of managing solid waste accounts and selling waste monitoring
devices (black boxes). Pursuant to the MGM Letter Agreement,
K & R would acquire all of the outstanding stock of MGM for
350,000 shares (the "K & R Registrant Shares") of Registrant's
Common Stock beneficially owned by K & R, subject to adjustment.
The consummation of the transaction is contingent upon any
required Board and shareholder approvals by the parties. Upon
execution of the MGM Letter Agreement, the Registrant is
providing, at no cost to MGM, Peter V. Cullinan, Vice President
of Management Services of the Registrant, to assist in the
management of MGM. In that connection, Registrant management,
upon consummation of the transaction, intends to enter into a
management agreement with MGM to assist MGM in its operations.
The MGM Letter Agreement further contemplates that John Weidner
of MGM will have the invitation and appointment to become a Board
member of the Registrant in 1998 or upon an earlier vacancy
thereon.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ------ -------------------------------------------
The response to this Item is submitted as a separate section
of this report beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
- ------ ------------------------------------------------
ACCOUNTING AND FINANCIAL DISCLOSURE
-----------------------------------
The Registrant did not change accounting firms for the audit
of the 1996 financial statements. There were no disagreements
with accountants in accounting and/or financial disclosure
matters.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------- --------------------------------------------------
The information set out in the sections entitled ELECTION OF
DIRECTORS in the Registrant's Proxy Statement for the 1997 Annual
Meeting of Shareholders and the information set out in the
section entitled EXECUTIVE OFFICERS OF THE REGISTRANT on pages 14
and 15 of Part I of this report are incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
- ------- ----------------------
The information set out in the section entitled EXECUTIVE
COMPENSATION in the Registrant's Proxy Statement for the 1997
Annual Meeting of Shareholders is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
- ------- ---------------------------------------------------
MANAGEMENT
----------
The information set out in the section entitled VOTING
SECURITIES in the Registrant's Proxy Statement for the 1997
Annual Meeting of Shareholders is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- ------- ----------------------------------------------
The information set out in the section entitled EXEUCTIVE
COMPENSATION - Certain Transactions in the Registrant's Proxy
Statement for the 1997 Annual Meeting of Shareholders is
incorporated herein by reference.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
- ------- -------------------------------------------------------
FORM 8-K
--------
(a) (1) FINANCIAL STATEMENTS FILED
--------------------------
PAGE
Report of Independent Auditors F-1
Balance Sheets as of December 31, 1996 and 1995 F-2
Statements of Operations for the years
ended December 31, 1996, 1995 and 1994 F-4
Statements of Stockholders' Equity for the
years ended December 31, 1996, 1995 and 1994 F-5
Statements of Cash Flows for the years
ended December 31, 1996, 1995 and 1994 F-6
Notes to Financial Statements F-7
(2) FINANCIAL STATEMENT SCHEDULES
-----------------------------
Schedule II - Valuation and Qualifying Accounts is
incorporated herein by reference at page F-24 of the Financial
Statements of the Registrant.
(3) LIST OF EXHIBITS
----------------
The list of exhibits on the Exhibit Index is
incorporated herein by reference. The management contract
required to be filed as an exhibit to this Form 10-K pursuant to
Item 14(c) is noted by an asterisk (*) in the Exhibit Index.
(b) REPORTS ON FORM 8-K.
-------------------
The Registrant did not file any Reports on Form 8-K during
the last quarter of the fiscal year of the Registrant ended
December 31, 1996.
(c) EXHIBITS.
--------
The exhibits listed on the Exhibit Index are filed as a part
of this report.
(d) FINANCIAL STATEMENT SCHEDULES.
-----------------------------
Schedule II - Valuation and Qualifying Accounts is
incorporated herein by reference at page F-24 of the Financial
Statements of the Registrant.
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Industrial Services of America, Inc.
We have audited the accompanying balance sheets of Industrial
Services of America, Inc. as of December 31, 1996 and 1995, and
the related statements of operations, stockholders' equity, and
cash flows for the three years ended December 31, 1996, 1995 and
1994. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an
opinion of these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of Industrial Services of America, Inc. as of December 31, 1996
and 1995, and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31,
1996, in conformity with generally accepted accounting
principles.
As discussed in Note 1 to the financial statements, in 1996 the
Company adopted Statement of Financial Accounting Standards No.
123.
Our audits of the foregoing 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/ MATHER, HAMILTON & CO.
MATHER, HAMILTON & CO.
Louisville, Kentucky
March 10, 1997
F-1
INDUSTRIAL SERVICES OF AMERICA, INC.
BALANCE SHEETS
DECEMBER 31, 1996 and 1995
=================================================================
ASSETS
1996 1995
---- ----
CURRENT ASSETS
Cash and cash equivalents
(Notes 6 and 11) $1,371,435 $ 507,889
Receivables:
Trade, net of allowance for
doubtful accounts of $16,000
in 1996 and 1995 3,300,728 3,241,290
Related parties (Notes 5 and 8) 100,360 -
Income taxes refunds 1,203,900 -
Other 10,599 -
--------- ---------
Total receivables 4,615,587 3,241,290
Net investment in sales-type
leases (Note 3) 8,435 29,273
Inventories (Note 2) 433,103 138,503
Deferred income taxes (Note 10) 45,400 6,400
Other (Note 8) 158,385 146,295
--------- ---------
Total current assets 6,632,345 4,069,650
Net property and equipment
(Notes 4 and 6) 2,704,192 1,961,381
Investment in joint venture
(Notes 5 and 8) 15,684 -
Other assets (Note 3) 87,247 178,330
--------- ---------
TOTAL ASSETS $9,439,468 $6,209,361
========= =========
See accompanying notes.
- -----------------------------------------------------------------
F-2
INDUSTRIAL SERVICES OF AMERICA, INC.
BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
=================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
1996 1995
---- ----
CURRENT LIABILITIES
Current maturities of
long-term debt (Note 6) $ 611,774 $ 19,797
Payables:
Trade accounts 4,790,710 3,466,540
Income taxes - 184,126
Affiliated company (Note 8) 179,778 226,446
--------- ---------
Total payables 4,970,488 3,877,112
Other 82,019 110,426
--------- ---------
Total current liabilities 5,664,281 4,007,335
Long-term debt (Note 6) 5,356 367,431
Deferred income taxes (Note 10) 161,000 66,600
Commitments and contingencies (Note 7)
STOCKHOLDERS' EQUITY (NOTE 13)
Common stock, $.01 par value,
10,000,000 shares authorized;
1,957,500 shares issued as of
December 31, 1996 and 1,757,500
issued as of December 31, 1995 19,575 17,575
Additional paid-in capital 1,405,000 27,000
Retained earnings 2,192,256 1,731,420
Treasury stock, at cost, 27,900 shares (8,000) (8,000)
--------- ---------
Total stockholders' equity 3,608,831 1,767,995
--------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $9,439,468 $6,209,361
========= =========
- -----------------------------------------------------------------
F-3
INDUSTRIAL SERVICES OF AMERICA, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
===========================================================================
1996 1995 1994
---- ---- ----
REVENUE (NOTE 11)
Net equipment and scrap sales
(includes $204,386 to
affiliated companies
in 1996) (Note 8) $ 6,490,915 $ 6,742,988 $ 4,471,924
Service and consulting revenue 27,355,393 23,505,472 18,702,528
Rental income 430,908 296,682 205,542
---------- ---------- ----------
Total revenue 34,277,216 30,545,142 23,379,994
COSTS AND EXPENSES
Costs of sales:
Equipment and scrap 4,953,493 4,366,918 2,897,582
Service and consulting 24,727,047 20,524,174 17,282,060
---------- ---------- ----------
Total costs of sales 29,680,540 24,891,092 20,179,642
Direct expenses applicable
to rental income 153,823 116,571 84,853
Selling, general and
administrative expenses
(Notes 8 and 12) 3,271,246 3,544,061 2,614,735
Expenses to related parties
(Note 8):
Rent 184,000 268,279 249,361
Commissions 177,000 485,124 94,532
Consulting and legal fees 69,000 77,820 -
---------- ---------- ----------
Total costs and expenses 33,535,609 29,382,947 23,223,123
---------- ---------- ----------
Income from operations 741,607 1,162,195 156,871
Other (expense) income, net (Note 9) (2,171) 58,964 618,846
---------- ---------- ----------
Income before provision for
income taxes 739,436 1,221,159 775,717
Provision for income taxes (Note 10) 278,600 517,000 286,300
---------- ---------- ----------
NET INCOME $ 460,836 $ 704,159 $ 489,417
========== ========== ==========
EARNINGS PER COMMON SHARE
Primary $ .24 $ .41 $ .28
========== ========== ==========
Fully diluted $ .24 $ .38 $ .28
========== ========== ==========
See accompanying notes.
- ---------------------------------------------------------------------------
F-4
INDUSTRIAL SERVICES OF AMERICA, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
============================================================================
Common Stock Additional Treasury Stock
------------ Paid-in Retained --------------
Shares Amount Capital Earnings Shares Cost Total
------ ------ ------- -------- ------ ---- -----
Balance as of
January 1, 1994 1,757,500 $17,575 $ 27,000 $ 537,844 (27,900) $(8,000) $ 574,419
Net income - - - 489,417 - - 489,417
--------- ------- --------------------------------------------- -----------
Balance as of
December 31, 1994 1,757,500 17,575 27,000 1,027,261 (27,900) (8,000) 1,063,836
Net income - - - 704,159 - - 704,159
--------- ------- ---------- ----------- ------- ------- -----------
Balance as of
December 31, 1995 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 13) - - 117,500 - - - 117,500
Common stock issued
upon exercise of
nonemployee stock
options (Note 13) 200,000 2,000 248,000 - - - 250,000
Income tax benefit
related to exercise
of nonemployee stock
options (Note 13) - - 970,000 - - - 970,000
Stock transferred by
Company's principal
stockholder for services
to be provided to the
Company (Note 8) - - 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
========= ======= ========== =========== ======= ======= ===========
See accompanying notes.
- -----------------------------------------------------------------------------
F-5
INDUSTRIAL SERVICES OF AMERICA, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
===========================================================================
1996 1995 1994
---- ---- ----
OPERATING ACTIVITIES
Net income $ 460,836 $ 704,159 $ 489,417
Adjustments to reconcile net
income to net cash provided
by operating activities:
Equity in loss of joint venture 29,142 - -
Consulting fees related to
issuance of nonemployee
stock options 100,625 - -
Depreciation and amortization 465,838 329,481 189,501
Provisions for doubtful accounts 2,255 33,200 -
Deferred income taxes 55,400 37,600 29,300
Special charge - - 108,006
Gain on sale of property
and equipment (31,229) (42,287) (10,091)
Increase (decrease) in cash
resulting from changes in:
Receivables (404,297) (863,787) (176,332)
Inventories (294,600) 22,708 (88,564)
Other current assets (52,715) 85,788 (101,263)
Payables 1,193,376 992,570 (272,701)
Other current liabilities (28,407) 65,248 (36,903)
--------- --------- ---------
Net cash provided by
operating activities 1,496,224 1,364,680 130,370
INVESTING ACTIVITIES
Payments and deposits for property
and equipment (1,156,839) (1,555,359) (609,639)
Proceeds from sale of property
and equipment 59,603 119,580 29,888
Investment in joint venture (44,826) - -
Purchase of restricted investment - (100,000) -
Increase in notes receivable
to affiliated company - - (37,135)
Payments on notes receivable -
affiliated company - - 109,000
Other (7,537) (15,893) (26,970)
--------- --------- ---------
Net cash used in
investing activities (1,149,599) (1,551,672) (534,856)
FINANCING ACTIVITIES
Proceeds from exercise of
nonemployee stock options 250,000 - -
Proceeds from issuance of
long-term debt 600,000 31,525 -
Payments on long-term debt (370,098) (21,590) (24,507)
Net proceeds from issuance
of note payable to bank - 300,000 50,000
Investment in sales-type leases (2,369) (6,875) (43,647)
Proceeds from sales-type leases 39,388 36,937 29,777
--------- --------- ---------
Net cash provided by
financing activities 516,921 339,997 11,623
--------- --------- ---------
Net increase (decrease) in cash
and cash equivalents 863,546 153,005 (392,863)
Cash and cash equivalents at
beginning of year 507,889 354,884 747,747
--------- --------- ---------
Cash and cash equivalents at
end of year $1,371,435 $ 507,889 $ 354,884
========= ========= =========
See accompanying notes.
- ---------------------------------------------------------------------------
F-6
INDUSTRIAL SERVICES OF AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
=================================================================
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
NATURE OF BUSINESS - Industrial Services of America, Inc.
(the Company) is engaged in providing products and services
to meet the waste management needs of its customers related
to waste equipment sales and rental, scrap recycling,
service and consulting, and solid waste disposal. The
Company's customers are located throughout the United States
and Canada.
CONSOLIDATION - The 1995 and 1994 financial statements
include IES of America, Inc., an inactive wholly-owned
subsidiary disolved during the year ended December 31, 1996.
No significant intercompany transactions occurred during the
years ended December 31, 1995 and 1994.
COMMON CONTROL - The Company conducts significant levels of
business (see Note 8) with K & R Corporation, Inc. (K&R)
which is owned by the Company's principal stockholder.
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 - The preparation of financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual
results could differ from those estimates.
CASH AND CASH EQUIVALENTS - Cash and cash equivalents
includes all cash balances and highly liquid investments
with a maturity of three months or less.
ACCOUNTS RECEIVABLE - Credit is extended based on an
evaluation of the customer's financial condition, and
generally collateral is not required.
- -----------------------------------------------------------------
F-7
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.
PROPERTY AND EQUIPMENT - Net property and equipment is
stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are provided
using the straight-line method over the estimated useful
lives of the respective assets. Accelerated depreciation
methods are used for income tax purposes. The estimated
useful lives for each asset category are as follows:
Category Range
-------- -----
Equipment and vehicles 3 - 10 years
Office equipment 3 years
Rental equipment 5 years
Leasehold improvements 10 years
INCOME TAXES - The Company recognizes deferred income tax
liabilities and assets for the expected future tax
consequences of events that have been included in the
financial statements or tax returns. Under this method,
deferred income tax liabilities and assets are determined
based on the difference between the financial statement and
tax bases of assets and liabilities using enacted tax rates
in effect for the year in which the differences are expected
to reverse. The significant components of deferred tax
provision for income taxes are based on income and expenses
included in the accompanying Statement of Operations.
Differences between taxes so computed and taxes payable
under applicable statutes and regulations, when material,
are classified as deferred income taxes arising from
temporary differences.
RECLASSIFICATIONS - Certain reclassifications were made to
1995 and 1994 amounts to conform to the 1996 presentation.
EARNINGS PER COMMON SHARE - For the year ended December 31,
1996, primary earnings per common share is computed by
dividing net income by the weighted average number of shares
of common stock and common stock equivalents outstanding
during the year. The number of common shares is increased
by the number of shares issuable on the exercise of stock
options when the market price of the Company's common stock
exceeds the exercise price of the options. This increase in
the number of common shares is reduced by the number of
common shares
- ----------------------------------------------------------------
F-8
assumed to be purchased with the proceeds from the exercise
of the options. Those purchases are assumed to be made at
the average price of the Company's common stock during the
year. Fully diluted earnings per common share for the years
ended December 31, 1996 and 1995 is determined in the same
manner as primary earnings per common share for the year
ended December 31, 1996 except that the applicable year end
stock price is used to calculate the number of common shares
that are assumed to be purchased with the proceeds from the
exercise of the options.
For the year ended December 31, 1995, primary earnings per
common share is computed by dividing net income by the
weighted average number of shares of common stock
outstanding during 1995. Because the average price of the
Company's common stock is not determinable for the year
ended December 31, 1995 due to its limited trading on a
secondary market, the primary earnings per common share
computation does not include an increase in common shares by
the number of shares issuable on the exercise of stock
options nor does it include a reduction of the common shares
by the number of common shares assumed to be purchased with
the proceeds from the exercise of the stock options.
For the year ended December 31, 1994, no stock options were
issued. Therefore, primary and fully diluted earnings per
common share are computed by dividing net income by the
weighted average number of shares of common stock
outstanding during 1994.
The weighted average number of common and dilutive
equivalent shares used to compute primary earnings per
common share were 1,949,702, 1,729,600 and 1,729,600 for the
years ended December 31, 1996, 1995, and 1994, respectively.
The weighted average number of common and dilutive
equivalent shares used to compute fully diluted earnings per
common share were 1,953,581, 1,852,814 and 1,729,600 for the
years ended December 31, 1996, 1995 and 1994, respectively.
IMPAIRMENT OF LONG-LIVED ASSETS - In March 1995, Statement
of Financial Accounting Standards (SFAS) No. 121,
"Accounting for Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of," was issued. SFAS No.
121 requires that long-lived assets and certain identifiable
intangibles to be held and used or disposed of by an entity
be reviewed for impairment whenever events
- ----------------------------------------------------------------
F-9
or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. During 1996, the
Company adopted this statement and determined that no
impairment loss need be recognized for applicable assets of
continuing operations.
STOCK-BASED COMPENSATION AND TRANSACTIONS - In October 1995,
the Financial Accounting Standards Board issued SFAS No. 123
"Accounting for Stock-Based Compensation." This new
statement defines a fair value based method of accounting
for employee stock options and similar equity instruments,
and transactions in which an entity acquires goods or
services from nonemployees in exchange for equity
instruments. Under the new fair value method, cost is
measured at the grant date based on the value of the equity
instrument and is recognized over the vesting or service
period. Under the intrinsic value based method prescribed
by APB Opinion No. 25 "Accounting for Stock Issued to
Employees," cost is measured as the excess, if any, of the
quoted market price of the stock at grant date over the
stock acquisition price.
SFAS No. 123 gives entities a choice of recognizing related
compensation expense for employee stock options using the
intrinsic value approach described above. If APB Opinion
No. 25 is elected for measurement, SFAS No. 123 requires
supplemental pro forma disclosures of net income and
earnings per share, as if the fair value method of
accounting prescribed by SFAS No. 123 had been applied.
Although the Company does not currently maintain employee
stock option or similar plans, it intends to use the
measurement method prescribed by APB Opinion No. 25 and will
provide the pro forma footnote disclosures required by SFAS
No. 123. In 1996, the Company adopted SFAS No. 123 for
transactions in which the Company acquires goods or services
from nonemployees in exchange for equity instruments.
2. INVENTORIES
Inventories as of December 31, 1996 and 1995 consist of the
following:
- -----------------------------------------------------------------
F-10
1996 1995
---- ----
Equipment and parts $ 84,858 $ 61,608
Scrap materials 348,245 76,895
------- -------
Total inventories $433,103 $138,503
======= =======
3. LEASES
The Company is the lessor of equipment under sales-type
leases having terms of three to five years, with the lessees
having the option to acquire the equipment at the
termination of the leases. All costs associated with this
equipment are the responsibility of the lessees.
Future minimum lease payments receivable for sales-type
leases as of December 31, 1996 are as follows:
1997 $ 12,181
1998 8,773
1999 3,185
2000 2,029
2001 676
-------
Net minimum lease payments receivable 26,844
Less unearned income 7,244
-------
Net investment in sales-type leases 19,600
Less current portion 8,435
-------
Long-term portion $ 11,165
=======
The Company also is the lessor of equipment under operating
leases having terms of one to five years. All costs
associated with this equipment are the responsibility of the
lessees. The net investment in equipment leased to
customers under noncancelable operating leases as of
December 31, 1996 and 1995 is as follows:
1996 1995
---- ----
Rental equipment $ 844,765 $ 633,285
Less accumulated depreciation 376,730 298,914
-------- --------
Net rental equipment $ 468,035 $ 334,371
======== ========
- -----------------------------------------------------------------
F-11
Future minimum rentals receivable under noncancelable
operating leases as of December 31, 1996 are as follows:
1997 $ 220,232
1998 109,391
1999 59,697
2000 25,327
2001 10,325
--------
Future minimum rentals $ 424,972
========
4. NET PROPERTY AND EQUIPMENT
Net property and equipment as of December 31, 1996 and 1995
consists of the following:
1996 1995
---- ----
Equipment and vehicles $2,536,174 $1,763,696
Office equipment 426,777 335,883
Rental equipment 844,765 633,285
Leasehold improvements 143,477 68,634
--------- ---------
Property and equipment 3,951,193 2,801,498
Less accumulated depreciation
and amortization 1,247,001 840,117
--------- ---------
Net property and equipment $2,704,192 $1,961,381
========= =========
5. INVESTMENTS IN AFFILIATES
In May 1996 the Company entered into a 50% joint venture
agreement. The Company's investment in Moros N.A., LLC
(Moros) is recorded under the equity method of accounting.
The Company's equity interest required an initial investment
of $44,826. The Company's share of the loss for the year
ended December 31, 1996 totaled $29,142 (see Note 9).
During the year ended December 31, 1996, the Company
incurred expenses on behalf of Moros totaling $66,747. The
Company has recorded a receivable as of December 31, 1996
for these expenses.
- -----------------------------------------------------------------
F-12
In December 1994, the Company entered into an agreement with
Recycling Data Management Corporation (RDMC) regarding the
Company's 50% equity interest in Recycleline, Inc. Under
this agreement, the Company agreed to assign its interest in
Recycleline to RDMC. As part of the agreement, the Company
absorbed all expenses incurred on behalf of Recycleline
during 1994 which totaled $37,135. In addition, the Company
loaned Recycleline $25,000. The loan bears interest at
prime (prime was 8.25% as of December 31, 1996) and is
secured by all RDMC outstanding stock. The loan and accrued
interest is payable on December 31, 1999. In exchange for
the assignment and the loan, the Company received an option
to acquire 40% equity interest in Recycleline based on its
book value at the exercise date. The option exercise period
extends through December 31, 1999.
During December 1994, the Company wrote off a note
receivable from Recycleline totaling $78,877 and its
remaining investment in Recycleline totaling $29,129 (see
Note 9).
6. DEBT
Long-term debt as of December 31, 1996 and 1995 consists of
the following:
1996 1995
---- ----
Note payable to bank $600,000 $350,000
Notes payable; interest ranging
from 6% to 10.75%; due in monthly
installments of principal and
interest totaling $2,040 with various
maturity dates through January 1999;
secured by vehicles with a net book
value of approximately $12,000 as of
December 31, 1996 17,130 37,228
------- -------
Total long-term debt 617,130 387,228
Less current maturities 611,774 19,797
------- -------
Long-term maturities $ 5,356 $367,431
======= =======
As of December 31, 1996, the Company had borrowed $600,000
under its $750,000 credit agreement with a financial
institution. Interest under the agreement is payable
monthly at the bank's prime rate plus
- -----------------------------------------------------------------
F-13
.5% (prime rate was 8.25% as of December 31, 1996).
Principal is payable upon expiration of the agreement on
June 30, 1997. This agreement is secured by certain assets
owned by the Company and K&R, certain rent assignments, a
life insurance policy on the Company's principal
stockholder, and any assets held by the financial
institution on behalf of the Company. The agreement is
guaranteed by the Company's principal stockholder.
As of December 31, 1996, aggregate maturities of long-term
debt are as follows:
1997 $611,774
1998 4,572
1999 784
-------
Total long-term debt $617,130
=======
7. COMMITMENTS AND CONTINGENCIES
The Company has a noncancelable operating lease agreement
for certain facilities through December 1998. The lease may
be renewed by the Company for one successive three year
period. Rent expense for the years ended December 31, 1996,
1995 and 1994 under this agreement totaled $19,327, $18,442,
and $18,000, respectively. Future minimum rental payments
under this agreement as of December 31, 1996 are as follows:
1997 $ 19,327
1998 14,496
-------
Future minimum rental payments $ 33,823
=======
In November 1996 the Company entered into a contract to
purchase certain equipment for $180,000. As of December 31,
1996, the Company's remaining commitment totaled
approximately $135,000.
In March 1995, the Company entered into two consulting
agreements for certain strategic and financial advisory
services. In conjunction with these agreements, the Company
granted stock options to the consultants (see Note 13). In
addition to the granted stock options, one of the consulting
agreements requires compensation for services based on
negotiated fees. Under the second agreement, the Company is
additionally committed for a minimum fee equal to 5% of the
aggregate
- ----------------------------------------------------------------
F-14
price paid by the Company for acquisitions of operating
businesses or working assets on which the consultant
performs services on behalf of the Company. These
agreements expire March 31, 1997.
In July 1996, the Company signed a letter of intent with
Earthwatch Waste Systems, Inc. (EWS). The letter calls for
a stock exchange under which the Company will issue 300,000
shares of its common stock to EWS note holders and will
grant an option for an additional 200,000 shares of the
Company's common stock in exchange for all outstanding
common stock of EWS. The stock exchange is contingent upon
release of all debts and claims against EWS by its note
holders. As of March 10, 1997, the release by EWS note
holders and EWS Board of Director approval have not been
obtained. While the Company's management is actively
pursuing closure regarding this transaction, the probability
of this exchange occurring is uncertain.
8. RELATED PARTY TRANSACTIONS
The Company enters into various transactions with related
parties including the Company's principal stockholder, an
affiliated company controlled by the Company's principal
stockholder (K&R) and a joint venture in which the Company
owns a 50% equity interest. These transactions primarily
involve advances from the Company, notes receivable, and
leasing of facilities and vehicles by the Company. A
summary of these transactions is as follows:
1996 1995
---- ----
Receivables from related parties:
Affiliated companies $ 76,695 $ -
Principal stockholder 23,665 -
------- -------
Total receivables from
related parties $100,360 $ -
======= =======
Payable to K&R $179,788 $226,446
======= =======
1996 1995 1994
---- ---- ----
Rent expense to K&R $184,000 $268,279 $249,361
======= ======= =======
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F-15
The Company had sales to an affiliated company which owns
50% in the joint venture (see Note 5) totaling $129,386 and
had sales to K&R totaling $75,000 for the year ended
December 31, 1996.
The Company paid legal fees totaling approximately $16,000
and $25,000 to one of its Directors for the years ended
December 31, 1996 and 1995, respectively.
The Company paid consulting fees totaling $53,000 and
$52,820 to an affiliated company owned by one of the
company's stockholders for the years ended December 31, 1996
and 1995, respectively.
In November 1996, the Company entered into a one year
consulting agreement for certain marketing expertise. The
Company's principal stockholder agreed to transfer 5,000
shares of his stock on behalf of the Company to the
consultant as payment for these future services. As of
December 31, 1996, the Company recorded deferred consulting
costs and additional paid-in capital totaling $42,500
resulting from the stock's quoted market value as of the
date of the agreement.
The Company's principal stockholder and Chief Executive
Officer has discretionary authority regarding his annual
salary. During the year ended December 31, 1996, the CEO
did not receive a salary. The CEO's salary for the years
ended December 31, 1995 and 1994 totaled $100,000 and
$200,000, respectively. These amounts are included in
selling, general and administrative expenses in the
Statement of Operations.
Under certain operating lease agreements with K&R, the
Company incurs monthly expenses of $3,750 to lease the
Company's main office facility, $6,250 for facilities used
in the scrap recycling operations, and $5,000 for equipment
and vehicles used in the scrap recycling operations.
The Company has an agreement with K&R, enabling the Company
to manage all aspects of K&R's scrap recycling operations.
The original agreement provided that the Company retain 60%
of the profits from the management of the scrap recycling
operations commencing July 1, 1994. Effective January 1,
1996 the agreement was amended to provide that the Company
retain 80% of the profits from the management of the
- -----------------------------------------------------------------
F-16
scrap recycling operations. The Company includes all
revenue from the scrap recycling operations and the related
commission fee in the Statement of Operations. The scrap
recycling operations generated income before commission
expense to K&R and provision for income taxes to the Company
totaling $889,765, $1,213,515 and $236,330 for the years
ended December 31, 1996, 1995 and 1994, respectively. The
Company incurred commission expenses to K&R totaling
$177,000, $485,124 and $94,532 for the years ended
December 31, 1996, 1995 and 1994, respectively. This
agreement may be canceled by either party upon prior written
notice.
In January 1997 the Company entered into a rental agreement
with K&R for certain additional facilities. The agreement
calls for monthly rental payments of $20,000 through
December 2001.
9. OTHER (EXPENSE) INCOME, NET
Other (expense) income, net consists of the following for
the years ended December 31, 1996, 1995 and 1994:
1996 1995 1994
---- ---- ----
Interest income $ 43,339 $ 56,961 $ 32,579
Interest expense (53,268) (36,760) (2,336)
Loss on investment in
joint venture (Note 5) (29,142) - -
Change in estimates
related to waste
collection and disposal
services - - 647,634
Loss on investment in
Recycleline, Inc.
(Note 5) - - (108,006)
Gain on sale of property
and equipment 31,229 42,287 10,091
Miscellaneous 5,671 (3,524) 38,884
------- ------- -------
Other (expense)
income, net $ (2,171) $ 58,964 $618,846
======= ======= =======
- ----------------------------------------------------------------
F-17
10. INCOME TAXES
Provision for income taxes consists of the following for the
years ended December 31, 1996, 1995 and 1994:
1996 1995 1994
---- ---- ----
Current:
Federal $177,900 $386,700 $196,400
State and local 45,300 92,700 60,600
------- ------- -------
Current provision 223,200 479,400 257,000
Deferred:
Federal 48,500 31,900 29,300
State and local 6,900 5,700 -
------- ------- -------
Deferred provision 55,400 37,600 29,300
------- ------- -------
Provision for
income taxes $278,600 $517,000 $286,300
======= ======= =======
The difference between the actual provision for income taxes
and the tax provision computed by applying the statutory
Federal income tax rate to income before provision for
income taxes is attributable to the following for the years
ended December 31, 1996, 1995 and 1994:
1996 1995 1994
---- ---- ----
Federal income tax at
statutory rate $251,400 $415,200 $263,700
State and local income
taxes, net of federal
income tax effect 25,100 63,000 40,000
Effect of tax rate change
on deferred tax assets - 13,500 (12,200)
Other differences, net 2,100 25,300 (5,200)
------- ------- -------
Provision for
income taxes $278,600 $517,000 $286,300
======= ======= =======
- -----------------------------------------------------------------
F-18
Deferred income tax (liabilities) assets consist of the
following as of December 31, 1996 and 1995:
1996 1995
---- ----
Nonemployee stock options $ 39,000 $ -
Provisions for estimated
liabilities 18,200 17,300
Depreciation (172,800) (77,500)
-------- -------
Net deferred income tax liability $(115,600) $(60,200)
======== =======
The tax effect of income tax deductions for the year ended
December 31, 1996 related to the exercise of certain
nonemployee stock options is credited to additional paid-in
capital (see Note 13).
11. RISK AND UNCERTAINTIES
Revenue from two customers represents approximately 58% of
total revenue for the year ended December 31, 1996 while
revenue from a single customer represents approximately 44%
and 41% of total revenue for the years ended December 31,
1995 and 1994, respectively. A change in the status of
these customers could adversely affect operating results in
the near term.
As of December 31, 1996 the Company maintains cash deposits
of approximately $1,270,000 in excess of federally insured
limits at a single financial institution.
12. RETIREMENT PLAN
During 1995, the Company sponsored a defined contribution
retirement plan under Section 401(k) of the Internal Revenue
Code which covers substantially all employees. Eligible
employees may contribute up to 15% of their annual
compensation. Under the plan, the Company matches 10% of
each employee's voluntary contributions. Any additional
annual matching amounts made by the Company are determined
by management. The Company's matching contributions totaled
$13,856 and $31,111 for the years ended December 31, 1996
and 1995, respectively.
- -----------------------------------------------------------------
F-19
13. NONEMPLOYEE STOCK OPTIONS
During the years ended December 31, 1996 and 1995, the
Company entered into various consulting agreements for
certain strategic and financial advisory services. In
conjunction with these agreements, the Company granted stock
options to the consultants. The fair value of each stock
option was based on the quoted market price of the Company's
common stock at the date of grant. Due to the limited
trading of the Company's stock, the quoted market price of
the Company's common stock less the exercise price of the
related stock option was used as the best estimate of each
stock option's fair value at the date of grant. Because
exercise prices of the stock options issued in 1996 were
below the market price of the Company's common stock at the
dates of grant, consulting costs totaling $100,625 were
recorded for the year ended December 31, 1996 and deferred
consulting costs totaling $16,875 were recorded as of
December 31, 1996. Because exercise prices of the stock
options issued in 1995 were above the market price of the
Company's common stock at the dates of grant, no consulting
costs were recorded related to issuance of these stock
options. Because the stock options issued in 1995 were
valued at fair value as would have been determined in
accordance with SFAS No. 123, no pro forma disclosures
related to net income and earnings per share for the year
ended December 31, 1995 are necessary.
Following is a summary of stock option activity and number
of shares reserved for outstanding options for the years
ended December 31, 1996, 1995 and 1994:
Weighted
Weighted Maximum Average
Average Option Term of Grant Date
Number of Option Price Price Per Options Fair Value
Shares Per Share Share Granted of Options
------ --------- ----- ------- ----------
Balance as of
January 1, 1994 - $ - - - $ -
Granted - - - - -
Exercised - - - - -
-------
Balance as of
December 31, 1994 - - - - -
Granted 200,000 1.25 $.50 to $2.00 2 years -
Exercised - - - - -
-------
Balance as of
December 31, 1995 200,000 1.25 $.50 to $2.00 2 years -
Granted 70,000 5.00 $5.00 2 to 10 2.93
years
Exercised (200,000) 1.25 $.50 to $2.00 2 years -
-------
Balance as of 2 to 10
December 31, 1996 70,000 $5.00 $5.00 years $2.93
======== ===== ===== ======= =====
- ----------------------------------------------------------------------
F-20
The tax effect of income tax deductions for the year ended
December 31, 1996 related to the 1996 exercise of the
nonemployee stock options issued during the year ended
December 31, 1995 is credited to additional paid-in capital.
Because no consulting costs were recorded in 1995 related to
the issuance of these stock options, the amount credited to
additional paid-in capital represents the tax effect related
to the excess of the market price of the Company's common
stock at the date of exercise compared to the related stock
option exercise price.
14. SIGNIFICANT FOURTH QUARTER CHARGES AND ADJUSTMENTS
During the quarter ended December 31, 1996, the Company
recorded the following significant items having financial
statement impact on previously reported quarters:
Per Share Amount
----------------
Fully
Item Primary Diluted
---- ------- -------
Consulting expenses related to
issuance of nonemployee stock
options, net of income tax effect
of $39,000 $( 61,625) $ (.03) $ (.03)
Adjustment of expenses previously
allocated to K&R, net of income
tax effect of $98,000 (147,000) (.08) (.08)
-------- ------ ------
Expenses incurred on behalf of joint
venture reclassified as receivable
from joint venture, net of income
tax effect of $13,000 20,000 .01 .01
--------- ------ ------
Effect on previously reported net
income and earnings per common
share $(188,625) $ (.10) $ (.10)
======== ====== ======
15. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
1996 1995 1994
---- ---- ----
Interest $ 48,748 $ 36,760 $ 2,336
Income taxes 641,226 583,659 124,934
- ---------------------------------------------------------------
F-21
16. SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES
The following noncash investing and financing activities
occurred during the year ended December 31, 1996:
Reclassification of deposits on
operating equipment $125,000
Transfer of restricted investment
in lieu of cash for payment of
accounts payable to K&R 100,000
Fair value of stock options issued
for consulting services provided
to the Company 117,500
Income tax benefit related to exercise
of nonemployee stock options 970,000
Stock transferred by Company's
principal stockholder for
future consulting services
to be provided to the Company 42,500
17. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate
the fair value of each class of financial instruments for
which it is practicable to estimate that value.
CASH AND CASH EQUIVALENTS - The carrying amount of cash and
cash equivalents approximates fair value because of the
short-term maturity of these instruments.
DEBT - The fair value of debt is estimated based on quoted
market prices for the same or similar issues or on the
current rates offered to the Company for debt of the same
maturities.
As of December 31, 1996 and 1995, the estimated values of
the Company's financial instruments are as follows:
- --------------------------------------------------------------
F-22
1996 1995
---- ----
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
Cash and cash
equivalents $1,371,435 $1,371,435 $507,889 $507,889
Debt 617,130 617,130 387,228 387,228
18. SUBSEQUENT EVENT
On February 11, 1997 the Company entered into an agreement
for investment banking services. Under terms of the
agreement, the Company is required to pay a 6% investment
banking fee based on any funds raised through an equity
placement. In addition, the investment banker will be
entitled to receive five-year warrants to purchase an amount
of the Company's common stock equal to 12,500 common shares
per million dollars raised on behalf of the Company at the
same per share price paid by the purchasers of the offering.
Additionally, the investment banker is entitled to a
consulting fee of 4% of the total dollars raised in the
financing, payable in warrants with the same terms as those
mentioned above and a monthly advisory fee of $5,000 through
the term of the agreement. The term of the agreement
extends through May 12, 1997.
- -----------------------------------------------------------------
F-23
INDUSTRIAL SERVICES OF AMERICA, INC. Schedule II
VALUATION AND QUALIFYING ACCOUNTS
YEAR ENDED DECEMBER 31, 1996
==============================================================
Balance
at Charged to Charged to Balance
Beginning Costs and Other at End
of Year Expenses Accounts Deductions of Year
------- -------- -------- ---------- -------
Description
-----------
Allowance for doubtful
accounts (deducted from
accounts receivable) $ 16,000 $ - $ - $ - $ 16,000
======== ======== ======= ======= ========
Allowance for doubtful
accounts (deducted from
notes receivable) $ 27,200 $ 2,255 $ - $ - $ 29,455
======== ======== ======= ======= ========
- -------------------------------------------------------------------
F-24
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.
-----------------------------------
(Registrant)
By : /s/ Harry Kletter
---------------------------------
Harry Kletter
President and Chief Executive Officer
Date: March 31, 1997
--------------
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 DATE
--------- ----
/s/ Harry Kletter 3/31/97
- --------------------------
Harry Kletter
Director, President and Chief
Executive Officer (Principal
Executive Officer and
Principal Financial Officer)
/s/ Roberta Kletter 3/31/97
- --------------------------
Roberta Kletter
Director and Executive Vice
President
/s/ Matthew L. Kletter 3/31/97
- --------------------------
Matthew L. Kletter
Director, Vice President of
Legal Affairs and Secretary
/s/ Alan Schroering 3/31/97
- --------------------------
Alan Schroering
Director of Finance and
Treasurer (Principal
Accounting Officer)
EXHIBITS
--------
Exhibit
Number Description
- ------- -----------
3.1 Certificate of Incorporation of the Registrant is
incorporated by reference to Exhibit 3.1 of the
Registrant's report on 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 Management Agreement, dated as of April 1, 1992, as
amended, by and between the Registrant and K & R
Corporation.*
10.2 Stock Option Agreement, dated February 14, 1996, by
and between the Registrant and Ernest D. Chu.
10.3 Stock Option Agreement, dated June 11, 1996, by and
between the Registrant and R. Jerry Falkner.
10.4 Independent Consulting Services Agreement -
Maxwell, dated as of March 31, 1995, and executed
on June 26, 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).
10.5 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).
10.6 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).
10.7 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).
10.8 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).
10.9 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).
11 Statement of Computation of Earnings Per Share.
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.
EXHIBIT 10.1
MANAGEMENT AGREEMENT
--------------------
THIS AGREEMENT, dated as of April 1, 1992, by and between
Industrial Services of America, Inc. ("ISA") a Florida
Corporation with offices at 7100 Grade Lane, Louisville,
Kentucky, 40213 and K & R Corporation ("K&R"), a Kentucky
Corporation with offices at 7100 Grade Lane, Louisville,
Kentucky, 40213.
WHEREAS, ISA is in the business of management and consulting
for business in all aspects of solid waste and recycling; and
WHEREAS, ISA has personnel with experience in physical
operations of facilities in the waste field; and
WHEREAS, K&R owns three separate physical operations all of
which are involved in solid waste and/or recycling, located
adjacent to ISA headquarters, as well as the real estate for
another operation on the same property; and
WHEREAS, K&R wishes to employ ISA to manage all these
facilities and to serve as leasing agent for the property
currently being utilized by Medigen, Inc., a corporation based in
Boston, Massachusetts as a medical waste incineration facility;
and
WHEREAS, the Corporation considers the formation of this
relationship a unique opportunity to expand its current business
base with minimal financial risk to the Corporation;
NOW THEREFORE, for and in consideration of the mutual
covenants of the parties, and other good and valuable
consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties agree as follows:
1. Term: The term of this Agreement shall be for a period of 2
----
years and shall be renewable for an additional 2 year
period, but may be cancelled by either of the parties hereto
upon 60 days written notice from one party to the other.
2. Price: K&R shall pay ISA a management fee equal to 90% of
-----
the net profits from the physical operation(s) of K&R and
such other consideration as described in Exhibit A attached.
In addition to profits from operations, K&R agrees to pay
certain "rental overages" on the rental of any facility
under management of ISA. These facilities and any rental
overages are listed in Exhibit A attached.
3. Management Responsibilities: ISA shall have certain
---------------------------
monetary and operational responsibilities relating to the
activities of the K&R facilities located at 7100 Grade Lane.
These responsibilities include, but are limited to, payment
of all expenses incident to the operation of the K&R
businesses located at 7100 Grade Lane. ISA will also be
responsible for collection of receivables and payment of
invoices and other payables for K&R. All money in any
account of K&R shall be used by ISA in said operations.
These businesses include the scrap operation known as "Tri-
City Scrap", the recycling/reduction facility, the transfer
station and the medical waste incineration facility. ISA
shall be responsible for the physical operation of all
above-listed facilities, except the medical waste
incineration facility. ISA shall be responsible for the
leasing or operation of the medical waste incineration
facility should the present tenant vacate the facility. If
ISA operates the facility, a separate agreement shall be
entered into detailing the terms of this relationship.
Should ISA find a tenant for the facility, ISA shall be
entitled to a "rental overage" of no less than $5000.00 per
month for the life of the lease and any renewals (as further
described in Exhibit A).
4. Insurance: ISA shall be responsible for all necessary
---------
insurance incident to the operation of the facilities
listed.
5. Employment: K&R shall remain responsible for any policies
----------
in place at the time of this Agreement and any prior work-
related claims. ISA shall comply with K&R policies, but
will handle all payroll and personnel matters on behalf of
K&R.
6. Conflict of Interest: ISA acknowledges the fact that an
--------------------
officer and director of ISA owns all of the stock in K&R and
hereby waives any conflict which may exist due to this
relationship. The Board of Directors has approved this
Agreement by unanimous vote and feels that terms of this
management arrangement are quite favorable to ISA and that
ISA would accept this business proposal or any similar or
identical proposal from any outside source.
7. Assignment: This Agreement may not be assigned or
----------
transferred by either party without the prior written
consent of the non-assigning party, which consent shall not
be unreasonably withheld.
8. Entire Agreement: This Agreement (and any Exhibits) shall
----------------
be deemed to constitute the entire Agreement between the
parties hereto and no modification or amendment of any of
the terms hereof shall be binding upon either of the parties
unless in writing and signed by the parties hereto.
9. Entire Agreement: This Agreement shall be governed by the
----------------
law of the Commonwealth of Kentucky.
IN WITNESS WHEREOF, the parties have caused this Agreement
to be executed by their duly authorized representatives as of the
date first above written.
K&R CORPORATION INDUSTRIAL SERVICES OF AMERICA, INC.
By: /s/ Tim Myers By: /s/ Harry Kletter
------------------------- --------------------------------
Title: Vice President Title: President
---------------------- ------------------------------
K & R CORPORATION
7100 GRADE LANE
LOUISVILLE, KY 40213
as of April 30, 1994
Industrial Services of America, Inc.
7100 Grade Lane
Louisville, Kentucky 40213
Re: Tri-City Scrap
--------------
Gentlemen:
Reference is made to the Management Agreement dated April 1,
1992 between us (the "Agreement"). This letter shall confirm that
effective July 1, 1994 the management fee, as set forth in Section
2 of the Agreement, shall be sixty (60%) percent rather than ninety
(90%) percent.
If the foregoing meets with your approval, please sign in the
space provided below and return a copy to us.
Sincerely,
K & R CORPORATION
By: /s/ Tim Myers
---------------------------------
Tim Myers
Vice President
AGREED AND ACCEPTED:
INDUSTRIAL SERVICES OF AMERICA, INC.
By: /s/ Harry Kletter
----------------------------
Harry Kletter
President
(0448K/18)
MLK/jm
K & R CORPORATION
7100 GRADE LANE
LOUISVILLE, KY 40213
as of October 30, 1995
Industrial Services of America, Inc.
7100 Grade Lane
Louisville, Kentucky 40213
Re: Tri-City Scrap
Gentlemen:
Reference is made to the Management Agreement dated April 1, 1992
between us, as amended (the "Agreement"). This letter shall
confirm that effective January 1, 1996, the management fee, as set
forth in Section 2 of the Agreement shall be eighty (80%) percent
rather than sixty (60%) percent (as set forth in the letter
agreement between us dated as of April 30, 1994 relating to this
same subject matter).
If the foregoing meets with your approval, please sign in the space
provided below and return a copy of this letter to us.
Sincerely,
K & R CORPORATION
By: /s/ Tim Myers
--------------------------------
Tim Myers
President
AGREED AND ACCEPTED:
INDUSTRIAL SERVICES OF AMERICA, INC.
By: /s/ Harry Kletter
----------------------------
Harry Kletter
President
EXHIBIT 10.2
50,000 Shares Exercise Price: $5.00
- ------------- ----------------------
STOCK OPTION AGREEMENT
THIS STOCK OPTION AGREEMENT (the "Agreement") made this 14th day of
----
February, 1996, between INDUSTRIAL SERVICES OF AMERICA, INC.,
- --------
herein referred to as the "Corporation", being incorporated under
the laws of the State of Florida, maintaining its principal place
of business at 7100 Grade Lane, Louisville, Kentucky 40213; and
Ernest D. Chu, herein referred to as "Consultant", of Corporate
- -------------
Builders, L.P. of Trump Tower, 725 Fifth Avenue, 19th Floor, New
York, NY 10022.
WITNESSETH:
WHEREAS, the variety of services rendered by Consultant, including
general business, research management and business opportunity
evaluation, represents an important and valuable aid to the conduct
of the Corporation's business enterprise, and as such Corporation
deems it to be in the best interests of the Corporation to secure
the services of Consultant; and
WHEREAS, the Corporation desires to enter into this Option
Agreement with the Consultant containing the terms and conditions
hereinafter set forth, and to grant to Consultant an option to
purchase shares of the Common Stock of the Corporation.
NOW, THEREFORE, in consideration of the promises and mutual
agreements of the parties herein contained, and for other good and
valuable consideration, the parties agree as follows:
1. GRANT OF OPTION. In consideration of the foregoing, the
Corporation hereby grants and issues to Consultant (or his estate)
the right at his option (hereinafter referred to as the "Option")
to purchase up to an aggregate of 50,000 Shares of Common Stock
------
($.01 par value) of the Corporation at a price of $5.00 per share
all of which Option shall be exercisable, in whole or in part at
any time prior to December 31, 1997 (the "Expiration Date").
1.1 ANTI-DILUTION PROVISION. The number of shares underlying
the Option shall be proportionately increased in the event that the
Corporation causes to be issued additional Shares in the form of a
stock dividend, stock splits, option exercise at less than book
value, or other such reclassification; or conversely,
proportionately decreased in the event of a reverse split or
reclassification. In the event that stockholders of the
Corporation are granted the right to purchase additional shares
from the proceeds of a cash dividend by the Corporation, such event
shall be treated as a stock dividend as relates to the Option.
2. METHOD OF EXERCISING OPTION. The Option may be
exercised, in whole, or in part at any time prior to 3:00 p.m.
Louisville, Kentucky Time on the Expiration Date, by giving written
notice to the Corporation to that effect. The Option evidenced
hereby shall be exercisable by the delivery to and receipt by the
Corporation of: (a) a copy of this original Option Agreement and
(b) a written Notice of Election to Exercise specifying the number
of Shares to be purchased; in not less than one thousand (1000)
share denominations. If the Notice of Exercise is for less than
the total of 50,000 Shares, and the time for exercise has not
expired, the Corporation shall provide the Consultant with a new or
revised Option Agreement for the balance of the Shares then
remaining unexercised, upon the same terms and conditions as stated
herein.
3. CORPORATION'S REPRESENTATION. The Corporation represents
that it will use its best efforts to prepare, file and maintain
with the appropriate regulatory authorities an effective
Registration Statement relating to the securities underlying the
options granted herein within twelve months of the date hereof. In
addition in connection with any registration statement of the
Corporation to be used to offer and sell shares of the Common Stock
($.01 par value) of the Corporation for cash, Consultant is hereby
granted "piggyback" registration rights in connection with any
registration statements of the Corporation to be used to offer and
sell shares of the Common Stock $.01 par value of the Corporation
for cash. Consultant may serve written notice upon the Corporation
and request that all or part of the underlying shares of Common
Stock be included in the first such registration statement which
the Corporation shall prepare and file with the Securities and
Exchange Commission subsequent to the date hereof satisfying the
prior conditions hereof. The number of shares of the Common Stock
subject to the Option that may be included in any such registration
statement shall be the sole decision of any underwriter selected by
the Corporation for the offer and sale of the shares of the Common
Stock of the Corporation included in the registration statement of
the Corporation for which the Consultant has piggyback registration
rights. All expenses associated with the registration of the
Option and the underlying shares of Common Stock shall be borne
solely by the Corporation.
4. RESTRICTION AGAINST ASSIGNMENT. Except as otherwise
expressly provided above, Consultant agrees on behalf of himself
and of any other person or persons claiming any benefits by virtue
of this Option Agreement, that this Option Agreement and the
rights, interests and benefits under it shall not be assigned,
transferred, pledged, or hypothecated in any way by Consultant or
any other person claiming under Consultant by virtue hereof. Such
rights, interests, or benefits shall not be subject to execution,
attachment, or similar process. Any attempted assignment,
transfer, pledge, or hypothecation, or other disposition of this
Option Agreement or of such rights, interests, and benefits
contrary to the preceding provisions, or the levy on any attachment
or similar process thereupon, shall be null and void and without
any legal effect.
5. EXCEPTION TO NON-ASSIGNABILITY. This Agreement shall
inure to the benefit of, and shall be binding upon, the parties
hereto and their respective heirs, personal representatives, legal
representatives, successors and assigns.
6. NOTICES. All notices required to be given by either
party shall be in writing and delivered by registered, certified or
overnight express mail, return receipt requested, to the party
being noticed at the address set forth in the first paragraph of
this Agreement and shall be effective three days following the
mailing of said notice. Any notice to the Corporation shall be
addressed to the attention of the President. Any notice to the
Corporation shall be addressed to the attention of the President.
Either party may effect a change in such address by a prior written
notice.
7. BINDING ACCEPTANCE. By acceptance of this signed Option
Agreement, the Consultant does hereby agree to be bound by all of
the terms and conditions set forth herein.
8. GOVERNING LAW.
(a) CONSENT TO JURISDICTION AND SERVICE OF PROCESS. This
Agreement has been entered into in the Commonwealth of Kentucky and
the validity, interpretation and legal effect of this Agreement
will be governed by the laws of the Commonwealth of Kentucky
applicable to contracts entered into within the Commonwealth of
Kentucky. Any dispute under this agreement shall be resolved by
arbitration conducted in the City of Louisville in the Commonwealth
of Kentucky by the American Arbitration Association. Any process
including, without limitation, any summons or subpoena in any such
action or proceeding may, among other methods, be served upon
delivering it or mailing it, by registered or certified mail,
directed to the address on page one (1) of this Agreement. Any
such delivery or mail service will be deemed to have the same force
and effect as personal service within the Commonwealth of Kentucky.
(b) In any action or proceeding referred to above each party
hereto waives, to the extent permitted by the Hague Convention on
Service of Process Abroad, personal service of the summons,
complaint, or other process or translation thereof and agrees that
service may be mailed to its address as set forth on page 1 of this
Agreement.
IN WITNESS WHEREOF, the Corporation has executed this Option
Agreement by its duly authorized corporate officers on the day and
year first above written.
INDUSTRIAL SERVICES OF AMERICA, INC.
By: /s/ Harry Kletter
-------------------------------------
Title: CEO
---------------------------------
Accepted By:
/s/ Ernest D. Chu
----------------------------------------
Ernest D. Chu
Senior Managing Director
CORPORATE BUILDERS L.P.
EXHIBIT 10.3
20,000 Shares Exercise Price: $5.00
- ------------- ----------------------
STOCK OPTION AGREEMENT
THIS STOCK OPTION AGREEMENT (the "Agreement") made this 11th day of
----
June 1996, between INDUSTRIAL SERVICES OF AMERICA, INC., herein
referred to as the "Corporation", being incorporated under the laws
of the State of Florida, maintaining its principal place of
business at 7100 Grade Lane, Louisville, Kentucky 40213; and
R. Jerry Falkner, herein referred to as "Consultant", P. O. Box
- ----------------
1230, of 214 Sixth Street, Suite 12, Crested Butte, CO 81224.
WITNESSETH:
WHEREAS, the variety of services rendered by Consultant, including
general business, research management and business opportunity
evaluation, represents an important and valuable aid to the conduct
of the Corporation's business enterprise, and as such Corporation
deems it to be in the best interests of the Corporation to secure
the services of Consultant; and
WHEREAS, the Corporation desires to enter into this Option
Agreement with the Consultant containing the terms and conditions
hereinafter set forth, and to grant to Consultant an option to
purchase shares of the Common Stock of the Corporation.
NOW, THEREFORE, in consideration of the promises and mutual
agreements of the parties herein contained, and for other good and
valuable consideration, the parties agree as follows:
1. GRANT OF OPTION. In consideration of the foregoing, the
Corporation hereby grants and issues to Consultant (or his estate)
the right at his option (hereinafter referred to as the "Option")
to purchase up to an aggregate of 20,000 Shares of Common Stock
------
($.01 par value) of the Corporation at a price of $5.00 per share
all of which Option shall be exercisable, in whole or in part at
any time within ten (10) years from the date hereof (the
"Expiration Date").
1.1 ANTI-DILUTION PROVISION. The number of shares underlying
the Option shall be proportionately increased in the event that the
Corporation causes to be issued additional Shares in the form of a
stock dividend, stock splits, option exercise at less than book
value, or other such reclassification; or conversely,
proportionately decreased in the event of a reverse split or
reclassification. In the event that stockholders of the
Corporation are granted the right to purchase additional shares
from the proceeds of a cash dividend by the Corporation, such event
shall be treated as a stock dividend as relates to the Option.
2. METHOD OF EXERCISING OPTION. The Option may be
exercised, in whole, or in part at any time prior to 3:00 p.m.
Louisville, Kentucky Time on the Expiration Date, by giving written
notice to the Corporation to that effect. The Option evidenced
hereby shall be exercisable by the delivery to and receipt by the
Corporation of: (a) a copy of this original Option Agreement; (b) a
written Notice of Election to Exercise specifying the number of
Shares to be purchased; in not less than one thousand (1000) share
denominations and (c) payment of the full purchase price, either by
federal funds wire transfer to the bank depository to be specified
by the Corporation or by certified check, U.S. funds, payable to
the order of the Corporation, or on such other terms as may be
acceptable to the Corporation.
3. CORPORATION'S REPRESENTATION. The Corporation represents
that it will use its best efforts to prepare, file and maintain
with the appropriate regulatory authorities an effective
Registration Statement relating to the securities underlying the
options granted herein within twelve months of the date hereof. In
addition in connection with any registration statement of the
Corporation to be used to offer and sell shares of the Common Stock
($.01 par value) of the Corporation for cash, Consultant is hereby
granted "piggyback" registration rights in connection with any
registration statements of the Corporation to be used to offer and
sell shares of the Common Stock $.01 par value of the Corporation
for cash. Consultant may serve written notice upon the Corporation
and request that all or part of the underlying shares of Common
Stock be included in the first such registration statement which
the Corporation shall prepare and file with the Securities and
Exchange Commission subsequent to the date hereof satisfying the
prior conditions hereof. The number of shares of the Common Stock
subject to the Option that may be included in any such registration
statement shall be the sole decision of any underwriter selected by
the Corporation for the offer and sale of the shares of the Common
Stock of the Corporation included in the registration statement of
the Corporation for which the Consultant has piggyback registration
rights. All expenses associated with the registration of the
Option and the underlying shares of Common Stock shall be borne
solely by the Corporation.
4. RESTRICTION AGAINST ASSIGNMENT. Except as otherwise
expressly provided above, Consultant agrees on behalf of himself
and of any other person or persons claiming any benefits by virtue
of this Option Agreement, that this Option Agreement and the
rights, interests and benefits under it shall not be assigned,
transferred, pledged, or hypothecated in any way by Consultant or
any other person claiming under Consultant by virtue hereof. Such
rights, interests, or benefits shall not be subject to execution,
attachment, or similar process. Any attempted assignment,
transfer, pledge, or hypothecation, or other disposition of this
Option Agreement or of such rights, interests, and benefits
contrary to the preceding provisions, or the levy on any attachment
or similar process thereupon, shall be null and void and without
any legal effect.
5. EXCEPTION TO NON-ASSIGNABILITY. This Agreement shall
inure to the benefit of, and shall be binding upon, the parties
hereto and their respective heirs, personal representatives, legal
representatives, successors and assigns.
6. NOTICES. All notices required to be given by either
party shall be in writing and delivered by registered, certified or
overnight express mail, return receipt requested, to the party
being noticed at the address set forth in the first paragraph of
this Agreement and shall be effective three days following the
mailing of said notice. Any notice to the Corporation shall be
addressed to the attention of the President. Any notice to the
Corporation shall be addressed to the attention of the President.
Either party may effect a change in such address by a prior written
notice.
7. BINDING ACCEPTANCE. By acceptance of this signed Option
Agreement, the Consultant does hereby agree to be bound by all of
the terms and conditions set forth herein.
8. GOVERNING LAW.
(a) CONSENT TO JURISDICTION AND SERVICE OF PROCESS. This
Agreement has been entered into in the Commonwealth of Kentucky and
the validity, interpretation and legal effect of this Agreement
will be governed by the laws of the Commonwealth of Kentucky
applicable to contracts entered into within the Commonwealth of
Kentucky. Any dispute under this agreement shall be resolved by
arbitration conducted in the City of Louisville in the Commonwealth
of Kentucky by the American Arbitration Association. Any process
including, without limitation, any summons or subpoena in any such
action or proceeding may, among other methods, be served upon
delivering it or mailing it, by registered or certified mail,
directed to the address on page one (1) of this Agreement. Any
such delivery or mail service will be deemed to have the same force
and effect as personal service within the Commonwealth of Kentucky.
(b) In any action or proceeding referred to above each party
hereto waives, to the extent permitted by the Hague Convention on
Service of Process Abroad, personal service of the summons,
complaint, or other process or translation thereof and agrees that
service may be mailed to its address as set forth on page 1 of this
Agreement.
IN WITNESS WHEREOF, the Corporation has executed this Option
Agreement by its duly authorized corporate officers on the day and
year first above written.
INDUSTRIAL SERVICES OF AMERICA, INC.
------------------------------------
By: /s/ Harry Kletter
---------------------------------
Title: Chairman/CEO
------------------------------
Accepted By:
/s/ R. Jerry Falkner
------------------------------------
R. Jerry Falkner
INDUSTRIAL SERVICES OF AMERICA, INC. EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE
Years ended December 31, 1996, 1995 and 1994
1996 1995 1994
---- ---- ----
Net income $ 460,836 $ 704,159 $ 489,417
========== ========= =========
Primary:
Weighted average number of common
shares outstanding 1,729,600 1,729,600 1,729,600
Add:
Common equivalent shares (determined
using the "treasury stock" method)
representing shares issuable upon
exercise of stock options 220,102 - (1) -
---------- ----------- ---------
Weighted average number of shares used
in calculation of primary earnings
per share 1,949,702 1,729,600 1,729,600
---------- ---------- ---------
Primary earnings per common share $ 0.24 $ 0.41 $ 0.28
========== ========= =========
Fully diluted:
Weighted average number of common
shares outstanding 1,729,600 1,729,600 1,729,600
Add:
Common equivalent shares (determined
using the "treasury stock" method)
representing shares issuable upon
exercise of stock options 223,981 123,214 -
---------- ---------- ---------
Weighted average number of shares used
in calculation of fully diluted
earnings per share 1,953,581 1,852,814 1,729,600
---------- ---------- ---------
Fully diluted earnings per
common share $ 0.24 $ 0.38 $ 0.28
========== ========= ========
(1) Does not include increase in common shares by the number of shares
issuable on the exercise of available stock options nor a reduction
of the common shares by the number of common shares assumed to be
purchased with the proceeds from the exercise of available stock
options because average price of the Company's common stock is not
determinable for the year ended December 31, 1995.