content="text/html; charset=iso-8859-1"> Industrial Services of America, Inc. Form 10-Q

FORM 10-Q

 

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

 

[X]   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003

OR

[  ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From _________ to ________

 
Commission File Number 0-20979
 

INDUSTRIAL SERVICES OF AMERICA, INC.
(Exact Name of Registrant as specified in its Charter)

 

Florida

59-0712746

(State or other jurisdiction of

(IRS Employer

Incorporation or Organization)

Identification No.)

 

7100 Grade Lane, PO Box 32428
Louisville, Kentucky 40232
(Address of principal executive offices)

 

(502) 368-1661
(Registrant's Telephone Number, Including Area Code)

 
Check whether the registrant (1) has filed all Reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES    X      NO ___
 
Indicate by check mark whether the registrant is an accelerated filer (as defined in rule 12b-2 of the Act). Yes       No   X  
 
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of September 30, 2003: 1,601,900.

 


 

INDUSTRIAL SERVICES OF AMERICA, INC. AND SUBSIDIARIES

     
 

INDEX

 
     
   

Page No.

Part I Financial Information  
     
  Condensed Consolidated Balance Sheets  
     September 30, 2003 and December 31, 2002

3

     
  Condensed Consolidated Statements of  
     Operations Three Months Ended  
     September 30, 2003 and 2002

5

     
  Condensed Consolidated Statements of  
     Operations Nine Months Ended  
     September 30, 2003 and 2002

6

     
  Condensed Consolidated Statements of  
     Cash Flows Nine Months Ended  
     September 30, 2003 and 2002

7

     
  Notes to Condensed Consolidated  
     Financial Statements

8

     
  Management's Discussion and Analysis  
     of Financial Condition and Results  
     of Operations

13

     
     
Part II Other Information

16

     

 


 

Part I – FINANCIAL INFORMATION

 

ITEM 1: Condensed CONSOLIDATED FINANCIAL STATEMENTS.

 

INDUSTRIAL SERVICES OF AMERICA, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

ASSETS

 
 

September 30,
2003

 

December 31,
2002

Current assets      
  Cash and cash equivalents

$    574,402

 

$   1,630,028

  Accounts receivable - trade (after allowance
    for doubtful accounts of $60,000 in 2003
    and $50,000 in 2002)

9,885,395

 

6,803,856

  Income tax refund receivable

-

 

79,593

  Net investment in sales-type leases

105,277

 

142,218

  Inventories

1,343,007

 

1,883,162

  Deferred income taxes

383,200

 

317,600

  Other

        51,605

 

       141,446

       
        Total current assets

12,342,886

 

10,997,903

       
Net property and equipment

7,742,681

 

6,805,295

       
Other Assets      
  Non-compete agreements, net

-

 

51,180

  Goodwill

560,005

 

560,005

  Net investment in sales-type leases

117,897

 

263,921

  Notes receivable

31,493

 

37,735

  Other assets

        108,267

 

        196,740

 

       817,662

 

     1,109,581

       
 

$ 20,903,229

 

$ 18,912,779

       
See accompanying notes to consolidated financial statements.
 

3

 


 

INDUSTRIAL SERVICES OF AMERICA, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED BALANCE SHEETS

CONTINUED

(UNAUDITED)

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 
 

September 30,
2003

 

December 31,
2002

Current liabilities      
  Senior revolving credit facility

$                - 

 

$   1,750,000 

  Current maturities of long-term debt

836,254 

 

623,363 

  Current maturities of capital lease obligation

156,746 

 

100,827 

  Accounts payable

10,963,380 

 

8,676,287 

  Income tax payable

100,885

 

-

  Other current liabilities

      749,352 

 

      353,920 

       Total current liabilities

12,806,617 

 

11,504,397 

       
Long-term liabilities      
  Long-term debt, less current maturities

3,133,022 

 

3,014,225 

  Capital lease obligation, less current obligation

871,525 

 

733,971 

  Deferred income taxes

      340,177 

 

     271,277 

 

4,344,724 

 

4,019,473 

       
Stockholders' equity      
  Common stock, $.01 par value, 10,000,000 shares authorized,
     1,957,500 shares issued and 1,601,900 and
     1,614,800 shares outstanding in 2003 and 2002

19,575 

 

19,575 

  Additional paid-in capital

1,925,321 

 

1,925,321 

  Retained earnings

2,520,450 

 

2,132,761 

  Treasury stock, 355,600 and 342,700 shares at cost in      
     2003 and 2002

    (713,458)

 

     (688,748)

 

   3,751,888 

 

    3,388,909 

 

$ 20,903,229 

 

$ 18,912,779 

       
See accompanying notes to consolidated financial statements.
 

4

 


 

INDUSTRIAL SERVICES OF AMERICA, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

THREE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002

(UNAUDITED)

 
 

2003

 

2002

       
Revenue

$ 30,636,541 

 

$ 27,417,677 

       
Cost of goods sold

  29,004,802 

 

 25,723,328 

       
Selling, general and administrative expenses

    1,365,037 

 

   1,582,965 

       
Income before other expense

266,702 

 

111,384 

       
Other expense

       (77,227)

 

       (39,904)

       
Income before income taxes

189,475 

 

71,480 

       
Provision for income taxes

         75,790 

 

        28,331 

       
Net income

$      113,685 

 

$       43,149 

       
Basic earnings per share

$0.07 

 

$0.03 

       
Diluted earnings per share

$0.07 

 

$0.03 

       
Weighted shares outstanding:      
   Basic

1,602,065 

 

1,629,760 

       
   Diluted

1,647,121 

 

1,645,179 

 
See accompanying notes to consolidated financial statements.
 

5

 


 

INDUSTRIAL SERVICES OF AMERICA, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002

(UNAUDITED)

 
 

2003

 

2002

       
Revenue

$ 87,380,504 

 

$ 76,857,641 

       
Cost of goods sold

  82,113,116 

 

 71,626,286 

       
Selling, general and administrative expenses

    4,246,570 

 

   4,624,820 

       
Income before other expense

1,020,818 

 

606,535 

       
Other expense

     (374,670)

 

       (55,742)

       
Income before income taxes

646,148 

 

550,793 

       
Provision for income taxes

       258,459 

 

       220,056 

       
Net income

$      387,689 

 

$     330,737 

       
Basic earnings per share

$0.24 

 

$0.20 

       
Diluted earnings per share

$0.24 

 

$0.20 

       
Weighted shares outstanding:      
   Basic

1,609,093 

 

1,648,097 

       
   Diluted

1,610,544 

 

1,662,498 

 
See accompanying notes to consolidated financial statements.
 

6

 


 

INDUSTRIAL SERVICES OF AMERICA, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002

(UNAUDITED)

 
 

2003

 

2002

Cash flows from operating activities      
  Net income

$  387,689 

 

$    330,737 

  Adjustments to reconcile net income to
    net cash from operating activities:
     
      Depreciation and amortization

1,332,214  

 

1,306,717 

      Deferred income tax

3,300 

 

-   

      (Gain) loss on sale of property and equipment

(575)

 

1,489 

      Change in assets and liabilities      
        Receivables

(3,075,297)

 

(1,922,006)

        Inventories

540,155 

 

36,141 

        Other assets

257,907 

 

(393,159)

        Accounts payable

2,287,093 

 

2,052,464 

        Other current liabilities

      496,313 

 

     107,960 

            Net cash from operating activities

2,228,799 

 

1,520,343 

       
       
Cash flows from investing activities      
  Proceeds from equipment under sales-type leases

107,770 

 

83,253 

  Purchases or transfers of equipment under sales-type leases

75,196 

 

(133,873)

  Proceeds from sale of property and equipment

599,600 

 

82,955 

  Purchases of property and equipment

  (2,532,444)

 

     (894,661)

          Net cash from investing activities

(1,749,878)

 

(862,326)

       
Cash flows from financing activities      
  Net borrowings (payments) on senior revolving credit facility

(1,750,000)

 

500,000 

  Purchase of common stock

(24,710)

 

(103,123)

  Payments on capital lease obligation

(91,527)

 

(27,264)

  Proceeds from long-term debt

1,515,779 

 

-   

  Payments on long-term debt

  (1,184,089)

 

     (496,530)

          Net cash from financing activities

  (1,534,547

 

     (126,917)

       
Net increase (decrease) in cash

(1,055,626)

 

531,100 

       
Cash at beginning of period

  1,630,028 

 

     776,745 

       
Cash at end of period

$    574,402 

 

$ 1,307,845 

 
See accompanying notes to consolidated financial statements.
 

7

 


 

INDUSTRIAL SERVICES OF AMERICA, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 
NOTE 1 – BASIS OF PRESENTATION
 
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial reporting. They do not include all information and footnotes required by generally accepted accounting principles for complete consolidated financial statements. The information furnished includes all adjustments which are, in the opinion of management, necessary to present fairly the Registrant's financial position as of September 30, 2003 and the results of its operations and changes in cash flow for the periods ended September 30, 2003 and 2002. Results of operations for the period ended September 30, 2003 are not necessarily indicative of the results that may be expected for the entire year. Additional information, including the audited December 31, 2002 consolidated financial statements and the Summary of Significant Accounting Policies, is included in the Registrant's Annual Report on Form 10-K for the year ended December 31, 2002 on file with the Securities and Exchange Commission.
 
NOTE 2 – ESTIMATES
 
In preparing the condensed consolidated financial statements in conformity with generally accepted accounting principles, management must make estimates and assumptions. These estimates and assumptions affect the amounts reported for assets, liabilities, revenues and expenses, as well as affecting the disclosures provided. Future results could differ from the current estimates.
 
NOTE 3 – RECLASSIFICATIONS
 
Certain prior year amounts have been reclassified to conform to the current year presentation.
 
NOTE 4 – LONG TERM DEBT AND NOTES PAYABLE TO BANK
 
The terms of the Company’s bank debt place certain operational and financial position requirements on the Company. As of, and for the quarter ended September 30, 2003, the Company was in compliance with these requirements.
 

8

 


 

NOTE 5 – RECENTLY ENACTED ACCOUNTING STANDARDS
 
In November 2002, the Financial Accounting Standards Board (FASB) issued FASB interpretation FIN 45, "Guarantor’s Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others", effective in the quarter beginning January 1, 2003. This interpretation expands the disclosures to be made by a guarantor in its financial statements about its obligations under certain guarantees and requires the guarantor to recognize a liability for the fair value of an obligation assumed under a guarantee. Adoption of the standard did not have a material impact on the Company’s operating results or financial condition.
 
In January 2003, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. (FIN) 46, "Consolidation of Variable Interest Entities." The objective of this interpretation is to provide guidance on how to identify a variable interest entity (VIE) and determine when the assets, liabilities, non-controlling interests, and results of operations of a VIE need to be included in a company’s consolidated financial statements, effective in the quarter beginning October 1, 2003. A company that holds variable interests in an entity will need to consolidate the entity if the company’s interest in the VIE is such that the company will absorb a majority of the VIE’s expected losses and/or receive a majority of the entity’s expected residual returns, if they occur. FIN 46 also requires additional disclosures by primary beneficiaries and other significant variable interest holders. The Company has not yet fully evaluated the impact of adopting the standard.
 
In addition, the Financial Accounting Standard Board (FASB) recently issued two new accounting standards, Statement 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities, and Statement 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equities, both of which became effective in the quarter beginning July 1, 2003. Because the Company does not have these instruments, the new accounting standards will not materially affect the Company’s operating results or financial condition.
 
NOTE 6 – SEGMENT INFORMATION
 
The Company’s operations include three primary segments: ISA Recycling, Computerized Waste Systems (CWS), and Waste Equipment Sales & Service (WESSCO). ISA recycling provides products and services to meet the needs of its customers related to ferrous, non-ferrous and fiber recycling at two locations in the Midwest. CWS provides waste disposal services including contract negotiations with vendors, centralized billing, invoice auditing, and centralized dispatching. WESSCO sells, leases, and services waste handling and recycling equipment.
 
The Company’s three segments are determined by the products and services that each offers. The recycling segment generates its revenues based on buying and selling of ferrous, non-ferrous and fiber scrap; CWS’s revenues consist of charges to customers for waste disposal services; and WESSCO sales and lease income comprise the primary source of revenue for this segment.
 
The Company evaluates segment performance based on gross profit or loss and the evaluation process for each segment includes only direct expenses and selling, general and administrative costs, omitting any other income and expense and income taxes.
 

9

 


 

NOTE 6 – SEGMENT INFORMATION (Continued)
 


For the
NINE months ended
SEPTEMBER
30, 2003

ISA
Recycling

 

Computerized
Waste

Systems

 

Waste
Equipment
Sales &
Services

 

Corporate

 

Segment
Totals

                   
Recycling revenues

$20,115,769 

 

$                  - 

 

$                - 

 

$               - 

 

$20,115,769 

Equipment sales, service                  
   And leasing revenues

 

 

1,740,494 

 

 

1,740,494 

Management fees

 

65,524,241 

 

 

 

65,524,241 

Cost of goods sold

(19,097,502)

 

(62,140,199)

 

  (875,415)

 

 

(82,113,116)

Selling, general and                  
   administrative expenses

(974,786)

 

      (1,469,709)

 

   (452,052)

 

  (1,350,023)

 

  (4,246,570)

                   
Segment profit (loss)

$       43,481 

 

$    1,914,333 

 

$    413,027 

 

$(1,350,023)

 

$  1,020,818 

                   
Segment assets

$  8,955,683 

 

$    6,853,609 

 

$  1,978,861 

 

$  3,115,076 

 

$20,903,229 

                   


For the
NINE months ended
sEPTEMBER
30, 2002

ISA
Recycling

 

Computerized
Waste

Systems

 

Waste
Equipment
Sales &
Services

 

Corporate

 

Segment
Totals

                   
Recycling revenues

$16,703,920 

 

$                  - 

 

$                - 

 

$               - 

 

$ 16,703,920 

Equipment sales, service                  
   And leasing revenues

 

 

1,667,443 

 

 

1,667,443 

Management fees

 

58,486,278 

 

 

 

58,486,278 

Cost of goods sold

(15,136,239)

 

(55,635,318)

 

(854,729)

 

 

(71,626,286)

Selling, general and                  
   administrative expenses

  (1,137,341)

 

   (1,600,359)

 

   (446,543)

 

  (1,440,577)

 

  (4,624,820)

                   
Segment profit (loss)

$     430,340 

 

$   1,250,601 

 

$    366,171 

 

$(1,440,577)

 

$     606,535 

                   
Segment assets

$ 10,129,555 

 

$   7,308,839 

 

$ 1,945,636 

 

$    737,970 

 

$20,122,000 

 

10

 


 

NOTE 7 - Stock Option Information
 
Pursuant to SFAS No. 123, "Accounting for Stock-Based Compensation," the Company has elected to account for its employee stock options under APB No. 25, "Accounting for Stock Issued to Employees." Accordingly, no compensation cost has been recognized for employee options. Had compensation cost for employee options been determined based on the fair value at the grant date consistent with SFAS No. 123, the Company’s net income (loss) per share for the three months and nine months ended September 30 would have been as follows:
 

 

   

Three Months
Ended September 30,

Nine Months
Ended September 30,

     

2003

   

2002

   

2003

   

2002

Net income (loss):                        
  As reported   $

113,685

 

$

43,149

 

$

387,689

 

$

330,737

  Pro forma   $

90,855

 

$

43,149

 

$

364,859

 

$

330,737

Basic and diluted income (loss) per
  common share:
                       
  Basic, As reported    

$0.07

   

$0.03

   

$0.24

   

$0.20

  Diluted, As reported    

$0.07

   

$0.03

   

$0.24

   

$0.20

  Basic, Pro forma    

$0.07

   

$0.03

   

$0.24

   

$0.20

  Diluted, Pro forma    

$0.06

   

$0.03

   

$0.23

   

$0.20

 
The fair value of each option grant to employees was estimated on the date of grant using the Black Scholes option-pricing model with the following weighted average assumptions:
 
 

2003

2002

Interest rate

3.6

4.25

Dividends

-

-

Expected volatility

1.25

1.09

Expected life in years

5

5

 
NOTE 8 - Income (Loss) per Share
 
Income (loss) per common share is calculated in accordance with Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share." The Company calculates basic earnings per common share using the weighted average number of shares outstanding for the period. Outstanding shares for purposes of determining diluted earnings per common share includes the weighted average number of shares outstanding for basic earnings per share, plus the diluted effect of any common share equivalents such as options in the calculation. The average fair market stock price for the Company exceeded the strike price, therefore a portion of common share equivalents outstanding would be dilutive. Accordingly, basic and diluted earnings per share amounts are different.
 

11

 

 


 

NOTE 8 - Income (Loss) per Share (continued)
 
A reconciliation of basic to diluted share amounts used in computing the per share amounts for the three and nine months ended September 30, 2002 and 2003 is as follows:
 
   

Three Months

Ended September 30,

   

2003

 

2002

Basic – weighted average shares outstanding  

1,602,065

 

1,629,760

Dilutive effect of stock options  

     45,056

 

     15,419

Diluted – weighted average shares outstanding and assumed conversions  

1,647,121

 

1,645,179

         
   

Nine Months

   

Ended September 30,

   

2003

 

2002

Basic – weighted average shares outstanding  

1,609,093

 

1,648,097

Dilutive effect of stock options  

       1,451

 

     14,401

Diluted – weighted average shares outstanding and assumed conversions  

1,610,544

 

1,662,498

         

12

 

 


 

ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
 
Liquidity and Capital Resources
 
        As of September 30, 2003 the Registrant held cash and cash equivalents of $574,402.
 
        The Registrant derives its revenues from several sources, including management services, equipment sales and leasing and from its recycling operations. Management services comprised approximately 75.0% and 76.1% of the Registrant's total revenues for the quarters ended September 30, 2003 and 2002, respectively.
 
        The Registrant currently maintains a $4.3 million senior revolving credit facility with a bank. Outstanding principal under this credit facility bears interest at the Bank's prime rate and the line matures in June 2004. At September 30, 2003 there was no draw against this line of credit.
 
Results of Operations
 
        The following table presents, for the periods indicated, the percentage relationship which certain captioned items in the Registrant's Statements of Operations bear to total revenues and other pertinent data:
 
 

Nine months ended September 30,

 

2003

 

2002

Statements of Operations Data:      
Total Revenue ..................................................................................

100.0%

 

100.0%

Cost of goods sold............................................................................

94.0%

 

93.2%

Selling, general and administrative expenses ..................................

4.8%

 

6.0%

Income before other expenses...........................................................

1.2%

 

0.8%

 
Nine months ended September 30, 2003 compared to nine months ended September 30, 2002
 
        Total revenue increased $10,522,863 or 13.7% to $87,380,504 in 2003 compared to $76,857,641 in 2002. Recycling revenue increased $3,411,849 or 20.4% to $20,115,769 in 2003 compared to $16,703,920 in 2002. This is due to an increase in the volume of shipments as well as an increase in the price of the commodities. Management services revenue increased $7,037,963 or 12.0% to $65,524,241 in 2003 compared to $58,486,278 in 2002. This is due to an increase in revenues per the customer locations while maintaining a consistent customer base. Equipment sales, service and leasing revenue increased $73,051 or 4.4% to $1,740,494 in 2003 compared to $1,667,443 in 2002. In the continued effort to lease equipment for the long-term benefit of revenue streams and customer retention in lieu of equipment sales, leasing income increased approximately $228,000 as equipment sales decreased approximately $158,000 compared to the prior period.
 

13

 

 


 

        Total cost of goods sold increased $10,486,830 or 14.6% to $82,113,116 in 2003 compared to $71,626,286 in 2002. As a percentage of revenue, cost of goods sold was 94.0% in 2003 compared to 93.2% in 2002. Recycling cost of goods sold increased $3,961,263 or 26.2% to $19,097,502 in 2003 compared to $15,136,239 in 2002. This is due to an increase in the volume of purchases as well as an increase in commodity purchase prices in the recycling market. As a percentage of recycling revenue, recycling cost of goods sold was 94.9% in 2003 compared to 90.6% in 2002. Management services cost of goods sold increased $6,504,881 or 11.7% to $62,140,199 in 2003 compared to $55,635,318 in 2002. This is due to increases in vendor service fees. As a percentage of management services revenue, management services cost of goods sold was 94.8% in 2003 compared to 95.1% in 2002. Equipment, service and leasing cost of goods sold increased $20,686 or 2.4% to $875,415 in 2003 compared to $854,729 in 2002. As a percentage of equipment, service and leasing revenue, equipment, service and leasing cost of goods sold was 50.3% in 2003 compared to 51.3% in 2002.
 
        Selling, general and administrative expenses decreased $378,250 or 8.2% to $4,246,570 in 2003 compared to $4,624,820 in 2002. This decrease is due to a reduction of compensation expenses, consulting expenses, insurance expenses, amortization expenses and rent expenses. The Company anticipates a consistent reduction of these expenses through the remainder of the year. As a percentage of revenue, selling, general and administrative expenses were 4.8% in 2003 compared to 6.0% in 2002.
 
        Other expense increased $318,928 to $374,670 in 2003 compared to $55,742 in 2002. This increase was primarily due to payments of $156,000 for terminating a property lease agreement and $28,000 for property repair in the recycling division in 2003, and a bad debt recovery of $73,861 in the management services segment in 2002.
 
Three months ended September 30, 2003 compared to three months ended September 30, 2002
 
        Total revenue increased $3,218,864 or 11.7% to $30,636,541 in 2003 compared to $27,417,677 in 2002. Recycling revenue increased $783,293 or 12.7% to $6,943,549 in 2003 compared to $6,160,256 in 2002. This is due to an increase in the volume of shipments as well as an increase in the price of the commodities. Management services revenue increased $2,376,202 or 11.5% to $23,074,606 in 2003 compared to $20,698,404 in 2002. This is due to an increase in revenues per the customer locations while maintaining a consistent customer base. Equipment sales, service and leasing revenue increased $59,369 or 10.6% to $618,386 in 2003 compared to $559,017 in 2002. In the continued effort to lease equipment for the long-term benefit of revenue streams and customer retention in lieu of equipment sales, leasing income increased approximately $88,000 as equipment sales decreased approximately $38,000 compared to the prior period.
 
        Total cost of goods sold increased $3,281,474 or 12.8% to $29,004,802 in 2003 compared to $25,723,328 in 2002. As a percentage of revenue, cost of goods sold was 94.7% in 2003 compared to 93.8% in 2002. Recycling cost of goods sold increased $686,736 or 12.0% to $6,405,745 in 2003 compared to $5,719,009 in 2002. This is due to higher commodity purchase prices in the recycling market. As a percentage of recycling revenue, recycling cost of goods sold was 92.3% in 2003 compared to 92.8% in 2002. Management services cost of goods sold increased $2,577,019 or 13.1% to $22,291,424 in 2003 compared to $19,714,405 in 2002. This is due to increases in vendor service fees. As a percentage of management services revenue, management services cost of goods sold was 96.6% in 2003 compared to 95.2% in 2002.
 

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Equipment, service and leasing cost of goods sold increased $17,719 or 6.1% to 307,633 in 2003 compared to $289,914 in 2002. As a percentage of equipment, service and leasing revenue, equipment, service and leasing cost of goods sold was 49.7% in 2003 compared to 51.9% in 2002.
 
        Selling, general and administrative expenses decreased $217,928 or 13.8% to $1,365,037 in 2003 compared to $1,582,965 in 2002. This decrease is due to a reduction of compensation expenses, insurance expenses, amortization expenses and rent expenses. The Company anticipates a consistent reduction of these expenses through the remainder of the year. As a percentage of revenue, selling, general and administrative expenses were 4.5% in 2003 compared to 5.8% in 2002.
 
        Other expense increased $37,323 to $77,227 in 2003 compared to $39,904 in 2002. This increase was primarily due to a payment of $28,000 for property repair due to terminating a property lease agreement in the recycling division in 2003.
 
Financial condition at September 30, 2003 compared to December 31, 2002
 
        Cash and cash equivalents decreased $1,055,626 to $574,402 as of September 30, 2003 compared to $1,630,028 as of December 31, 2002. This is primarily due to the payment in full of the senior revolving credit facility as it decreased from $1,750,000 as of December 31, 2002 to $0 as of September 30, 2003. Net cash from operating activities increased $708,456 to $2,228,799 as of September 30, 2003 compared to $1,520,343 as of September 30, 2002. This is primarily due to an increase in deposits of approximately $350,000 of recycling commodity sales collected from vendors during the last part of the quarter that will be distributed to customers after September 30, 2003.
 
        Accounts receivable trade increased $3,081,539 or 45.3% to $9,885,395 as of September 30, 2003 compared to $6,803,856 as of December 31, 2002. This is due to an increase in revenues per the customer locations while maintaining a consistent customer base in the Management Services segment as well as an increase in the volume of shipments in the Recycling segment.
 
        Inventories decreased $540,155 or 28.7% to $1,343,007 as of September 30, 2003 compared to $1,883,162 as of December 31, 2002. This decrease is due to a higher volume of shipments in the Recycling segment for the first nine months of 2003 compared to the same period of 2002. It is offset slightly by higher commodity purchase prices. Commodity purchase prices increased approximately 23% for the ferrous division and 5% for the nonferrous division in the third quarter compared to the same period in 2002. This has increased the inventory carrying cost per unit as of September 30, 2003. Volume of shipments in the ferrous division have increased approximately 18% in the first nine months compared to the same period in 2002. Volume of shipments in the nonferrous division have remained the same for the first nine months compared to the same period in 2002.
 
        Accounts payable trade increased $2,287,093 or 26.4% to $10,963,380 as of September 30, 2003 compared to $8,676,287 as of December 31, 2002. Accounts payable trade increased due to an increase in expenses per the customer locations while maintaining a consistent customer base in the Management Services segment as well as an increase in the volume of commodity purchases in the Recycling segment.
 

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        Long-term debt increased $331,688 to $3,969,276 as of September 30, 2003 compared to $3,637,588 as of December 31, 2002. Long-term debt increased $1,515,779 due to the purchase of the 7110 Grade Lane property and a vehicle. During the third quarter, four Mack trucks, several trailers and one portable hydraulic shear were sold. From these transactions, $600,000 was used to pay down long-term debt. Long-term debt decreased $584,091 due to monthly principal payments.
 
        Working capital increased $42,763 to a deficit of $463,731 as of September 30, 2003 compared to a deficit of $506,494 as of December 31, 2002. These deficits are due to the use of working capital to finance the purchase of property and equipment rather than using long-term debt in 2003 and 2002.
 
Item 3:    Quantitative and Qualitative Disclosures About Market Risk.
 
        There is market risk in our recycling segment, since it is driven by fluctuating commodity prices. Management mitigates this risk by selling our product on a monthly contract basis, insulating the Registrant from large fluctuations in the commodity prices.
 
ITEM 4:    CONTROLS AND PROCEDURES
 
(a)       Evaluation of disclosure controls and procedures.
 
        Based on the evaluation of the Chief Executive Officer and the Chief Financial Officer of the Registrant of its disclosure controls and procedures as of September 30, 2003, it has been concluded that the disclosure controls and procedures are effective for the purposes contemplated by Rule 13a-14 (e) promulgated by the Securities and Exchange Commission.
 
(b)       Changes in internal controls.
 
        There have been no significant changes to the Registrant's internal controls or in other factors that could significantly affect these controls subsequent to September 30, 2003.
 

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PART II – OTHER INFORMATION

   
   
Item 1. Legal Proceedings
  None
   
Item 2. Changes in Securities and Use of Proceeds
  None
   
Item 3. Defaults upon Senior Securities
  None
   
Item 4. Submission of Matters to a Vote of Security Holders
  None
   
Item 5. Other Information
  None
   
Item 6. Exhibits and Reports on Form 8-K
   
  (a) Exhibits filed with, or incorporated by reference herein, this report are identified in the Index to Exhibits appearing in this report.
   
   
 

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SIGNATURES

 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
   
  INDUSTRIAL SERVICES OF AMERICA, INC.
   
   
DATE: November 10, 2003     /s/  Harry Kletter                                 
  Chairman and Chief Executive Officer
   
   
DATE: November 10, 2003    /s/  Alan L. Schroering                         
  Chief Financial Officer

 


 

INDEX TO EXHIBITS

     
Exhibit
Number
 


Description of Exhibits

     
31.3   Rule 13a-14(a) Certification of Harry Kletter for the Form 10-Q for the quarter ended September 30, 2003.
     
31.4   Rule 13a-14(a) Certification of Alan Schroering for the Form 10-Q for the quarter ended September 30, 2003.
     
32.2   Section 1350 Certification of Harry Kletter and Alan Schroering for the Form 10-Q for the quarter ended September 30, 2003

.