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INDUSTRIAL SERVICES OF AMERICA, INC.
UNITED STATES
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, 1997
[ ]TRANSITION REPORT UNDER SECTON 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _______ to ________
Commission File No.: 0-20979
INDUSTRIAL SERVICES OF AMERICA, INC.
(Exact name of registrant as specified in its charter)
Florida 59-0172746
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7100 Grade Lane, P.O.Box 32428, Louisville, Kentucky 40232
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (502) 368-1661
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
(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
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 $5,999,376 as of March 16, 1998.
The number of shares outstanding of the registrant's class of common stock is
1,929,600 shares as of March 16, 1998.
DOCUMENT INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for the Annual Meeting of
Shareholders to be held on May 21, 1998 are incorporated by reference into Part
III of this report.
Part I
ITEM 1. BUSINESS
General
Industrial Services of America, Inc. (the "Registrant") is a ferrous,
non-ferrous and fiber recycling as well as an integrated solid waste management
company. The ferrous division's major products include recycling of steel and
iron products, whereas the non-ferrous division recycles copper, aluminum and
brass. The fiber recycling consists mainly of high-grade papers and corrugated
cardboard. The management division of the Registrant is engaged in the business
of commercial, retail and industrial waste management and waste handling
equipment sales and service. The Registrant is able to offer a "total package"
concept to commercial, retail and industrial clients to cover their waste
management needs. Combining waste reduction, waste materials diversion and waste
equipment technology, the Registrant creates waste programs tailored to each
client's individual needs. The Registrant believes that it offers a more
complete line of products and services than its competitors and is better able
to coordinate these services on a regional and nationwide basis. By offering
competitively priced waste handling equipment from a number of different
manufacturers, the Registrant is able to tailor equipment packages for
individual client needs. 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 and contracting with a hauling
company at a reasonable cost at each participating location for the retail chain
customers of the Registrant that are a part of the management program offered by
the Registrant. Because the Registrant is not a "waste transporter", it is able
to maintain a neutral position vis-a-via the customers and the hauling
companies. The Registrant has designed and developed proprietary computer
software that provides the Registrant's personnel with relevant information on
each of the client's locations, as well as pertinent information on disposal
rates and costs of equipment, installation and shipping. The availability of
this software has allowed the Registrant to build a database for serving
customers from coast to coast. The Registrant is able to estimate cost savings
to potential customers by reviewing their current waste hauling invoices either
regionally or nationwide.
The Registrant plans to grow by expanding its marketing base and by
seeking future joint ventures and acquisitions of companies in related
businesses. The Registrant continues to target retail and industrial customers
throughout the United States for the purpose of increasing its clientele in this
sector. Although the number of locations for each industrial customer will
generally be less than that of large retail chains, solid waste output for each
location of industrial clients is generally greater than that of retail clients.
The Registrant believes that the corresponding greater need for appropriate
equipment results in the increased possibility of large equipment orders.
Further, the Registrant believes it can provide savings for each industrial
location.
The Registrant believes that opportunities for its continued growth are
enhanced by the increasingly stringent regulatory and political constraints
being placed on the waste hauling and disposal industries. These more stringent
federal, state and local regulations drive prices higher throughout the
industry. With ever-increasing costs, solid waste disposal is becoming one of
the larger expense items for retail and industrial customers, and perhaps one of
the most difficult to contain. The Registrant believes these increased costs
will enhance the value of its services. Through the retention of the
Registrant's services, customers will be able to "outsource" their in-house
waste needs to an experienced independent entity capable of lowering and
containing waste disposal costs. The Registrant is able to provide customized
reports detailing clients' recycling revenues as well as waste disposal expense.
In 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 was 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 retained 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 1997, 1996 and 1995, revenue derived
under this arrangement resulted in income before provision for income taxes to
the Registrant totaling $469,184, $712,765 and $728,391, respectively.
Commencing in January 1998, the Registrant and K&R entered into a Consulting
Agreement, such that the Registrant now retains all profits from the scrap and
corrugated paper recycling facility and pays only the consulting fee to K&R.
This Agreement enables the Registrant to control the management and day-to-day
decisions regarding the recycling plant. See "Business Subsequent Events" for
(the "Consulting Agreement") details of this Consulting Agreement.
On July 1, 1997, the Registrant acquired the assets of a complete
non-ferrous scrap metal recycling facility in Louisville, Kentucky known as "The
Metal Center" pursuant to the "Acquisition of Assets of TMG Enterprises, Inc. by
Industrial Services of America, Inc." thus expanding the Registrants recycling
product lines and markets. The Metal Center is located at 7100 Grade Lane,
Louisville, Kentucky 40213. The acquisition of assets included purchase of
equipment and a non-compete agreement with the two selling principals for
$1,600,000. The purchase price is to be paid in two installments of $800,000
each, payable on January 2, 1998 and July 1, 1998. The sellers have the
alternative of receiving the equivalent purchase price payable in the
Registrant's Common Stock at an exchange rate of $8.00 per share value. The
Registrant believes that this acquisition enhances the Registrant's ability to
provide turnkey services in the recycling business. On an annualized basis this
acquisition could increase revenues by over $10 million.
In September 1997, the Registrant entered into an agreement (the "MGM
Agreement") with MGM Services, Inc. ("MGM") to void a May 1, 1997 management
agreement in favor of a new agreement to: (i) reimburse the Registrant for
certain operating expenses, (ii) cause MGM to assign to the Registrant certain
of the management contracts of MGM, and (iii) mutually release each other from
any and all future claims under the MGM Agreement. Under the MGM Agreement, MGM
agreed to reimburse the Registrant $30,000 for certain
operating expenses, and the Registrant agreed to pay a purchase price of
$300,000 for assignment of management contracts from MGM to the Registrant. The
management contracts are various contracts to manage the waste stream and
recyclables for assorted retail, commercial and industrial clients, previously
contracted by MGM. The assignment included approximately 550 locations and an
approximate $3 million in additional revenues to the Registrant.
During August 1997, the Registrant issued options (the "Bierman Options")
to purchase 100,000 shares of its Common Stock to its then acting Chief
Executive Officer, Glenn Bierman. Mr. Bierman's Letter Agreement of August 21,
1997 (the "Bierman Agreement") set forth a monthly consulting fee. Bierman
Options provide for an exercise price of $5 per share and are exercisable
through October 1999. Because the exercise price of these options was in excess
of the market value of the Registrant's Common Stock on the date of grant, there
are no compensation costs recorded in 1997 related to these options. In November
1997 it was mutually agreed that Mr. Bierman would cease to be Acting Chief
Executive Officer of the Registrant. The monthly fee due to Mr. Bierman per the
Bierman Agreement for serving as Acting Chief Executive Officer was terminated
by mutual agreement in November 1997.
In October 1997, the Registrant issued options to purchase 25,000 shares
and an additional option to purchase 100,000 shares of Common Stock to its
Interim President and Chief Operating Officer, Sean M. Garber as a component of
a five-year employment agreement (the "Garber Employment Agreement"). The
exercise price related to the options to purchase (i) the 25,000 shares is $1.00
per share and (ii) the 100,000 shares is $5.00 per share. Both such options are
exercisable over a five year period. Compensation cost charged to operations in
1997 related to the option to purchase 25,000 shares was $14,974. The option to
purchase 100,000 shares was at market value the day of the grant, therefore no
charges were associated with this option.
Registrant Background
The Registrant was incorporated in October 1953 in Florida under the name
Alson Manufacturing, Inc ("Alson"). From the date of incorporation through
January 5, 1975, the Registrant was involved in the design and manufacture of
various forms of electrical products. In 1979, the Board of Directors and the
shareholders of the Registrant commenced liquidation of all the tangible assets
of Alson. On October 27, 1983, Harry Kletter, the Chairman of the Board 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. On July 1, 1997, the Registrant
acquired the assets of a complete non-ferrous scrap metal recycling facility,
now called "ISA Recycling".
The Registrant's divisions operate closely with each other in terms of
present customer care and proposals for new customers. WESSCO has expanded its
product line and presently offers a variety of equipment, which would be
necessary for an efficient waste handling and/or recycling system for an
individual user. The prices WESSCO can offer are competitive with most dealers
since it purchases equipment at dealer cost without having to pay dealer
overhead. The WESSCO program is attractive to customers planning expansion
programs. Some of these customers have designated WESSCO as their exclusive
waste equipment supplier and consultant. By working with the customer from the
time the initial building plans are developed, WESSCO has input into the design,
development and implementation of the waste handling system.
CWS has developed a network of over 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.
Through ISA Recycling, the Registrant processes, sells and brokers a broad
range of materials for recycling. These materials include ferrous and
non-ferrous metals, corrugated containers, high-grade paper and plastic. The
Registrant offers document destruction and transport of recyclable materials to
the Registrant's facility for regional clients. This division also brokers
recycled commodities for CWS customers.
The Registrant derives a significant portion of its revenues from two
primary customers accounting for approximately 57%, 58% and 44% of 1997, 1996
and 1995 revenues, respectively. The Registrant is taking affirmative action to
counter its dependence on any one customer. The potential negative effect of
losing any single customer has been reduced by the Registrant's expansion of its
customer base. However, there can be no assurance that if the Registrant was to
lose all or the substantial portion of the business with these two customers
that such losses would not have a material adverse effect on the Registrant.
In addition to its other services, the Registrant provides management
services relating to recycling and waste stream analysis. The main advantage to
offering management services is that the individual projects are priced on a
substantial prepaid individual basis. This method of pricing allows the
Registrant to collect an up-front fee with the opportunity to "sell" the
customer traditional services after the evaluation and/or any subsequent
implementation is complete. By offering management and evaluation services, the
Registrant is able to pursue additional customers.
During 1997, the Registrant committed approximately $1,374,000 towards
capital improvements with respect to its operation. A significant portion of
such funds was used to purchase two cranes, recycling equipment and make
additions to the rental/lease fleet of equipment. The acquisition of this new
material processing equipment has enhanced operating efficiencies and created
additional capacity for new and expanded equipment leasing business
opportunities.
Equipment Leasing/WESSCO
The Registrant leased approximately 94 pieces of solid waste and recycling
equipment to customers in 1997, with a subsequent increase in monthly rental
income to the Registrant of 29% as compared to the same period of 1996. The
majority of these contracts are for a minimum of 36 months. While the resources
required to purchase this equipment are generated internally and the revenues
returned are deferred over the term of the contract, the Registrant's management
believes this investment in the rental fleet to be a proper use of capital and
will provide a long-term favorable return on its investment.
Industry Background
The Registrant is involved in the management of non-hazardous solid waste
and recyclables for retail and industrial customers. As such, the industry is
actually driven by the multi-billion dollar solid waste collection and disposal
industry. The size of this industry has increased for the past several years and
should continue to increase, as landfill space becomes more scarce. Although
society (and industry) has developed an increased awareness of the environmental
issues and recycling has increased, waste production also continues to increase.
Because of environmental concerns, new regulations and cost factors, it has
become difficult to obtain the necessary permits to build any new landfills.
Management of the Registrant believes that with the consolidation taking place
in the waste industry, it will become increasingly difficult for an individual
to get a fair price. The Registrant should therefore be in a position to be
called upon to represent the best interest of that customer; this fact can only
enhance the Registrant's business.
The rising costs associated with solid waste disposal have created
additional opportunities for the Registrant. Because waste disposal has begun to
be an increasingly larger percentage of the total monthly expenditures incurred
by commercial establishments, the Registrant believes that the services offered
by the Registrant will be in greater demand. Many commercial establishments that
have paid little attention to the costs associated with waste disposal in the
past are now looking for ways to reduce expenses in this area. The Registrant
offers commercial establishments its expertise to lower waste disposal bills and
initiate recycling programs to generate additional revenues and/or reduce costs
and materials bound for ultimate disposal.
In addition to increasing landfill costs, regulatory measures and more
stringent control of material bound for disposal ("flow control") are making the
management of solid waste an increasingly difficult problem. The United States
Environmental Protection Agency (the "EPA") is expected to continue the present
trend of restricting the amount of "potentially" recyclable material bound for
landfills. Many states have passed, or are contemplating measures, which would
require commercial establishments to recycle a minimum percentage of their waste
stream and would restrict the percentage of recyclable materials in any
commercial load of solid waste material. Many states have already passed
restrictive regulations requiring a plan for the reduction of waste or the
segregation of recyclable materials from the waste stream at the source.
Management of the Registrant believes that these restrictions may create
additional marketing opportunities as waste disposal needs within commercial
establishments become more specialized. Some large commercial establishments
have hired in-house staff to handle the solid waste management and recycling
responsibilities, but have found that without adequate resources and staff
support, in-house handling of these responsibilities may not be an effective
alternative. The Registrant offers these establishments a possible solution to
this increasing burden.
Competition
On a commercial/industrial waste management level, the Registrant has
competition from a variety of sources. Much of it is from companies that
concentrate their efforts on a regional level. Management of the Registrant
believes that with the proprietary database of regional and national pricing,
the Registrant will maintain its edge on a national basis.
There has been increased competition from national hauling companies. The
large national hauling companies often attempt to handle an entire chain of
locations for a "national chain" client. This scenario poses a potential
conflict of interest since these hauling companies can attain greater
profitability from increases in hauling and disposal revenues. In addition to
having an interest in higher hauling and disposal rates, the national hauling
companies do not have operations in every community and do not, to the knowledge
of management, have some of the billing and computer capabilities which the
Registrant is able to offer. Additionally, management has encountered evidence
of some reluctance from independent hauling companies to work with national
hauling companies.
There is also competition from some equipment manufacturers. These
companies have their primary interest in selling or leasing equipment and offer
management services in order to secure these sales or leases. There is a cost
involved in "using" the equipment and the money saved must justify the amount
spent on this equipment.
The metals recycling business is highly competitive, it is subject to
significant changes in economic and market conditions. Certain of the
Registrant's competitors have greater financial, marketing and other resources.
There can be no assurance that the Registrant will be able to obtain its desired
market share based on the competitive nature of this industry.
An important difference between the Registrant and the majority of its
competition is the Registrant's management "process". The systematic approach
attempts to provide consistent results for the customer. At the implementation
stage, the Registrant actively "bids out" every location that a new customer
requests. The Registrant repeats this bidding process at any time that a client
receives notice of an undocumented price increase or at regular intervals as
indicated in the contractual relationship. At subsequent stages, the Registrant
will evaluate a customer's solid waste program and give suggested alternatives
for improvement.
The Registrant has developed a network of maintenance and hauling
companies throughout the country and due to the volume of business awarded to
them by the Registrant, often these companies will offer discounted hauling and
maintenance rates to the Registrant. However, the Registrant is not "affiliated"
with any particular company or vendor in the hauling and/or maintenance
industries, but rather deals with those companies and vendors that can supply
quality service at a favorable price. In addition to the volume of business
handled by some of these "vendors", the vendors understand that as long as the
accounts are well serviced, they will be invited to bid on future accounts.
Few if any, of the Registrant's competitors have a national network of
vendors similar to the one the Registrant has developed over its years of
operation. The major hauling companies are limited in the scope of services
which they can provide to commercial/industrial accounts. Although the major
hauling companies have operating companies in most major and intermediate-sized
cities, they do not have nationwide geographic coverage. Therefore, for large
commercial/industrial clients, they must obtain bids from local hauling
companies that may perceive them to be future competitors. The Registrant has
positioned itself to negotiate with the haulers, while servicing its clients on
a nationwide basis.
Most of the direct competition is from small regional companies that
bid on regional accounts or national accounts on a regional basis. Few of
the Registrant's competitors appear to be equipped to handle large national
accounts nor do they seem to have the inclination to expand their geographic
coverage. There are numerous national companies in closely related businesses,
including national hauling companies that have substantially greater financial
resources than does the Registrant. Should any of these companies decide to
compete directly with the Registrant, it could have a material adverse effect on
the business of the Registrant.
Employees
The Registrant has approximately one hundred and thirteen (113) full-time
employees and two (2) independent consultants.
Effect of State and Federal Environmental Regulations
Any environmental regulatory liability relating to the Registrant's
operations is generally borne by the customers with whom the Registrant
contracts and the third party vendors in their capacity as transporters. As a
matter of Registrant's policy, the Registrant uses its best efforts to secure
indemnification for environmental liability from its customers and third party
vendors. Although management of the Registrant believes that for the most part
its business does not subject it to potential environmental liability, the
Registrant continues to use best efforts to be in compliance with federal, state
and local environmental laws, including but not limited to the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended, the
Hazardous Materials Transportation Act, as amended, the Resource Conservation
and Recovery Act, as amended, the Clean Air Act, as amended, and the Clean Water
Act. Such compliance in 1997 did not constitute a material expense to the
Registrant.
The collection and disposal of solid waste and rendering of related
environmental services are subject to federal, state and local requirements
which regulate health, safety, the environment, zoning and land-use. Federal,
state and local regulations vary, but generally govern disposal activities and
the location and use of facilities and also impose restrictions to prohibit or
minimize air and water pollution. In addition, governmental authorities have the
power to enforce compliance with these regulations and to obtain injunctions or
impose fines in the case of violations, including criminal penalties. These
regulations are administered by the EPA and various other federal, state and
local environmental, health and safety agencies and authorities, including the
Occupational Safety and Health Administration of the U.S. Department of Labor.
The Registrant strives to conduct its operations in compliance with
applicable laws and regulations. While such amounts expended in the past or
anticipated to be expended in the future have not had and are not expected to
have a material adverse effect on the Registrant's financial condition or
operations, the possibility remains that technological, regulatory or
enforcement developments, the results of environmental studies or other factors
could materially alter this expectation.
Each state in which the Registrant operates has its own laws and
regulations governing solid waste disposal, water and air pollution and, in most
cases, releases and cleanup of hazardous substances and liability for such
matters. Several states have enacted laws that will require counties to adopt
comprehensive plans to reduce, through waste planning, composting, recycling, or
other programs, the volume of solid waste landfills. These laws have recently
been promulgated in several states. Legislative and regulatory measures to
mandate or encourage waste reduction at the source and waste recycling, also are
under consideration by Congress and the EPA.
Finally, various states have enacted, or are considering enacting, laws
that restrict the disposal within the state of solid or hazardous wastes
generated outside the state. While laws that overtly discriminate against out of
state waste have been found to be unconstitutional, some laws that are less
overtly discriminatory have been upheld in court. Challenges to other such laws
are pending. The outcome of pending litigation and the likelihood that other
such laws will be passed and will survive constitutional challenge are
uncertain. In addition, Congress is currently considering legislation
authorizing states to adopt such restrictions.
Subsequent Events
A. Appointment of President.
The Board of Directors of the Registrant appointed Sean M. Garber to the
position of President at its meeting on February 16, 1998, retroactive to
February 5, 1998. The Board of Directors elected Mr. Garber to this position at
its meeting on February 16, 1998. Garber became Interim President effective
December 1, 1997, when Harry Kletter, the former president, resigned.
B. Election of New and Replacement Directors. On February 16, 1998, the
Registrant received resignations from the following Board Members: Peter
Cullian, Matthew L. Kletter and Timothy W. Myers. The Board of Directors of the
Registrant accepted their resignations effective February 16, 1998 and appointed
Joseph H. Cohen and R. Michael Devereaux to fill the vacancies. Additionally,
for purposes of having outside members on the Board, the Registrant, with Board
approval, appointed Dr. Barry Naft to the Board, thus giving the Registrant
these outside directors: Dr. Naft and Mr. Devereaux. Messrs. Cohen, Devereaux
and Dr. Naft will serve as members of the Board until the 1998 Annual Meeting of
the Shareholders. With the selection of Messrs. Cohen and Devereaux and Dr.
Naft, the Board of Directors is comprised of five (5) members, the other members
being Harry Kletter and Sean M. Garber.
C. Formalization of Lease and Consulting Arrangements between K&R Corporation
and the Registrant.
On February 16, 1998 the Registrant's Board of Directors ratified and
formalized an existing relationship in connection with (i) the leasing by the
Registrant of its facilities from K&R, and (ii) the provision of consulting
services from K&R to the Registrant. K&R is an affiliate of the Registrant.
1. Lease Agreement. The Lease Agreement (the "K&R Lease"), effective as of
January 1, 1998, between K&R, as landlord, and the Registrant, as lessee, covers
approximately 24.5 acres of land and the improvements thereon (including the
recent acquisition by K&R of approximately 4.5 acres plus improvements), which
are located at 7100 Grade Lane in Louisville, Kentucky (the "Leased Premises").
The principal improvements consist of an approximately 22,750 square foot
building used as the Corporate Office, an approximately 8,286 square foot
building used for CWS offices, an approximately 13,995 square foot used as the
paper recycling plant, an approximately 12,000 square foot building used for
metals recycling plant, and an approximately 51,760 square foot building used as
the recycling offices and warehouse space, with a remaining 15,575 square feet
of space contained in five (5) buildings ranging in size from approximately
8,000 to 256 square feet.
The initial term of the K&R Lease is for ten years with two five-year
option periods (the "Option Periods") available thereafter. The base rent
for the first five years is $450,000 per annum, payable at the beginning of
each month in an amount equal to $37,500 (the "Fixed Minimum Rent"). The
Fixed Minimum Rent adjusts each five years, including each of the Option
Periods, in accordance with the Consumer Price Index. The Fixed Minimum Rent
also increases to $750,000 per annum and an amount equal to $62,500 per month in
the event of a "change in control" of the Registrant. Under the K&R Lease,
"change in control" means a transaction or series of transactions as a result of
which (i) any person who does not currently own a majority of the outstanding
stock of the Registrant acquires a majority of the outstanding stock of the
Registrant, (ii) the Registrant sells or otherwise disposes of all or
substantially all of the assets or business operations of the Registrant to any
other person; or (iii) the Registrant merges or consolidates with any other
person; unless, in any such case, shareholders owning the outstanding voting
stock of the Registrant immediately prior to the consummation of such
transaction or transactions will own, upon consummation of such transaction or
transactions, at least a majority of the outstanding shares of the voting stock
of the person acquiring the shares or assets of the person acquiring the
Registrant or surviving the merger or consolidation of the Registrant in the
transaction(s).
The Registrant is also required to pay, as additional rent, all real
estate taxes, insurance, utilities, maintenance and repairs, replacements
(including replacement of roofs if necessary) and other expenses. The Registrant
provided a $50,000 security deposit to K&R for performance by the Registrant of
the terms, covenants and conditions of the K&R Lease applicable to it.
The K&R Lease provides that the Leased Premises may be used by the
Registrant in its metal recycling and recycled paper sorting and bailing
businesses, and for its corporate offices. The Registrant covenants to use and
occupy the Leased Premises in a careful, safe and proper manner, among other
covenants the Registrant agrees to and typically contained in a net lease to a
tenant. Without the prior consent of K&R (and in the case of (ii) below the
prior consent of any mortgagee of K&R) the Registrant may not (i) make any
structural alterations, improvements or additions to the K&R Leased Premises, or
(ii) assign (including a change of control) or sublet the Leased Premises. The
K&R Lease provides for indemnification of K&R by the Registrant for all damages
arising out of the Registrant's use or condition of the Leased Premises
excepting therefrom K&R's negligence. The K&R Lease further provides that the
Registrant will agree to subordinate its leasehold interest to the mortgage
interest of any mortgagee of K&R.
The K&R Lease provides for termination by the Registrant upon damage (the
"Damage") by fire or other casualty that cannot be reasonably repaired within,
in most instances, 120 days of the Damage. All rent ceases as of the "injury
date" under these circumstances. The K&R Lease also terminates upon condemnation
of the Leased Premises in whole, with a condemnation of a portion of the Leased
Premises resulting in an equitable adjustment of the Fixed Minimum Rent.
Events of Default under the K&R Lease include (i) failure by the
Registrant to pay the Fixed Minimum Rent for 10 days after written demand
therefor, (ii) any other default in the observance or performance by the
Registrant of any of the other covenants, agreements or conditions of the Lease,
which shall continue for 30 days after written notice, unless the Registrant
shall have commenced and shall be diligently pursuing curing such default, (iii)
certain bankruptcy or related events affecting the Registrant, (iv) vacation of
the Leased Premises by the Registrant, or (v) the transfer or devolution whether
by operation of law or otherwise of the K&R Lease or
the Registrant's estate or of any of the Registrant's interest to anyone other
than K&R. Upon the occurrence of an event of default, K&R may, at its option,
terminate the K&R Lease and enter into and take possession of the Leased
Premises with the right to sue for and collect all amounts due, including
damages.
2. Consulting Agreement. The Consulting Agreement (the "K&R Consulting
Agreement"), effective as of January 2, 1998, by and between K&R, as consultant,
and the Registrant, remains in effect until December 31, 2007, with automatic
annual renewals thereafter unless one party provides written notice to the other
party of its intent not to renew at least six months in advance of the next
renewal date. K&R shall provide strategic planning and development to the
Registrant, including advice on management activities, advertising, financial
planning and mergers and acquisitions (the "Consulting Activities"). The
Registrant shall be responsible for all of K&R's expenses and pay to K&R
$240,000 in equal monthly installments of $20,000 in connection with the
Consulting Activities.
The K&R Consulting Agreement terminates upon a non-defaulting party
providing written notice to the other party of its intent to terminate. The
recipient of the notice has 10 days to cure monetary defaults and 30 days to
cure non-monetary defaults (which will be extended if a cure is being diligently
commenced and pursued during that 30 day period). The K&R Consulting Agreement
also terminates upon the condemnation or destruction by fire or other casualty
of all or substantially all of the Leased Premises. Upon termination, K&R agrees
not to engage, directly or indirectly, in the business conducted by, or hire
employees from, the Registrant for a period of five years and within 100 miles
of any operation of the Registrant.
The K&R Consulting Agreement provides for cross-indemnification of each
party by the other for acts other than negligence or willful malfeasance. The
K&R Consulting Agreement further provides that K&R must maintain the
confidentiality of any information of the Registrant not otherwise in the public
domain or required to be disclosed by law.
ITEM 2. PROPERTIES
The Registrant leases its corporate offices and processing property and
buildings for $10,250 per month from Fetra Enterprises ("Fetra"). The Leased
Premises are located at 7100 Grade Lane in Louisville, Kentucky. The
improvements include, among others, a 22,750 square foot office and attached
warehouse, an 8,286 square foot office building, and 15,575 square feet of space
in miscellaneous smaller buildings. See "BUSINESS - Subsequent Events - Lease
Agreement".
During 1997, the Registrant managed the scrap recycling operations of K&R,
an affiliate of the Registrant, and paid $15,750 per month for the ferrous and
corrugated scrap processing 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. Beginning January 1, 1998, the
Registrant has entered into a Lease Agreement to lease these and other
facilities from K&R. See "BUSINESS - Subsequent Events Lease Agreement".
On July 1, 1997, the Registrant entered a Lease Agreement (the "Fetra
Lease") with Fetra Investments, a Kentucky partnership, to lease the 4.412-acre
parcel where The Metal Center is located. The term of the lease is for seven
months ending January 31, 1998. The Fetra Lease may be extended on a month to
month basis with consent of the landlord after the end of the original
seven-month term. The landlord has the right to sell the property and
improvements at any time and acknowledges that K&R possesses an option to
purchase the property and improvements. In January 1998, K&R completed the
purchase of this property and improvements. The Registrant currently leases the
property and improvements from K&R, and has a contracted for first right of
refusal in the event K&R were to decide to sell. The property is located in
Louisville, Kentucky adjacent to the Registrant's existing operations. The
property improvements include office, attached scrap processing building,
scales, and out building containing in the aggregate approximately 51,760 square
feet. The periodic rent is $7,883 per month. Effective January 1, 1998 this
property was included in the K&R Lease of property to the Registrant. "See
BUSINESS - Subsequent Events - Lease Agreement".
Certain of the property and equipment of the Registrant are subject to
liens securing payment of portions of the Registrant's indebtedness. See Note 2
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, as discussed herein. See Notes 5 and 6 of Notes to Financial
Statements included herein for information with respect to leased properties.
ITEM 3. LEGAL PROCEEDINGS
There are no material proceedings pending by, or against the Registrant or
affecting any of its properties.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 4a. EXECUTIVE OFFICERS OF THE REGISTRANT.
Served as an Position with the
Executive Registrant and Other
Name Officer Since Age Principal Occupations
Glenn Bierman August 21, 1997 42 Acting Chief Executive Officer
of
to November 1997 of the Registrant from August 21,
1997 to November 1997; Mr. Bierman
is President and Founder of Tycon
Equity Services, Inc., located in
New York, New York since July 1997;
from March 1994 to July 1997, Mr.
Bierman was a co-owner and founder
of a business advisory and
consulting service, Corporate
Builders, Inc., located in New
York, New York; and was with
Skadden, Arps, Slate, Meagher and
Flom, New York, New York from 1990
to March 1994.
Peter V. Cullinan January 1997 45 Vice President of Management
to July 1997 Services of the Registrant from
January 1997 to July 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
Sean M. Garber 1996 31 President and Treasurer of the
Registrant since February, 1998;
Interim President from December
1997 to February, 1998; Chief
Operating Officer and Director of
the Registrant from November 1997
to present, Vice President of
Recycling of the Registrant from
November 1996 to December 1997;
from 1989 to November, 1996 Mr.
Garber was an employee of and held
positions as general manager and
marketing director with OmniSource,
Inc. of Fort Wayne, Indiana, a
recycling company; Mr. Garber holds
degree in Business Management from
Indiana University
Charles J. Hulsman 1995 40 Manager of CWS division of the
Registrant since December 1991, and a
sales representative of WESSCO
division of the Registrant prior to
that date
Harry Kletter 1983 71 Chairman of the Board, Chief
Executive Officer and Chief
Financial Officer of the Registrant
from July 31, 1992 to present,
President of the Registrant from
July 31, 1992 to December 1997;
from January 1990 to July 1991, and
from October 1983 to January 1988;
Mr. Kletter is also Chairman and
sole shareholder of K&R
Corporation, a real estate holding
and materials processing company,
and an affiliate of the Registrant.
Matthew L. Kletter 1994 to 38 Vice President of Legal Affairs and
February 1998 Secretary of the Registrant from
1997 to February 1998; Director of
Legal Affairs from 1996 to 1997;
Director of the Registrant from 1995
to February 1998 and from 1990 to
1991;Attorney, New York, New York;
Nephew of Harry and Roberta Kletter
Roberta F. Kletter 1983 to 64 Vice President of Shareholder
November 1997 Relations and of Corporate
Communications from 1995 to November
1997, and Secretary and Marketing
Director of the Registrant prior to
1995; Director of the Registrant until
November 1997; Wife of Harry Kletter
and Aunt of Matthew Kletter
Timothy W. Myers 1996 to 46 Senior Vice President of the Reg-
December, 1997 istrant from 1996 to December 1997;
Mr. Myers has served as an Officer
of K&R Corporation an affiliate of
the Registrant, since 1996.
Alan L. Schroering 1995 to 32 Director of Finance and Treasurer of
March, 1998 the Registrant from 1995 to
February, 1998; Controller of the
Registrant from 1992 to February
1998; Staff Accountant of the
Registrant from 1984 to 1992. Mr.
Schroering is a graduate of Indiana
University.
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 1998 Annual Meeting of Shareholders as incorporated herein by
reference at Item 11.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Effective August 29, 1996, the $.01 par value common stock of the
Registrant became listed on the Small Cap Market (the "Small Cap Market") of the
Nasdaq Stock Market under the symbol "IDSA". During the fourth quarter of 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 Nasdaq for 1997 and 1996, respectively. The over-the-counter
market quotations reflect inter-dealer prices, without retail mark-up, mark-down
or commission and may not necessarily represent actual transactions.
Quarter Ended 1997 1996
High Low High Low
March 31 13.25 7.25 8.50 5.50
June 30 9.50 5.50 18.00 7.25
September 30 9.50 7.13 15.75 8.25
December 31 7.38 4.50 12.50 8.38
There were approximately 525 shareholders of record as of March 16, 1998.
The Registrant has never declared a cash dividend on its Common Stock. The
Board of Directors intends to retain all earnings for investment into the
Registrant's business and does not anticipate any cash dividends in the
foreseeable future. The retention of these earnings will be used to help finance
the Registrant's expansion programs. Although there are no restrictions on the
Registrant's present or future ability to pay dividends, the Board of Directors
has the discretionary power to make that determination.
The Nasdaq Stock Market, which began operation in 1971, is the world's
first electronic securities market and the fastest growing stock market in the
U.S. Nasdaq utilizes today's information technologies-computers and
telecommunications-to unite its participants in a screen-based, floorless
market. It enables market participants to compete with each other for investor
orders in each Nasdaq security and, through the use of Nasdaq Workstation II(TM)
and other automated systems, facilitates the trading and surveillance of
thousands of securities. This competitive marketplace, along with the many
products and services available to issuers and their shareholders, attracts
today's largest and fastest growing companies to Nasdaq. These include industry
leaders in computers, pharmaceuticals, telecommunications, biotechnology, and
financial services. More domestic and foreign companies list on Nasdaq than on
all other U.S. stock markets combined.
ITEM 6. SELECTED FINANCIAL DATA
Selected Financial Data
1997 1996 1995 1994 1993
---------------------------------------------------
(Amounts in Thousands,
Except Per Share Data)
Year ended December 31:
Total revenue $ 45,211 $ 34,277 $ 30,545 $ 23,380 $ 23,056
========= ========= ========== ========== =========
Income from operations 215 742 1,162 489 189
========= ========= ========== ========== =========
Earnings
per common share:
Basic $ 0.07 $ 0.25 $ 0.41 $ 0.28 $ 0.11
========= ========= ========== ========== =========
Assuming Dilution $ 0.07 $ 0.24 $ 0.40 $ 0.28 $ 0.11
========= ========= ========== ========== =========
Cash dividends declared
Per common share - - - - -
At year end:
Total assets $ 13,893 $ 9,439 $ 6,209 $ 4,093 $ 3,870
========= ========= ========== ========== =========
Long-term notes payable$ 760 $ 5 $ 367 $ 13 $ 29
========= ========= ========== ========== =========
Reclassifications
Earnings per share are computed under the provisions of statement of
financial accounting standards (FASE) No. 128, "Earnings per Share" which was
adopted retroactively at the beginning of the fourth quarter of 1997. This
resulted in restatement of earnings per share as previously reported for 1996
and 1995.
Certain amounts in the 1996 and 1995 financial statements have been
reclassified to conform to the 1997 financial statement presentation. These
reclassifications had no effect on 1996 or 1995 retained earnings or net income.
The Registrant provides waste management and consulting services to its
customers. Prior to 1995, 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 1995, 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 total revenue has been increased
approximately $17,837,000 and total assets as of December 31, 1993 have
increased approximately $1,475,000 from amounts originally reported. These
reclassifications, necessary to restate the 1993 selected financial data, had no
effect on net income.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
General
In July, 1997, the Registrant continued to pursue a growth strategy in the
recycling business through asset purchase of The Metal Center. See "BUSINESS
General". This asset purchase brought increased revenue, product line expansion,
and new markets to the Registrant. Prior financial information of The Metal
Center is not available from its prior owners and accordingly has not been
presented. Secondly, during September 1997, the Registrant further implemented
its acquisition program with the purchase of the accounts management division of
MGM Services, Inc. ("MGM"). This acquisition of management services accounts
fits directly into the management operations, with minimum customer disruption
and required no additional office capacity. The accounts purchased from MGM
represented 550 new store locations, adding to the existing 2,500 locations
serviced by the Registrant. Management anticipates additional management
services revenue of approximately $250,000 per month, from this acquisition.
Finally, the Registrant undertook a new program to streamline the organization
and reduce overhead, while also focusing on growing the existing recycling and
waste management businesses.
It is management's plan to continue in these directions in 1998. The
Registrant's goals are to continue aggressive pursuit of acquisitions in the
fields of recycling and waste management services. Also, the Registrant will
pursue more organizational cost control and efficiency programs while
emphasizing the sales and marketing efforts.
Liquidity and Capital Resources
As of December 31, 1997, the Registrant held cash and cash equivalents of
$495,834.
The Registrant currently maintains a working capital line of credit with
the Mid-America Bank of Louisville and Trust Company (the "Bank") in the amount
of $2,000,000. Indebtedness under this credit facility accrues interest at the
Bank's prime rate as promulgated from time to time. The maturity date under this
agreement is July 1, 1998. The Credit Line is collateralized by eligible
accounts receivable, inventories, equipment and the personal guarantees of the
majority shareholder of the Registrant, Harry Kletter. As of December 31, 1997,
$1,800,000 was outstanding under the credit facility as compared to $600,000 as
of December 31, 1996.
As consideration for the acquisition of The Metal Center, the Registrant
provided two (2) notes payable to the sellers in the amount of $800,000 each
payable, one half on January 2, 1998 and one half on or before July 1, 1998. The
sellers have the alternative of receiving the equivalent purchase price payable
in the Registrant's Common Stock at an exchange rate
of $8.00 per share value. On July 1, 1997, the Registrant opened an acquisition
credit facility with the Bank in the amount of $1,600,000. Indebtedness under
this line accrues interest at the Bank's prime rate as promulgated from time to
time. The maturity date under this agreement is July 1, 1998. The credit line is
collaterized by virtually all business assets and a personal guarantee of the
majority shareholder. As of December 31, 1997, there were no borrowings
outstanding under this agreement.
In 1997, the Registrant derived all its ferrous scrap and paper recycling
revenue from the management contract arrangement with K&R. The contract business
comprised 36%, 46% and 30% of the Registrant's income before provision for
income tax for the years ended December 31, 1997, 1996 and 1995. The Registrant
has reduced its relative profit dependence further by the asset purchase of The
Metal Center, thereby diversifying into the non-ferrous business on July 1,
1997.
Results of Operations
The following table presents, for the years indicated, the percentage
relationship which certain captioned items in the Registrant's Consolidated
Statements of Operations bear to total revenues and other pertinent data:
Year ended December 31, 1997 1996 1995
Statements of Operations Data:
Total Revenue...................... 100.0% 100.0% 100.0%
Cost of Goods Sold................. 91.4% 87.0% 81.9%
Selling, general and administrative
expenses........................... 8.1% 10.8% 14.3%
Income from operations............. 0.5% 2.2% 3.8%
Year ended December 31, 1997 Compared to Year ended December 31, 1996
The revenue in 1997 was $45,211,593 representing an increase of
$10,934,377 or 32% compared to 1996. The revenue from the newly acquired The
Metal Center is included for six months and represented 14% of the overall
growth. The major products include recycling of copper, aluminum and brass,
referred to herein as non-ferrous scrap. Except for equipment and corrugated
recycling, all other existing businesses had solid growth contributing the
remaining 18% of the total. One of the major contributors to the remaining
growth was the ferrous recycling business, which includes iron and steel
products. Recycling revenues grew 126% to $11,513,600 through an increase in
direct sales to mills and more aggressive purchasing practices. The management
services business grew 17% to $32,064,237 by increasing the same account and new
account business serviced from approximately 1,500 locations on December 31,
1996 to 2,000 locations on December 31, 1997. In addition, the management
services business absorbed approximately 550 additional locations from MGM in
the last quarter.
The 1997 total cost of sales was $41,330,538 increasing $11,496,175 or 39%
compared to 1996. The cost of goods sold in management services increased by
22.2% verses an increase in recycling cost of goods sold of 161.3%. This
divergence was caused by the addition of the non-ferrous business, which has
typically a lower gross profit percentage than the existing business base.
Secondly, the ferrous business spreads narrowed due to competitive pressures.
Finally, the corrugated recycling business, while the most profitable product
line in recycling and which showed an improved percentage gross margin in 1997,
experienced a drop in revenue during 1997. The equipment division had cost of
goods sold of $953,463 or 22% less in 1997 versus 1996. This cost decrease
compares with a revenue decrease of 11%. The
business experienced a 28% cost decrease in equipment sales to approximately
$803,500 while experiencing a 29% increase in rental/leasing. The Registrant has
focused on the growth of the rental/leasing portion of its business.
The gross margin was $3,881,055 representing a decrease of $561,798 in
1997 or 12.6% from 1996. The gross margin was 8.6% of revenue, which was 4.4%
lower than 1996. A reduced gross margin percentage of 4.0% was experienced in
management services due to some fixed fee contracts which experienced store
location growth during the year. Finally, the recycling division experienced a
11.9% gross profit decrease due to the new mix of non-ferrous products and
narrowing spreads on the ferrous products, and lower volume of corrugated scrap
processing. The equipment business had 8.6% higher gross margin percentage, due
to a favorable mix of higher rental and leasing business relative to equipment
sales.
The selling, general, and administrative expenses decreased $35,070 as
compared to 1996. As a percent of revenue, the selling, general and
administrative dropped from 10.8% of revenue to 8.1%.
Financial Condition at December 31, 1997 Compared to December 31, 1996
Trade accounts receivable increased $1,728,041 to $5,028,769 at December
31, 1997. Last year the Registrant received a December receivable payment of
$1,264,920 at year end, and as a result of this timing difference, trade
receivables decreased from $4,565,648 to $3,300,728. Therefore, the adjusted
increase as of December 31, 1997 was $463,121, which represented a 10% increase
in 1997. This increase is significantly less than the 32% increase in revenue,
reflecting management focus on working capital through the liquidation of
accounts receivable.
Inventory increased $2,078,723 or 480% to $2,511,826. Of the total
increase, equipment increased $667,241 and the non-ferrous scrap inventory
increased $960,117 due primarily to the new non-ferrous operation. The remaining
increase was due to the purchase of a major ferrous scrap plant rework, which
occurred at the end of the year, resulting in a temporary increase in ferrous
unprocessed scrap inventory.
Accounts payable trade increased $1,385,723 from December 31, 1996 to
$6,176,433 as of December 31, 1997. This increase was due to higher volumes in
all areas of the Registrant's operations except corrugated paper.
As of December 31, 1997, the Registrant's working capital was a deficit of
$495,550, which represents a $1,463,614 decrease from 1996. The total current
assets increased $1,875,835 due to the $2,078,723 increase in inventory, and the
increase in total receivables of $623,185 offset by impact of the lower cash of
$875,601. The current liabilities increased $3,321,449 affected primarily by
total accounts payable increases of $1,228,945 and additional short-term bank
borrowings of $1,200,000.
Year ended December 31, 1996 Compared to Year ended December 31, 1995
Total revenue increased 12% from $30,545,142 in 1995 to $34,227,216 in
1996. This increase in revenue is the result of (i) an increase of $3,849,921 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. Recycling sales
experienced a moderate increase of $73,349 or 1.5% to $5,091,550 in 1996.
Cost of goods sold increased $4,826,700 or 19%, from $25,007,663 in 1995
to $29,834,363 in 1996. As a percentage of revenue, these costs were 81.9% and
87.0% in 1995 and 1996, respectively. This increase was directly related to an
increase in CWS operations of $4,202,873. Recycling cost of goods sold increased
29% from $3,015,669 in 1995 to $3,880,577 in 1996.
Selling, general and administrative expenses decreased 15.4% from
$4,375,284 in 1995 to $3,701,246 in 1996. These expenses decreased from 14.3% to
10.8% of 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 48% 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 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.
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.
Impact of Recently Issued Accounting Standards
Reporting Comprehensive Income. In June 1997, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income". The SFAS establishes
standards for the reporting and display of comprehensive income and its
components (revenues, expenses, gains and losses) in financial statements.
Year 2000 Risk Factors
In February 1997, the Registrant implemented its "Year 2000 Project" to
address the potential problem with which substantially all users of automated
data processing and information systems must deal. This problem is mainly with
older systems with only two digits to represent the year, rather than the full
four digits. Older computer systems may not operate when the two digit year
becomes "00" as will happen in the year 2000.
The Registrant uses primarily "Microsoft" software, which is already year
2000 compliant. Our accounting system is a DOS based system, which could create
the problem with "00". The Registrant in its endeavor to alleviate this
DOS-based problem has contracted with the programmer of the
Registrant to write software to prevent this potential problem. The software
upgrade has just been completed, and the Registrant will test the program to
verify all is in working order. By having the upgrade this far in advance it
will enable the Registrant to run a test system to avert any future problem.
The only software that the Registrant uses that is beyond its control is
"EDI" or "Electronic Data Interchange". The vendor of this software used by the
Registrant and many Fortune 500 Companies, has promised a fix for this problem
with its Spring 1999 Release Software Upgrade. This area is the one over which
the Registrant has the least control. If EDI completes its upgrade as promised
the Registrant does not anticipate a Year 2000 problem with this software.
In summary, the Registrant's Year 2000 Project's goal and expectation are
that all necessary modifications and upgrades will be in place at minimum one
year in advance, with the exception of EDI that is promised by the vendor in
spring 1999. The Registrant currently has no reason to believe and does not
anticipate the cost of Year-2000 compliance to be a significant expense or
problem.
Notwithstanding the foregoing, the Registrant will bear some minimal risk
due to customers who fail to address the issues appropriately; or should the one
vendor fail to meet the spring 1999 deadline. Presently, the Registrant has no
reason to believe that any of its customers are failing to take appropriate
action to effect Year-2000 compliance or that its software will be unable to
perform as before with the upgrades.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable
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
(a)(1)
(i) On July 15, 1997, the Registrant dismissed Mather, Hamilton and
Company ("Mather, Hamilton") as its independent accountants.
(ii) Not applicable
(iii) The decision to change accountants was approved by the Board of
Directors.
(iv) (A) During the fiscal years of the Registrant ended December 31,
1996 and December 31, 1995, and for the interim periods from
December 31, 1996 through July 15, 1997 there were no
disagreements between Mather, Hamilton and the Registrant, on any
matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which, if not
resolved to the former accountant's satisfaction, would have
caused it to make reference to the subject matter of the
disagreement in connection with its reports.
(iv) (B) Not applicable
(iv) (c) Not applicable
(iv) (D) Not applicable
(iv) (E) Not applicable
(2) The Registrant engaged Crowe, Chizek and Company, LLP as the auditor
for the year ending December 31, 1997, on July 29, 1997.
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 1998 Annual Meeting of Shareholders and
the information set out in the section entitled EXECUTIVE OFFICERS of the
Registrant on pages 12, 13 and 14 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 1998 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 1998 Annual Meeting of Shareholders is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set out in the section entitled EXECUTIVE COMPENSATION
Certain Transactions in the Registrant's Proxy Statement for the 1998 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-1a-b
Balance Sheets as of December 31, 1997 and 1996 F-2
Statements of Income for the years
ended December 31, 1997, 1996 and 1995 F-3
Statements of Shareholders' Equity for the
years ended December 31, 1997, 1996 and 1995 F-4
Statements of Cash Flows for the years
ended December 31, 1997, 1996 and 1995 F-5
Notes to Financial Statements F-6
(2) Financial Statement Schedules F-17
Schedule II
(3) List of Exhibits
The list of exhibits on the Exhibit Index is incorporated herein by
reference. The Management Agreement and the Consulting Agreement required to be
filed as exhibits to this Form 10-K pursuant to Item 14(c) are noted by an
asterisk (*) in the 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, 1997. The
Registrant did file on Form 8-K on March 3, 1998.
(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 by
reference at page F-17 of the Financial Statements of the Registrant.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
INDUSTRIAL SERVICES OF AMERICA INC.
(Registrant)
By : /s/ Harry Kletter
Harry Kletter
Chairman of the Board and Chief Executive Officer
Date: March 31, 1998
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/ Joseph H. Cohen 3/31/98
Joseph H. Cohen
Director
/s/ R. Michael Devereaux 3/31/98
R. Michael Devereaux
Director
/s/ Sean M. Garber 3/31/98
Sean M. Garber
Director, President, Chief
Operating Officer and Treasurer
/s/ Harry Kletter 3/31/98
Harry Kletter
Director and Chief Executive Officer
(Principal Executive Officer and
Principal Financial Officer)
/s/ Dr. Barry N. Naft 3/31/98
Dr. Barry N. Naft
Director
/s/ Marcia E. Terry 3/31/98
Marcia E. Terry
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 of Form 10-KSB
for the year ended December 31, 1995.
3.2 Bylaws of the Registrant are incorporated by reference to Exhibit
3.2 of the Registrant's report on Form 10-KSB for the year ended
December 31, 1995.
10.1 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 25, 1996, by and between the
Registrant and Douglas I. Maxwell, III ("Maxwell"), is incorporated
by reference to Exhibit 4(a) of Registration Statement on Form S-8
of the Registrant, filed on June 26, 1996 (File No. 333-06915).
10.5 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).
10.10 Acquisition of Assets Agreement - TMG known as "The Metal Center"
dated as of July 1, 1997, by and between the Registrant and The
Metal Center set forth in an Asset Purchase Agreement, is
incorporated by reference, as the sole Exhibit on Form 8-K of the
Registrant, filed July 15, 1997 (File No. 0-20979).
10.11 Assignment of Contracts - MGM Assignment dated September 4, 1997, by
and between the Registrant and MGM Services, Inc.
10.12 Employment Agreement - Garber dated as of October 15, 1997, by and
between the Registrant and Garber.
10.13 Lease Agreement - K&R Lease dated January 1, 1998, by and between
the Registrant and K&R, is incorporated by reference herein, to
Exhibit 10.10 on Form 8-K of the Registrant, filed March 3, 1998
(File No. 0-20979).*
10.14 Consulting Agreement - K&R Consulting Agreement dated as of January
2, 1998, by and between the Registrant and K&R, is incorporated by
reference herein, to Exhibit 10.11 on Form 8-K of the Registrant,
filed March 3, 1998 (File No. 0-20979).*
10.15 Amendment to Employment Agreement - Garber dated as of February 5,
1998, by and between the Registrant and Garber, amending original
agreement dated October 15, 1997.
11 Statement of Computation of Earnings Per Share.
23.1 Consent of Mather, Hamilton & Co.
23.2 Consent of Crowe, Chizek and Company, LLP
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.
INDUSTRIAL SERVICES OF AMERICA, INC.
FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
Louisville, Kentucky
INDUSTRIAL SERVICES OF AMERICA, INC.
FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
CONTENTS
REPORT OF INDEPENDENT AUDITORS-CROWE, CHIZEK AND COMPANY LLP............... 1a
REPORT OF INDEPENDENT AUDITORS-MATHER, HAMILTON AND CO..................... 1b
FINANCIAL STATEMENTS
BALANCE SHEETS.......................................................... 2
STATEMENTS OF INCOME.................................................... 3
STATEMENTS OF SHAREHOLDERS' EQUITY...................................... 4
STATEMENTS OF CASH FLOWS................................................ 5
NOTES TO FINANCIAL STATEMENTS........................................... 6
SUPPLEMENTARY INFORMATION
VALUATION AND QUALIFYING ACCOUNTS....................................... 17
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Industrial Services of America, Inc.
Louisville, Kentucky
We have audited the accompanying balance sheet of Industrial Services of
America, Inc. as of December 31, 1997, and the related statements of income,
shareholders' equity and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit. The financial statements of Industrial Services of America, Inc. as
of December 31, 1996 and 1995 were audited by other auditors whose report dated
March 10, 1997, expressed an unqualified opinion on those statements.
We conducted our audit in accordance with general accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the 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 audit provides a reasonable basis for our opinion.
In our opinion, the 1997 financial statements referred to above present fairly,
in all material respects, the financial position of Industrial Services of
America, Inc. at December 31, 1997, and the results of its operations and its
cash flows for the year then ended in conformity with generally accepted
accounting principles.
Our audit of the foregoing 1997 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.
Crowe, Chizek and Company LLP
Indianapolis, Indiana
February 28, 1998
F-1a
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Industrial Services of America, Inc.
We have audited the accompanying balance sheet of Industrial Services of
America, Inc. as of December 31, 1996, and the related statements of income,
shareholders' equity, and cash flows for the two years ended December 31, 1996
and 1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on 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 the results of its operations and its cash
flows for each of the years in the two-year period ended December 31, 1996, in
conformity with generally accepted accounting principles.
/s/ Mather, Hamilton & Co.
MATHER, HAMILTON & CO.
Louisville, Kentucky
March 10, 1997
F-1b
INDUSTRIAL SERVICES OF AMERICA, INC.
BALANCE SHEETS
December 31, 1997 and 1996
- ------------------------------------------------------------------------------
1997 1996
ASSETS
Current assets
Cash and cash equivalents $ 495,834 $1,371,435
Accounts receivable - trade (after allowance for doubtful
accounts of $16,000 in 1997 and 1996) (Note 2) 5,028,769 3,300,728
Accounts receivable - related party (Note 7) 34,667 100,360
Income tax refund receivable 164,737 1,203,900
Net investment in sales-type leases (Note 5) 40,154 8,435
Inventories (Notes 1 and 2) 2,511,826 433,103
Deferred income taxes (Note 4) 18,200 45,400
Other 195,993 168,984
--------- ---------
Total current assets 8,490,180 6,632,345
Net property and equipment (Notes 1, 2 and 3) 3,642,712 2,704,192
Other assets
Non-compete agreements, net (Note 10) 450,000 -
Intangibles (net of accumulated amortization of
$26,667) (Note 10) 773,333 -
Net investment in sales-type leases (Note 5) 192,154 11,165
Other assets 344,645 91,766
---------- ---------
1,760,132 102,931
---------- ---------
$13,893,024 $9,439,468
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Notes payable to bank (Note 2) $1,800,000 $ 600,000
Notes payable (Note 10) 800,000 -
Current maturities of long-term debt (Note 3) 45,479 11,774
Accounts payable 6,176,433 4,790,710
Affiliated companies payable (Note 7) 23,000 179,778
Other current liabilities 140,818 82,019
---------- ---------
Total current liabilities 8,985,730 5,664,281
Long-term liabilities
Long-term debt (Note 3) 759,877 5,356
Deferred income taxes (Note 4) 257,700 161,000
- --------- --------
1,017,577 166,356
Shareholders' equity
Common stock, $.01 par value: 10,000,000 shares
authorized and 1,957,500 shares issued and 1,929,600
shares outstanding 19,575 19,575
Additional paid-in capital 1,548,750 1,405,000
Retained earnings 2,329,392 2,192,256
Treasury stock, 27,900 shares at cost (8,000) (8,000)
------ --------- ---------
3,889,717 3,608,831
--------- ---------
$13,893,024 $9,439,468
=========== ==========
F-2
See accompanying notes to financial statements.
INDUSTRAIL SERVICES OF AMERICA, INC.
STATEMENTS OF INCOME
Years ended December 31, 1997, 1996 and 1995
- ------------------------------------------------------------------------------
1997 1996 1995
Revenue
Recycling $11,513,600 $5,091,550 $5,018,201
Equipment sales, service and leasing 1,633,756 1,830,273 2,021,469
Management services 32,064,237 27,355,393 23,505,472
---------- ---------- ----------
Total revenue 45,211,593 34,277,216 30,545,142
Cost of goods sold
Recycling 10,141,822 3,880,577 3,015,169
Equipment sales, service and leasing 953,463 1,226,739 1,468,320
Management services 30,235,253 24,727,047 20,524,174
---------- ---------- ----------
Total cost of goods sold 41,330,538 29,834,363 25,007,663
---------- ---------- ----------
Gross margin 3,881,055 4,442,853 5,537,479
Selling, general and administrative 3,666,176 3,701,246 4,375,284
--------- --------- ---------
Income from operations 214,819 741,607 1,162,195
Other income (expense)
Interest expense (78,810) (53,268) (36,760)
Interest income 64,549 43,339 56,961
Gain on sale of assets 4,496 31,229 42,287
Other income (expense) 17,372 (23,471) (3,524)
--------- -------- ---------
7,607 (2,171) 58,964
Income before income taxes 222,426 739,436 1,221,159
Provision for income taxes (Note 4) 85,290 278,600 517,000
--------- -------- ---------
Net income $ 137,136 $ 460,836 $ 704,159
========= ========== ==========
Earnings per share $ .07 $ .25 $ .41
====== ====== ======
Earnings per share, assuming dilution $ .07 $ .24 $ .40
====== ====== ======
F-3
See accompanying notes to financial statements.
INDUSTRIAL SERVICES OF AMERICA, INC.
- ------------------------------------------------------------------------------------------------------------------------
STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended December 31, 1997, 1996 and 1995
- ------------------------------------------------------------------------------------------------------------------------
Additional
Common Stock Paid-in Retained Treasury Stock
Shares Amount Capital Earnings Shares Cost Total
Balance as of January 1, 1995 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 11) - - 117,500 - - - 117,500
Common stock issued upon exercise of
nonemployee stock options (Note 11) 200,000 2,000 248,000 - - -
250,000
Income tax benefit related to exercise
of nonemployee stock options (Note 11) - - 970,000 - - -
970,000
Stock transferred by Company's principal
shareholder for services to be provided
to the Company (Note 7) - - 42,500 - - - 42,500
Net income - - - 460,836 - - 460,836
--------- --------- ---------- ---------- --------- --------- ---------
Balance as of December 31, 1996 1,957,500 19,575 1,405,000 2,192,256 27,900 8,000 3,608,831
Fair value of stock options issued for
employee stock option plan (Note 11) - - 143,750 - - - 143,750
Net income - - - 137,136 - - 137,136
--------- ---------- ---------- ---------- --------- ---------- ---------
Balance as of December 31, 1997 1,957,500 $ 19,575 $1,548,750 $2,329,392 27,900 $ 8,000 $3,889,717
========= ========= ========== ========== ========= ========= ==========
F-4
See accompanying notes to financial
statements.
INDUSTRIAL SERVICES OF AMERICA, INC.
- --------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
Years ended December 31, 1997,1996 and 1995
- --------------------------------------------------------------------------------
1997 1996 1995
---- ---- ----
Cash flows from operating activities
Net income $ 137,136 $ 460,836 $ 704,159
Adjustments to reconcile net income to net
cash from operating activities
(Gain) loss on equity investment (29,142) 29,142 -
Stock options granted for services 14,974 100,625 -
Depreciation and amortization 730,227 465,838 329,481
Provisions for doubtful accounts 37,983 2,255 33,200
Deferred income taxes 123,900 55,400 37,600
Gain on sale of property and equipment (4,496) (31,229) (42,287)
Change in assets and liabilities
Receivables (661,168) (404,297) (863,787)
Inventories (2,078,723) (294,600) 22,708
Other current assets (27,009) (52,715) 85,788
Accounts payable 1,228,945 1,193,376 992,570
Other current liabilities 58,802 (28,407) 65,248
---------- ---------- ----------
Net cash from operating activities(468,571) 1,496,224 1,364,680
Cash flows from investing activities
Proceeds from sale of property & equipment 86,028 59,603 119,580
Proceeds from sale of joint venture 44,826 - -
Purchases of sales-type leases (226,517) (2,369) (6,875)
Proceeds from sales-type leases 13,807 39,388 36,937
Investment in joint venture - (44,826) -
Purchases of property and equipment (1,373,610) (1,156,839) (1,555,359)
Purchase of restricted investment - - (100,000)
Other (139,787) (7,537) (15,893)
----------- ----------- -----------
Net cash from investing activities (1,595,253) (1,112,580) (1,521,610)
Cash flows from financing activities
Net borrowings from note payable to bank 1,200,000 600,000 300,000
Proceeds from issuance of long-term debt - - 31,525
Payments on long-term debt (11,777) (370,098) (21,590)
Proceeds from exercise of nonemployee - 250,000 -
stock options ----------- ----------- -----------
Net cash from financing activities 1,188,223 479,902 309,935
----------- ----------- -----------
Net change in cash (875,601) 863,546 153,005
Cash at beginning of year 1,371,435 507,889 354,884
----------- ----------- -----------
Cash at end of year $ 495,834 $1,371,435 $ 507,889
========== ========== ==========
Supplemental disclosure of cash flow information
Cash paid for interest $ 78,810 $ 48,748 $ 36,760
Cash paid (refunded) for taxes $(1,077,773) $ 641,226 $ 583,659
F-5
See accompanying notes to financial statements
INDUSTRIAL SERVICES OF AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business: Industrial Services of America, Inc. (the Company) provides
products and services to meet the waste management needs of its customers
related to ferrous, non-ferrous and corrugated scrap recycling, management
services and waste equipment sales and rental. Management services represents
contracts with retail businesses to handle their waste disposal needs, primarily
by subcontracting with commercial waste hauling and disposal companies. The
Company's customers are located throughout the United States and Canada.
Common Control: The Company conducts significant levels of business (see Note 7)
with K & R Corporation, Inc. (K&R) which is owned by the Company's principal
shareholder. Because these entities are under common control, operating results
or financial position of the Company may be materially different from those that
would have been obtained if the entities were autonomous.
Estimates: In preparing the financial statements, management must make estimates
and assumptions. These estimates and assumptions affect the amounts reported for
assets, liabilities, revenues and expenses, as well as affecting the disclosures
provided. Future results could differ from the current estimates.
Inventories: Inventories consist principally of waste equipment machinery and
parts and scrap materials held for resale and are stated at the lower of cost
(first-in, first-out method) or market. Inventories as of December 31, 1997 and
1996 consist of the following:
1997 1996
Equipment and parts $ 752,099 $ 84,858
Ferrous material 756,940 305,575
Non-ferrous materials 1,002,787 42,670
--------- ---------
$2,511,826 $ 433,103
========== =========
Property and Equipment: Property and equipment are stated at cost and are
depreciated on a straight-line basis over the estimated useful lives of the
related property.
Property and equipment as of December 31, 1997 and 1996 consist of the
following:
Life 1997 1996
Equipment and vehicles 3-10 years $3,373,097 $2,536,174
Office equipment 3-5 years 402,186 426,777
Rental equipment 5 years 1,202,207 844,765
Leasehold improvements 10 years 296,308 143,477
---------- ----------
5,273,798 3,951,193
Accumulated depreciation
and amortization 1,631,086 1,247,001
--------- ---------
$3,642,712 $2,704,192
========== ==========
F-6
(Continued)
INDUSTRIAL SERVICES OF AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Depreciation expense for the years ended December 31, 1997, 1996 and 1995 was
$653,561, $465,838 and $329,481, respectively.
Intangible Assets: The excess of cost over fair value of assets acquired is
being amortized over a period of 15 years using the straight-line method.
Non-compete agreements are being amortized using the straight-line method over
the benefit period of 5 years.
Income Taxes: The Company records income tax expense based on the amount of
taxes due on its tax returns plus deferred taxes computed based on the expected
future tax consequences of temporary differences between the carrying amounts
and tax basis of assets and liabilities, using enacted tax rates.
Statement of Cash Flows: The statement of cash flows has been prepared using a
definition of cash that includes deposits with original maturities of 3 months
or less.
Reclassifications: Certain amounts in the 1996 and 1995 financial statements
have been reclassified to conform to the 1997 financial statement presentation.
These reclassifications had no effect on 1996 and 1995 retained earnings or net
income.
Earnings Per Common Share: Earnings per Common Share is computed under the
provisions of Statement of Financial Accounting Standards No. 128, "Earnings Per
Share," which was adopted retroactively by the Company at the beginning of the
fourth quarter of 1997. Adoption of the Statement resulted in a restatement of
the EPS amounts previously reported by the Company for prior annual periods.
Amounts reported as Earnings per Common Share for each of the three years ended
December 31, 1997 reflect the earnings available to common shareholders for the
year divided by the weighted average number of common shares outstanding during
the year. The weighted average common shares outstanding for the years ended
December 31, 1997, 1996 and 1995 were 1,929,600, 1,837,933 and 1,729,600,
respectively.
Stock-Based Compensation and Transactions: Expense for employee compensation
under stock option plans is reported only if options are granted below the
market price at the grant date. Pro forma disclosures of net income and earnings
per share are provided as if the fair value method of Financial Accounting
Standard No. 123 was used for stock-based compensation.
Fair Values of Financial Instruments: Fair value of financial instruments are
estimated using relevant market information and other assumptions. Fair value
estimates involve uncertainties and matters of significant judgment regarding
interest rates, prepayments and other factors. Changes in assumptions or market
conditions could significantly affect the estimates. As of December 31, 1997 and
1996, the estimated fair value of financial instruments approximated book value.
F-7
(Continued)
INDUSTRIAL SERVICES OF AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE 2 - NOTES PAYABLE TO BANK
At December 31, 1997, the Company has a $2,000,000 operating line of credit
collateralized by eligible accounts receivable, inventories, equipment and the
personal guarantee of the majority shareholder. Interest is payable monthly on
the outstanding principal balance at the current bank's prime rate. The note
matures in June 1998.
The Company also has available a $1,600,000 operating line of credit secured by
virtually all business assets and a personal guarantee of the majority
shareholder. Interest is payable monthly on the outstanding principal balance at
the current bank's prime rate. The note matures in July 1998. As of December 31,
1997, the Company had not drawn any funds on this note.
NOTE 3 - LONG-TERM DEBT
Long term debt as of December 31, 1997 and 1996 consists of the following:
1997 1996
---- ----
Notes payable to a bank in monthly installments of $10,000 including interest
at 8.5% through April 2003; secured by virtually all company assets and a
personal guarantee of the majority
shareholder. $800,000 $ -
Notes payable; interest ranging from 8.75% to 11%; due in monthly
installments of principal and interest totaling $909 with various maturity
dates through January 1999;
secured by vehicles. 5,356 17,130
-------- --------
805,356 17,130
Current maturities 45,479 11,774
-------- --------
$759,877 $ 5,356
======== ========
The long-term debt requires annual principal payments as follows:
1998 $ 45,479
1999 57,621
2000 62,714
2001 68,258
2002 74,291
Thereafter 496,993
F-8
- --------------------------------------------------------------------------------
(Continued)
INDUSTRIAL SERVICES OF AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 4 - INCOME TAXES
The provision for income taxes consists of the following for the years ended
December 31, 1997, 1996 and 1995:
1997 1996 1995
---- ---- ----
Federal
Current $(32,800) $177,900 $386,700
Deferred 105,300 48,500 31,900
------- ------- -------
72,500 226,400 418,600
State
Current (5,810) 45,300 92,700
Deferred 18,600 6,900 5,700
------ ----- -----
12,790 52,200 98,400
------ ------ ------
$ 85,290 $278,600 $517,000
======== ======== ========
A reconciliation of income taxes at the statutory rate to the company's
effective rate is as follows:
1997 1996 1995
---- ---- ----
Federal income tax at statutory rate $ 75,600 $251,400 $415,200
State and local income taxes, net of
federal income tax affect 8,400 25,100 63,000
Effect of tax rate change in deferred
tax assets - - 13,500
Other differences, net 1,290 2,100 25,300
-------- -------- --------
$ 85,290 $278,600 $517,000
======== ======== ========
Significant components of the Company's deferred tax liabilities and assets as
of December 31, 1997 and 1996 are as follows:
1997 1996
---- ----
Deferred tax liabilities
Tax depreciation in excess of book $277,000 $172,800
Deferred tax assets
Allowance for doubtful accounts 18,200 18,200
Book amortization in excess of tax 13,300 -
Stock options 6,000 39,000
-------- --------
37,500 57,200
-------- --------
Net deferred tax liabilities $239,500 $115,600
======== ========
F-9
(Continued)
INDUSTRIAL SERVICES OF AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE 5 - LEASES
The Company is the lessor of equipment under sales-type lease agreements 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.
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. These revenues are offset by rental payments made
by the Company totaling approximately $117,000 annually. The remaining net
investment in equipment leased to customers under noncancelable operating leases
as of December 31, 1997 and 1996 is as follows:
1997 1996
Rental equipment $1,202,207 $ 844,765
Accumulated depreciation 518,805 376,730
------- -------
$ 683,402 $ 468,035
========= =========
Future minimum lease payments receivable for sales-type and operating leases as
of December 31, 1997 are as follows:
Sales-Type Operating
---------- ---------
1998 $ 99,899 $ 638,320
1999 97,250 520,375
2000 87,197 459,366
2001 72,676 384,811
2002 66,000 325,338
---- ------ -------
Net minimum lease payments receivable 423,022 $2,328,210
==========
Less unearned income 190,714
-------
Net investment in sales-type leases 232,308
Less current portion 40,154
-------
$ 192,154
=========
F-10
(Continued)
INDUSTRIAL SERVICES OF AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
- -------------------------------------------------------------------------------
NOTE 6 - COMMITMENTS
The Company leases its facility from a related party (see Note 7) under an
operating lease expiring December 2007. This agreement provides for monthly
payments of $37,500 through December 2002, increasing at the beginning of the
second five years based on the change in the Consumer Price Index.
The following is a schedule by year of future minimum lease payments at December
31, 1997:
1998 $ 450,000
1999 450,000
2000 450,000
2001 450,000
2002 450,000
Thereafter 2,250,000
Total rent expense for the years ending December 31, 1997, 1996 and 1995 were
$381,884, $242,372 and $338,729, respectively.
NOTE 7 - RELATED PARTY TRANSACTIONS
The Company enters into various transactions with related parties including the
Company's principal shareholder and an affiliated company controlled by the
Company's principal shareholder (K&R). A summary of these transactions is as
follows:
1997 1996 1995
Accounts receivable $ 34,667 $ 100,360
========= =========
Accounts payable $ 23,000 $ 179,778
========= =========
Sales $ - $ 204,386
========= =========
Rent expense $ 261,000 $ 184,000 $ 268,279
========= ========= =========
Commission expense $ 114,000 $ 177,000 $ 485,124
========= ========= =========
Consulting fees $ 15,473 $ 53,000 $ 52,820
========= ========= =========
Legal expenses $ 9,100 $ 16,000 $ 25,000
========= ========= =========
F-11
(Continued)
INDUSTRAIL SERVICES OF AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 7 - RELATED PARTY TRANSACTIONS (Continued)
In November 1996, the Company entered into a one year consulting agreement for
certain marketing expertise. The Company's principal shareholder agreed to
transfer 5,000 shares of his stock on behalf of the Company to the consultant as
payment for these future services. The Company recorded deferred consulting fees
and additional paid-in-capital of $42,500 in 1996 resulting from the stock's
quoted market value as of the date of the agreement. This was recognized in
expense in 1997.
The Company's principal shareholder and Chief Executive Officer has
discretionary authority regarding his annual salary. During the years ended
December 31, 1997 and 1996, the CEO did not receive a salary. The CEO's salary
for the year ended December 31, 1995 totaled $100,000 which is included in
selling, general and administrative expenses in the statement of income.
The Company had an agreement with K&R to manage all aspects of K&R's scrap
recycling operations. The agreement provided that the Company pay a commission
equal to 20% of the profits from K&R's scrap recycling operations. The Company
included all revenue from the scrap recycling operations and the related
commission fee in the statement of income. The Company incurred commission
expenses to K&R totaling $114,000, $177,000 and $485,124 for the years ended
December 31, 1997, 1996 and 1995 respectively. This agreement was canceled on
July 1, 1997.
In January 1998, the Company entered into an agreement with K&R for consulting
services related to the scrap metal and paper recycling operations and related
equipment sales and services. The agreement is for a 10 year period and requires
payments of $240,000 annually.
NOTE 8 - MAJOR CUSTOMERS
Revenue from two customers in 1997, 1996 and 1995 represents approximately 57%,
58% and 44% of total revenues, respectively. At December 31, 1997 and 1996,
amounts due from these customers included in accounts receivable were $2,102,934
and $1,552,941, respectively.
NOTE 9 - EMPLOYEE RETIREMENT PLAN
The Company sponsors a defined contribution retirement plan under Section 401(k)
of the Internal Revenue Code which covers substantially all employees. Eligible
employees may contribute a maximum of 15% of their annual salary. Under the
plan, the Company matches 10% of each employee's voluntary contributions. The
Company's contributions to the plan for 1997, 1996 and 1995 were $11,448,
$13,856 and $31,111, respectively.
F-12
(Continued)
INDUSTRAIL SERVICES OF AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 10 - ACQUISITION
On July 1, 1997, the Company entered an agreement with the principles of TMG
Enterprises (TMG) d/b/a The Metal Center to purchase equipment for $1,100,000.
The purchase price of $1,100,000 exceeded the fair value of the net assets
acquired by $800,000. The excess is being amortized on the straight-line method
over 15 years. Non-compete agreements of $500,000 represent the portion of the
purchase price allocated to the arrangement whereby TMG's principles agreed not
to compete with the Company for a period of five years. The cost is being
amortized on the straight-line method over the term of the arrangement. The
amount charged to expense in 1997 was $50,000. The results of operations include
the acquired operations from the date of acquisition. The pro forma disclosures
required by APB No. 16 are not material.
Payments are due in two installments of $800,000 on January 2, and July 1, 1998.
No interest is being imputed on these installments. This note payable is secured
by letters of credit in the amount of $1,600,000.
NOTE 11 - STOCK OPTION PLANS
During the years ended December 31, 1996 and 1995, the Company entered into
various consulting agreements for certain strategic and 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 of $16,875
and $100,625 were recorded for the years ended December 31, 1997 and 1996,
respectively. 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 1996 and 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, 1996 and 1995 are necessary.
During 1997, the Company adopted an employee stock option plan under which the
Company may grant options for up to 330,000 shares of common stock. The exercise
price of each option is equal to the market price of the Company's stock on the
date of grant. The maximum term of the option is five years.
F-13
(Continued)
INDUSTRIAL SERVICES OF AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 11 - STOCK OPTION PLANS (Continued)
The Company applies APB Opinion 25 in accounting for its employee stock option
plan. Accordingly, no compensation cost has been recognized for the plan in
1997.
The Company also issued options to purchase 25,000 shares of common stock to its
president as a component of a two year employment agreement beginning in October
1997. The exercise price of each option is $1 per share and is exercisable over
a five year period. Compensation cost charged to operations in 1997 related to
this option was $14,974.
During 1997, the Company issued options to purchase 100,000 shares of common
stock to its acting Chief Executive Officer. The exercise price is $5 per share
and is exercisable through October 1999. Because the exercise price of these
options was in excess of the market value of the Company's common stock on the
date of grant, there were no compensation costs recorded in 1997 related to
these options.
Had compensation costs been recorded on the employee stock options on the basis
of fair market value pursuant to FASB Statement No. 123, net income and earnings
per share would have been reduced as follows:
Net income
As reported $ 137,136
=========
Pro forma $(145,684)
=========
Basic Earnings Per Share
As reported $ .07
=========
Pro forma $ (.08)
=========
Diluted Earnings Per Share
As reported $ .07
=========
Pro forma $ (.07)
=========
The above pro forma information is based on an estimated fair value of these
stock options as of the date of grant using a Black-Scholes option pricing
method with the following weighted average assumptions for 1997: risk free
interest rate of 4.0%, dividend yield of 0%, volatility factor of the expected
market price of the Company's common stock of .60, and a weighted average
expected life of the options of 4 years.
F-14
(Continued)
INDUSTRIAL SERVICES OF AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 11 - STOCK OPTION PLANS (Continued)
Following is a summary of stock option activity and number of shares reserved
for outstanding options for the years ended December 31, 1997, 1996 and 1995:
Weighted
Weighted Maximum Average
Average Option Term ofGrant Date
Number ofOption PricePrice PerOptionsFair Value
Shares Per Share Share Grantedof Options
-------- --------- -------- ------- ---------
Balance as of January 1, 1995 -
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 December 31, 1996 70,000 5.00 $5.00 2 to 10 2.93
years
Granted 225,000 4.55 $1.00 to $5.00 2 to 5 5.19
years
Exercised -
Expired (50,000) 5.00 $5.00 2 years
-------
Balance as of December 31, 1997 245,000 4.59
=======
As of December 31, 1997, the 245,000 options outstanding have exercise prices
between $1 to $5 and a weighted-average remaining contractual life of 3.8 years.
The tax effect of income tax deductions for the year ended December 31, 1996
related to the 1996 exercise of the non-employee stock options issued during the
year ended December 31, 1995 was 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.
F-15
(Continued)
INDUSTRIAL SERVICES OF AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 12 - SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
The following noncash investing and financing activities occurred during the
year ended December 31, 1997, 1996 and 1995.
1997 1996 1995
---- ---- ----
Reclassification of deposits on operating
equipment $ - $125,000 $ -
Transfer of restricted investment in lieu of
for cash payment of accounts payable to K&R - 100,000 -
Fair value of stock options issued for
employee and non-employee services 128,776 117,500 -
Income tax benefit related to exercise of
nonemployee stock options - 970,000 -
Stock transferred by Company's principal
shareholderfor future consulting services
to be provided to the Company - 42,500 -
Acquisition of TMG Enterprises by issuing 1,600,000 - -
note payable
NOTE 13 - PER SHARE DATA
The following illustrates the computation for earnings per share and earning per
share assuming dilution.
1997 1996 1995
---- ---- ----
Earnings per share
Net income $ 137,136 $ 460,836 $ 704,159
Weighted average shares outstanding 1,929,600 1,837,933 1,729,600
--------- --------- ---------
Basic earnings per share $ .07 $ .25 $ .41
========== =========== =========
Earnings per share assuming dilution
Net income $ 137,136 $ 460,836 $ 704,159
Weighted average shares outstanding 1,929,600 1,837,933 1,729,600
Add dilutive effect of assumed
exercising of stock options 28,595 106,522 52,853
---------- ---------- ---------
Diluted average shares outstanding 1,958,195 1,944,455 1,782,453
---------- --------- ---------
Earnings per share assuming $ .07 $ .24 $ .40
dilution ========= ========== =========
F-16
SCHEDULE II INDUSTRIAL SERVICES OF AMERICA, INC.
VALUATION AND QUALIFYING ACCOUNTS
Year ended December 31, 1997
- --------------------------------------------------------------------------------
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) $ 29,455 $ - $ - $ - $ 29,455
======== ======== ======= ======= ========
F-17
EXHIBIT 10.11
September 4, 1997
Mr. Tom Sutton, Chairman of the Board
MGM Services, Inc.
800 Bering Drive, Suite 400
Houston, Texas 77057
Dear Mr. Sutton:
Upon mutual desire of MGM Services, Inc. (MGM) and Industrial Services of
America, Inc. (ISA) the following changes are to be agreed upon and made. First,
the management agreement dated May 1, 1997 is to be voided and second, certain
contracts with MGM's customers will be assigned to ISA for consideration.
Accordingly, it is agreed as follows:
1. Termination of Management Agreement. The Management Agreement dated May 1,
1997 between MGM and ISA shall be deemed voided and shall be of not past or
future force or effect and ISA and MGM shall mutually release each other
from any and all claims that either party may have had against the other
party with respect to that agreement.
2. Reimbursement for Certain Operating Expenses. MGM shall reimburse to ISA
$30,000 for certain expenses that ISA has incurred and will incur in the
assistance of the operations management of MGM up to the effective date of
the assignment of the contracts described herein. Of this reimbursement,
$20,000 shall be paid to ISA over the next three (3) months and $10,000
will be credited towards ISA's purchase of certain furniture and fixtures
of MGM.
3. Assignment of Contracts. MGM shall assign to ISA the contracts it has with
its customers as set forth in Schedule 1(a) attached hereto. In
consideration for such assignment, ISA shall pay MGM Three hundred thousand
($300,000) dollars (the "Purchase Price") which shall be payable on or
before September 22, 1997. This assignment of the contracts is to be
effective January 1, 1998. As a condition precedent to ISA paying MGM the
Purchase Price, MGM shall furnish ISA with a signed letter in the form of
Exhibit A to evidence each customer's consent to the assignment of their
respective waste management agreement with MGM. In the event, MGM is unable
to receive the consent of any customer identified on Schedule 1(a), the
parties shall adjust the Purchase Price proportionately based upon the
percentage figures listed on Schedule 1(a) and any amounts otherwise
payable to MGM shall be deferred until such time as the applicable consent
has been received. In the event any customers identified on Schedule 1(a)
cancels its account before December 31, 1997, ISA shall be entitled to make
a proportionate adjustment of the Purchase Price based on the percentage
figures listed on Schedule 1(a) and agreed upon by MGM and ISA. ISA shall
have the right to retain amounts otherwise payable to MGM in the form of
commissions hereunder in order to receive an amount equal to the dollar
value of such adjustment. MGM will also assign any revenue rights starting
January 1, 1998 and waste management obligations to the customers as set
forth in Schedule 1(b) attached hereto. In consideration for such
assignment, ISA shall pay MGM a monthly commission fee equal to 20% of the
"management fee" and commodity revenues paid by such respective customers
listed on Schedule 1(b) to ISA for the period commencing January 1, 1998
and ending June 30, 1998. In the event any of the customers identified on
the attached Schedule 1(a) or Schedule 1(b) expand their locations managed
under the contracts or agreements, ISA shall pay MGM a monthly commission
fee equal to 20% of the "management fee" and commodity revenues paid by
such respective locations to ISA for the period commencing January 1, 1998
and ending June 30, 1998. MGM retains the right to any and all management
fees, commodity revenues and processing fees earned through December 31,
1997 for those customers identified on the attached Schedule 1(a) or
Schedule 1(b). CWS/ISA will not be responsible for any past due balances
owed by MGM.
4. Mutual Release. Upon the execution of this agreement, ISA and MGM shall
mutually release and hold harmless each other from any and all claims
either party may have had against the other party, other than the right to
enforce this agreement.
5. J.C. Penney. The parties agree to address the J.C. Penney account at a
later date under a separate agreement.
6. Further Documentation. Each party agrees to enter into any and all further
documentation necessary to effectuate the terms of this agreement as agreed
upon by both parties to this agreement. The parties have agreed to conduct
themselves in the manner contemplated in Schedule 2 attached hereto.
If the foregoing meets with your approval, please sign in the space provided
below and return a copy of this letter to ISA.
Sincerely,
Industrial Services of America, Inc.
By: /s/ Harry Kletter
Harry Kletter, President
Agreed to and Accepted:
MGM Services, Inc.
By: /s/ Thomas L. Sutton
Thomas L. Sutton, Chairman of the Board
SCHEDULE 1(a)
LIST OF CONTRACTS TO BE ASSIGNED
Customer Name Locations %value of Purchase Price
Home Base 84 22%
Franks 261 33%
Mervyns 147 22%
TGIF 77 15%
Taco Bueno 107 8%
Proffitts 13 0%
Austin Commercial 1 0%
SCHEDULE 1(b)
LIST OF CUSTOMERS RIGHTS TO BE ASSIGNED
Customer Name Locations
Bontons 66
Toys R Us 31
Save A Lot 9
La Quinta 14
Lord & Taylor 5
SCHEDULE 2
SCHEDULE OF PLANNED EVENTS
1. Get letters of consent signed with contract accounts.
2. CWS/ISA and MGM contact to make a personal visit and introduction to
CWS/ISA to each account.
3. Transfer of funds to be done in a timely manner upon the receipt of the
signed letter of assignment.
4. If account does not agree to sign a letter of consent, account to become a
commission account due the 20% commission as set forth in item #3 of the
contract rather than being treated as a contract account.
5. Set-up timetable of account roll-out into Louisville system.
6. MGM Dallas personnel to input correct store and hauler information and
rates to CWS database after verifying necessary information.
7. MGM personnel to coordinate new procedures with account corporate contact
and stores.
8. MGM personnel to get hauler invoices address changed from Houston to
Louisville address.
9. MGM personnel to get recyclers to change remittance address from Houston to
Louisville.
10. Accounts to start calling into Louisville dispatch office.
11. Monthly account management reports and invoices to be generated from CWS
management database and dispatch system.
12. Invoices for accounts in CWS/ISA systems to be paid by ISA by funds that
come in for remittance on invoices generated by CWS. CWS/ISA will not be
responsible for any past due balances owed by MGM.
13. ISA Louisville to begin EDI on applicable account no sooner than 1/1/98.
14. MGM Dallas office to downsize as accounts are shifted to CWS Louisville.
Leased employees, furniture, telephone and office space downsizing to be
handled by Tom Sutton and Tim Roach.
15. CWS - Dallas office to start-up 1/1/98.
Exhibit 10.12
EMPLOYMENT AGREEMENT
THIS AGREEMENT made this 14th day of October, 1997 (the "Effective Date")
by and between Sean Garber residing at 4403 Water Crest Court, Louisville,
Kentucky 40241 (hereinafter referred to as "Employee") and Industrial Services
of America, Inc., a Florida company located at 7100 Grade Lane, Bldg. #2,
Louisville, Kentucky 40213 (hereinafter referred to as the "Company").
WHEREAS, the Company is highly dependent on its senior management team; and
the loss of the services of any member of senior management may have a material
adverse effect on the Company's business, financial condition and results of
operations;
WHEREAS, the Company desires to retain Employee as a full time employee,
and Employee desires to accept employment upon the terms and conditions
hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, Employee and the Company do hereby mutually agree as follows:
1. Term.
1.1 The Company agrees to retain Employee as a full-time employee for a
term of five (5) years commencing upon the date of this agreement,
unless this agreement is earlier terminated as provided herein.
1.2 This Agreement shall automatically renew for additional successive one
(1) year periods unless either party hereto shall have provided the
other party notice of intent not to renew within 180 days prior to the
expiration of the then current term.
2. Duties.
2.1 Employee hereby agrees to serve as a full-time employee, and exercise
his full time best efforts in performing functions assigned by the
Board of Directors of the Company under the terms and conditions
contained in this agreement and such other policies, directions,
regulations, and other requirements as may from time to time be
established by the Board of Directors of the Company. The parties
acknowledge that the Employee is being hired to serve as a Senior Vice
President and Chief Operating Officer for the Company.
3. Exclusiveness of Services.
3.1 Employee hereby agrees that during the term of this Agreement the
Employee will make available his services solely and exclusively to
the Company, and that during such time the Employee will not render
any similar services for his own account, or any services for any
other person, firm, or corporation, without first obtaining the prior
written consent of the Company. Employee further agrees to promptly
reveal to other appropriate Employees of the Company all matters
coming to his attention pertaining to the business or interests of the
Company.
4. Confidential Information.
4.1 Employee recognizes that the Employee has access to a variety of
confidential information concerning the Company; therefore, Employee
agrees that the Employee will not, either during his employment or any
time after the termination of his employment with the Company, use or
divulge or reveal to any person, firm, or corporation, directly or
indirectly, any confidential proprietary information or any
information obtained by the Employee during the term of this Agreement
that might be used in any way to injure or interfere with the
Company's business or trade or to alienate customers, dealers, or
employees from the Company or to cause discontent or dissatisfaction
among the Company's customers or employees (collectively, the
"Confidential Information"). The obligations set forth in this
Section, will not apply to information or materials which (i) are
already known to Employee at the time that they are disclosed by
Company; or (ii) are publicly known at the time of disclosure. The
obligations in this Section will cease as to particular Confidential
Information after the date that the particular Confidential
Information: (i) becomes publicly known through no fault of Employee;
(ii) is received by Employee properly and lawfully from a third party
without restriction on disclosure and without knowledge or reasonable
suspicion that the third party's disclosure is in breach of any
obligations to Company; or (iii) has been approved for public release
by written authorization of Company.
4.2 This covenant of confidentiality shall extend beyond the term of this
Agreement and shall survive the termination of this Agreement for any
reason.
5. Covenant Not-to-Compete
5.1 Employee agrees that, upon termination of his employment with the
Company for any reason whatsoever, voluntary or involuntary, that for
a period of two (2) years after date of termination of employment with
the Company, Employee shall not, directly or indirectly, interfere
with, solicit, or accept for himself or for anyone other than the
Company any of the clients or customers of the Company or any of its
affiliates at the time of said termination of employment, or perform
any services of any competitive nature in connection with said clients
or customers for anyone other than the Company or its affiliates. This
covenant not-to-compete shall be effective within the geographical
territory within a radius of one hundred (100) miles of any of the
Company's business operations.
5.2 It is understood and agreed that the purpose of this limitation is for
the protection of the Company in that competition with its customers
would be detrimental to the Company. Employee acknowledges that there
is no adequate remedy at law in favor of the Company for breach of
this Agreement by Employee and that the Company, in addition to all of
the rights which may be available, shall have the right of specific
performance in the event of breach or of injunction in any event of
any threatened breach. 5.3 This covenant of non-competition shall
extend beyond the term of this Agreement and shall survive the
termination of this Agreement for any reason. If any of the covenants
set forth in this Section are held to be unreasonable, arbitrary or
against public policy, such covenants will be considered divisible
with respect to scope, time, and geographical area, and modified to
the extent necessary to make the same enforceable, and such lesser
scope, time and geographical area, as may necessary to make same be
enforceable against the Employee.
6. Compensation and Benefits.
6.1 (a) Employee shall receive an annual minimum salary commencing as of
the date of this agreement as follows:
Year Amount
First Year $90,000
Second Year $95,000
Third Year $100,000
Fourth Year $105,000
Fifth Year and thereafter $110,000
6.1 (b) Concurrently, with the execution of this Agreement, the Company is
granting Employee a nontransferable option to acquire twenty five
thousand (25,000) shares of common stock of the Company, at an
exercise price of $1 per share, which option shall vest two (2) years
after the execution of this agreement, provided Employee remains a
full time Employee of the Company, and shall terminate and expire
three (3) years thereafter; and, to the extent not inconsistent with
the foregoing, shall be subject to other terms and conditions
applicable to options granted under the Company's 1997 Employee Stock
Option Plan (the "Stock Option Plan").
6.1 (c) Concurrently with the execution of this Agreement, the Company is
granting Employee a nontransferable option to acquire one hundred
thousand (100,000) shares of common stock of the Company pursuant to
the Stock Option Plan, which option shall have an exercise price equal
to the market price of such stock on the date this agreement is
entered into and shall vest immediately and be exercisable within five
(5) years from the date of this Agreement. The other terms and
conditions of such option shall be fixed and set forth in the Option
Certificate evidencing such option, in accordance with the Stock
Option Plan.
6.1 (d) The obligation of the Company to issue or transfer and deliver
shares of common stock upon exercise of the options being granted to
Employee concurrently with the execution of this Agreement shall be
subject to all applicable laws, regulations, rules, orders and
approvals which shall then be in effect and required by governmental
entities and the stock exchanges and stock markets on which the common
stock may be traded. In addition, all transactions contemplated
hereunder shall be subject to, and may be limited by, the provisions
of applicable law including, but not limited to, federal and state
securities laws.
As a condition to the exercise of the options being granted to the
Employee, and described in (b) and (c) above, the Company may require
Employee to represent to and agree with the Company in writing that he
is acquiring such shares without a view to distribution thereof. The
certificates for such shares may include any legend which the Company
deems appropriate to reflect any restrictions on transfer under
federal and applicable state securities laws. All certificates for
shares of common stock delivered upon exercise of options shall be
subject to such stock-transfer orders and other restrictions as the
Company may deem advisable under the rules, regulations and other
requirements of the Securities and Exchange Commission, the NASDAQ
Stock Market or any stock exchange upon which the common stock is then
listed, and any applicable federal or state securities law, and the
Company may cause a legend(s) to be put on any such certificates to
make appropriate reference to such restrictions. 6.2 Employee shall be
entitled to receive such annual bonuses, if any, as may be established
by the Compensation Committee and approved by the Board of Directors
based upon the Company's fiscal performance and the Employee's
performance during each year.
6.3 As long as Employee is a full-time employee of the Company, the
Company shall maintain a life insurance policy insuring the life of
the Employee in the principal amount of $1,000,000 and Employee shall
have the full right to designate the beneficiary(s) under such policy.
6.4 Employee shall also be entitled to participate in and receive any and
all other benefits, including medical, dental, health, and life
insurance, pension, retirement and disability benefit (long-term and
short-term), profit sharing, vacation and other benefits and all other
comparable benefits and programs as are now or hereafter may be
customarily made available by the Company to employees and/or senior
Employees, subject to any qualification requirements imposed under the
Company's written compensation plans and requirements imposed by law.
6.5 Nothing in this Agreement shall be construed as obligating the Company
to continue in force and effect any Company plan, Company program, or
Company perquisite and the Company shall have full power and
authority, subject to the terms of such Company plan, Company program,
or Company perquisite, to amend, alter, modify, supplement, replace,
or terminate any plan, program, or perquisite or any part thereof to
which Employee is or may be entitled to participate.
6.6 INTENTIONALLY DELETED
6.7 In the event the Company fails to renew the term of this agreement as
provided in Section 1.2 above, or Employee becomes disabled, resigns
within 180 days following the effective date of a Change In Control,
or is terminated without cause as contemplated in, respectively,
Section 8.2, and Section 8.3 and Section 8.5 hereof, Employee shall
receive a payment equal to his then current annual salary multiplied
by two (2), and any and all stock options granted by the Company to
Employee, herein or elsewhere, in effect at such time, shall
immediately vest and become exercisable, provided Employee has and
continues to honor the provisions of Section 4 and Section 5 of this
Agreement. The payment referred to in the preceding sentence shall be
paid by the Company to the Employee in twenty four (24) equal monthly
installments unless there is a Change In Control, in which case the
payment referred to in the preceding sentence shall be made in one
lump sum payment within thirty (30) days of the effective date of the
applicable resignation or termination (as the case may be). "Change In
Control" means a transaction or series of transactions as a result of
which (i) any person who does not currently own a majority of the
outstanding voting stock of the Company acquires a majority of the
outstanding voting stock of the Company; or (ii) the Company sells or
otherwise disposes of all or substantially all of the assets or
business operations of the Company to any other person; or (iii) the
Company merges or consolidates with any other person; unless, in any
such case, shareholders owning the outstanding voting stock of the
Company immediately prior to the consummation of such transaction or
transactions will own, upon consummation of such transaction or
transactions, at least a majority of the outstanding shares of voting
stock of the person acquiring the shares or assets of the Company or
surviving the merger or consolidation of the Company in the
transaction(s). Notwithstanding anything to the contrary contained
elsewhere in this Agreement, the Company shall not be obligated to
pay, and Employee shall have no right to receive, any payments
pursuant to this Section 6.7 at any time that the Employee is in
breach of his obligations under Section 4 and Section 5 of this
Agreement.
7. Facilities.
7.1 The Company shall furnish Employee with such administrative assistance
as is reasonably required to enable Employee to perform his duties as
set forth herein.
7.2 The Company agrees to reimburse Employee for reasonable traveling,
entertainment, and other expenses incurred in the rendering of
services by Employee under this Agreement in accordance with such
policy or policies as may from time to time be established by the
Company and in effect pertaining to such expenses.
8. Termination.
8.1 Death. Upon Employee's death, this Agreement shall immediately
terminate and payment of compensation to Employee shall cease and all
options granted Employee, to the extent not previously exercised,
shall automatically expire and terminate.
8.2 Disability. Should Employee be unable to perform his obligations under
this Agreement on account of illness or disability, payments of
compensation and benefits shall continue to be made to him under this
Agreement in accordance with the Company's policy then in effect for
other active Company employees of like age and position, until the
Company's long-term disability coverage would be effective. If the
Employee is unable to resume his duties under this Agreement at the
end of the time the Company's long-term disability coverage becomes
effective, Employee's employment and this Agreement shall then
immediately terminate. The Employee shall be entitled to the
compensation set forth in Section 6.7. In addition, such termination
shall not cause Employee to lose those benefits to which the Employee
is entitled solely by reason of his illness or disability pursuant to
any plan or program of the Company then in effect.
8.3 Resignation. Employee may resign and terminate this Agreement upon
ninety (90) days written notice to the Company. In the event Employee
resigns from his position with the Company, this Agreement shall
immediately terminate and Employee shall be entitled to no further
compensation from the Company unless such resignation takes place
within 180 days following the effective date of a Change In Control as
contemplated in Section 6.7.
8.4 Termination For Cause. Employee's employment under the terms of this
Agreement may be terminated by the Board of Directors, and, if
Employee is a member of such Board of Directors, the Employee shall
not be permitted to vote on such issue, or to attend, without
invitation by a majority of the other board members, the meeting of
such Board of Directors at which such issue is being considered, at
any time during the term, if such Board of Directors reasonably,
properly, and in good faith determines by majority vote of those
members present and voting at any meeting at which a quorum is present
that any of the following causes for terminating Employee's employment
exists:
(a) Employee is engaging in competition with the Company or its
subsidiaries in any manner which is substantially harmful to the
business of the Company or its subsidiaries;
(b) Employee is regularly making a frequent, substantial, abusive use of
alcohol, drugs, or similar substances, and such abuse has affected his
ability to conduct the business of the Company in a proper and prudent
manner, provided Company has provided Employee with a reasonable
period of time to cure such ailment;
(c) Employee is convicted of a felony; or
(d) Employee has materially breached the terms of this agreement, and
fails or refuses to correct such breach within thirty (30) days of
receipt of written notice to the Employee from the Board of Directors
of the Company of the breach, which such notice shall specifically
describe Employee's breach of this agreement and the steps required to
remedy the same.
If its Board of Directors reasonably, properly, and in good faith
determines that any one or more of the above causes for terminating Employee's
employment exists, then the Company may, by giving thirty (30) days' written
notice of its intention to terminate Employee's employment, terminate this
Agreement, the term, and Employee's employment, and all rights, duties, and
obligations of the parties under this Agreement, except Employee shall continue
to be bound by the provisions of Section 4 and 5 of this Agreement. Employee
shall be entitled to receive all compensation and fringe benefits hereinabove
provided for such period of thirty (30) days, plus any accrued vacation time
(pro-rated to the end of such thirty (30) day period), plus any rights to any
fringe benefits or other compensation hereinabove described in this Agreement
which accrue during such period of thirty (30).
All determinations by the Board of Directors of the Company that sufficient
grounds exist for the termination of Employee's employment under the above
provisions of this paragraph must be made reasonably, properly, and in good
faith.
8.5 Termination Without Cause. The Company may at any time, upon delivery
of written notice to Employee, terminate this Agreement and Employee's
employment hereunder, provided payment of compensation to Employee
shall be as provided in Section 6.7.
8.6 Survival. The Employees obligations under Sections 4 and 5 of this
Agreement shall survive any termination of this agreement.
9. Severability and Limited Enforceability.
9.1 It is understood and agreed that, should any portion of any clause or
paragraph of this Agreement be deemed too broad to permit enforcement
to its full extent, then such restriction shall be forced to the
maximum extent permitted by law, and Employee hereby consents and
agrees that such scope may be modified accordingly in any proceeding
brought to enforce such restriction. Further, it is agreed that,
should any provision in this Agreement be entirely unenforceable, the
remaining provisions of the Agreement shall not be affected thereby.
10. Governing Law
10.1 This Agreement shall be governed by, and construed under and in
accordance with, the laws of the Commonwealth of Kentucky.
11. Assignment.
11.1 This Agreement and the rights and obligations hereunder shall be
deemed personal to Employee and Employee may not transfer, pledge,
encumber, assign, anticipate, or alienate all or any part of this
Agreement.
12. Indemnification
12.1 The Company shall indemnify the Employee against expenses (including
reasonable attorney's fees), judgments, taxes, penalties, fines
(including any excise tax assessed with respect to any employee
benefit plan) and amounts paid in settlement (collectively
"Liability"), incurred by the Employee in connection with defending
any threatened, pending or completed action, suit or proceeding
(whether civil, criminal, administrative or investigative) to which
the Employee is, or is threatened to be made, a party because Employee
is or was an employee of the Company, or is or was serving at the
request of the Company as a Director, Officer, partner, employee or
agent of another domestic or foreign corporation, partnership, joint
venture, trust or other enterprise, including services with respect to
employee benefit plans. The Employee shall be considered to be serving
an employee benefit plan at the Company's request if the Employee's
duties to the Company also impose duties on or otherwise involve
services by the Employee to the plan, or to participants in, or
beneficiaries of, the plan. The Company shall pay or reimburse
expenses (including reasonable attorneys fees) incurred by the
Employee as a party to a proceeding in advance of final disposition of
such proceeding.
12.2 The indemnification against Liability and advancement of expenses
provided by, or granted pursuant to, this provision shall not be
deemed exclusive of any other rights to which the Employee may be
entitled under law, any other agreement or otherwise, and shall
continue after the Employee ceases to be an employee or agent of the
Company, and shall inure to the benefit of the heirs, executors, and
administrators of the Employee.
12.3 The Company may purchase and maintain insurance on behalf of the
Employee while an employee or agent of the Company, or while serving
at the request to the Company as a Director, Officer, partner,
trustee, employee or agent of the Company and/or of another foreign or
domestic corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise, against Liability asserted against
or incurred by the Employee in that capacity or arising from his
status as a Director, Officer, employee or agent, regardless of
whether the Company would have power to indemnify the Employee as a
Director or Officer against the same Liability under the provision of
Section 607.0850 of the Florida Business Corporation Act.
12.4 Any termination or expiration of the Employment Agreement shall not
adversely affect any right or protection of the Employee under this
provision with respect to any act or omission occurring prior to the
time of such termination or expiration.
12.5 The indemnification provided to the Employee by the foregoing
provisions shall not be effective and hence not provided to the
Employee by the Company with regard to (I) a violation of the criminal
law, unless the director, officer, employee, or agent had reasonable
cause to believe his conduct was lawful; (ii) a transaction from which
the director, officer, employee, or agent derived an improper personal
benefit; (iii) liability provided under Section 607.0834 of the
Florida Business Corporation Act (to the extent the Employee is acting
as a Director of the Company); or (iv) willful misconduct or a
conscious disregard for the best interests of the Company in a
proceeding by or in the right of the Company to procure a judgment in
its favor or in a proceeding by or in the right of a shareholder.
13. Binding on Other Parties.
13.1 This Agreement shall be binding upon and inure to the benefit of
Employee, his heirs, executors, and administrators, and shall be
binding upon and inure to the benefit of the Company and its
successors and assigns, including without limitation, any person,
foreign Company, or other business entity which at any time, whether
by merger, purchase, or otherwise, acquires all or substantially all
of the assets or business of the Company. Nothing herein shall be
construed as preventing the liquidation, dissolution, sale, merger, or
consolidation of the Company or any subsidiary, division, or affiliate
of the Company.
14. Arbitration.
14.1 In the event of any controversy or claim arising out of employee's
employment by the Company or this Agreement or the breach thereof, the
parties shall try to settle such conflicts amicably between
themselves. Should this prove impossible, the matter in dispute shall
be settled by binding arbitration.
14.2 In the event of any dispute or controversy as to which arbitration is
called for, the same shall be submitted to and determined by
arbitration in Louisville, Kentucky in accordance with the rules of
the American Arbitration Association then in effect; and that judgment
may be entered upon such determination in the appropriate court of
competent jurisdiction.
15. Miscellaneous.
15.1 This Agreement contains all the terms, conditions, and promises of the
parties hereto. No modification or waiver of this Agreement, or of any
provision thereof, shall be valid or binding, unless in writing and
executed by both of the parties hereto. No waiver by either party or
any breach of any term or provisions of this Agreement shall be
construed as a waiver of any succeeding breach of the same or any
other term or provision.
15.2 The Employee acknowledges that the Employee has been advised by the
Company to seek independent counsel to review and negotiate this
agreement on his behalf.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
day and year first above written.
INDUSTRIAL SERVICES OF
AMERICA, INC.
By: /s/ Harry Kletter
Title: President
ATTEST:
/s/ Matthew Kletter
Secretary
/s/ Sean Garber
SEAN GARBER
WITNESS:
/s/ Tim Myers
Exhibit 10.15
EXHIBIT A
AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT
This Amendment No. 1 to Employment Agreement (as hereinafter defined) made
and effective as of the 5th day of February, 1998 (the "Amendment"), between
INDUSTRIAL SERVICES OF AMERICA, INC. (the "Corporation") maintaining its
principal place of business at 7100 Grade Lane, Louisville, Kentucky 40213; and
SEAN GARBER ("Employee"), residing at 4403 Water Crest Court, Louisville,
Kentucky 40241.
WITNESSETH:
WHEREAS the Corporation and Employee entered into an Employment Agreement
dated October 15, 1997 ("Employment Agreement"); and
WHEREAS under the Employment Agreement both the Corporation and Employee
desire to amend the Employment Agreement with respect to certain provisions
contained therein;
NOW THEREFORE in consideration of the above recitals and the mutual
agreements herein contained and for other good and valuable consideration, the
parties hereby agree as follows:
1. Section 2.1 of the Employment Agreement is hereby amended to read in
its entirety as follows:
2.1 Employee hereby agrees to serve as a full-time employee, and
exercise his full time best efforts in performing functions assigned
by the Board of Directors of the Company under the terms and
conditions contained in this agreement and such other policies,
directions, regulations, and other requirements as may from time to
time be established by the Board of Directors of the Corporation. The
parties acknowledge that the Employee is being hired to serve as
President of the Corporation.
2. Section 6.1(a) of the Employment Agreement is hereby amended to read
in its entirety as follows:
6.1(a) Employee shall receive an annual minimum salary commencing as
of the date of this agreement as follows:
Year Amount
First Year $104,000
Second Year $110,000
Third Year $120,000
Fourth Year $130,000
Fifth Year and thereafter $140,000
Incentive pay to be established by the compensation committee.
3. Section 6.1(c) of the Employment Agreement is hereby amended to read
in its entirety as follows:
6.1(c) Concurrently with the execution of this Agreement, the Company
is granting Employee a nontransferable option to acquire one hundred
thousand (100,000) shares of common stock of the Company pursuant to a
certain Stock Option Agreement dated October 15, 1997, as amended (the
"Stock Option Agreement") which option shave have an exercise price of
$5.00 per share and shall vest immediately and be exercisable within
five (5) years from the date of this Agreement. The other terms and
conditions of such option shall be fixed and set forth in the Stock
Option Agreement.
4. Other than is set forth in this Amendment, all the terms, conditions,
rights, duties, responsibilities and obligations set forth in the
Employment Agreement remain in full force and effect.
IN WITNESS WHEREOF, the Corporation has executed this Amendment by its duly
authorized corporate officer as of the date set forth above.
"Corporation"
INDUSTRIAL SERVICES OF AMERICA, INC.
By: /s/ Harry Kletter
Harry Kletter, Chairman of the Board of Directors
Accepted by:
"Employee"
/s/ Sean Garber
SEAN GARBER
EXHIBIT B
AMENDMENT NO. 1 TO OPTION AGREEMENT
This Amendment No. 1 to Stock