UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2013
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
(State or other jurisdiction of
incorporation or organization)
59-0712746
(IRS Employer Identification No.)
7100 Grade Lane, PO 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:
Common Stock, $0.0033 par value NASDAQ Capital Market
(Title of class) (Name of exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes
No
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
No
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Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this
chapter) 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.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule
12b-2 of the Exchange Act.
(Check one): Large accelerated filer
Non-accelerated filer
Accelerated filer
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
No
Aggregate market value of the 4,908,382 shares of voting Common Stock held by non-affiliates of the registrant at the
closing sales price on June 28, 2013: $12,418,206.
Number of shares of Common Stock, $0.0033 par value, outstanding as of the close of business on March 28, 2014:
7,069,267.
____________________________________________
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for the 2014 Annual Meeting of Shareholders are incorporated by
reference into Item 10 through Item 14 of Part III of this report.
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Table of Contents
Business
Risk Factors
Properties
Legal Proceedings
Mine Safety Disclosures
Market for ISA's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Consolidated Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Part I
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Part II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Part III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Part IV
Item 15.
Exhibits and Consolidated Financial Statement Schedules
Signatures
Index to Exhibits
Page
4
9
11
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15
38
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PART I
Item 1.
Business.
General
Industrial Services of America, Inc. (herein “ISA,” the “Company,” “we,” “us,” “our,” or other similar terms), is a
Louisville, Kentucky-based recycler of stainless steel, ferrous, and non-ferrous scrap and provider of waste services. Although
we have two principal business segments, recycling and waste services, we are primarily focusing our attention now and in the
future towards our recycling business. The recycling segment collects, purchases, processes and sells stainless steel, ferrous and
non-ferrous scrap metal to steel mini-mills, integrated steel makers, foundries and refineries. We purchase ferrous and non-
ferrous scrap metal primarily from industrial and commercial generators of steel, iron, aluminum, copper, stainless steel and
other metals as well as from scrap dealers and retail customers who deliver these materials directly to our facilities. We process
scrap metal through our shredding, sorting, cutting, and baling operations. Within the recycling segment, our alloys division
specialized in the purchasing, processing and sale of stainless steel, nickel-based and high-temperature alloys. As of the fourth
quarter of 2013, we discontinued this specialization. Our non-ferrous scrap recycling operations consist primarily of collecting,
sorting and processing various grades of copper, aluminum and brass. Our used automobile yard primarily purchases automobiles
so that retail customers can locate and remove used parts for purchase.
The waste services segment provides waste management services including contract negotiations with service providers,
centralized billing, invoice auditing and centralized dispatching. Waste services also rents, leases, sells, and services waste
handling and recycling equipment, such as trash compactors and balers to end-user customers.
Although our focus is on the recycling industry, our goal is to remain dedicated to the waste services industry as well,
while sustaining steady growth at an acceptable profit, adding to our net worth, and providing positive returns for our stockholders.
We intend to increase efficiencies and productivity in our core business while remaining alert for possible acquisitions, strategic
partnerships, mergers, and joint-ventures that would enhance our profitability.
Additional financial information about our segments can be found in Part II, Item 8, "Notes to Consolidated Financial
Statements" and related notes included elsewhere in this Form 10-K.
Available Information
We make available, free of charge, through our website www.isa-inc.com, our annual reports on Form 10-K and quarterly
reports on Form 10-Q and amendments to those reports as soon as reasonably practicable after we have electronically filed with
the Securities and Exchange Commission. We also make available on our website our audit committee charter, our Business
Ethics Policy and Code of Conduct and our Code of Ethics for the CEO, CFO and senior financial officers. Please note that our
Internet address is included in this annual report on Form 10-K as an inactive textual reference only. Information contained on
our website www.isa-inc.com is not incorporated by reference into this annual report on Form 10-K and should not be considered
a part of this report.
ISA Recycling Operating Division
Since October 2005, we have focused much of our attention on our recycling business segment. We sell processed ferrous
and non-ferrous scrap material, including stainless steel, to end-users such as steel mini-mills, integrated steel makers and
foundries and refineries. We purchase ferrous and non-ferrous scrap material primarily from industrial and commercial generators
of steel, iron, aluminum, copper, stainless steel and other metals as well as from other scrap dealers who deliver these materials
directly to our facilities. We process these materials by sorting, cutting, shredding and/or baling. We also remain dedicated to
initiating growth in our waste management business segment, which includes management services and waste and recycling
equipment sales, service and leasing.
On July 2, 2012, we opened the ISA Pick.Pull.Save used automobile yard, which is considered a new product line within
the recycling segment. We purchase automobiles for the yard through auctions, automobile purchase programs with various
suppliers, and general scrap purchases. Retail customers locate and remove used parts for purchase from automobiles within
the yard. Fuel, Freon, tires and certain core automobile parts are also sold to various vendors for additional revenue. All
automobiles are shredded and sold as scrap metal after a specified time period in the yard.
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Ferrous Operations
Ferrous Scrap Purchasing - We purchase ferrous scrap from two primary sources: (i) industrial and commercial generators
of steel and iron; and (ii) scrap dealers, peddlers, and other generators and collectors who sell us steel and iron scrap, known as
obsolete scrap. Market demand and the composition, quality, size and weight of the materials are the primary factors that
determine prices paid to these material providers.
Ferrous Scrap Processing - We prepare ferrous scrap material for resale through a variety of methods including sorting,
cutting, shredding and baling. We produce a number of differently sized, shaped and graded products depending upon customer
specifications and market demand.
•
Sorting - After purchasing ferrous scrap material, we inspect it to determine how we should process it to maximize
profitability. In some instances, we may sort scrap material and sell it without further processing. We separate scrap
material for further processing according to its size, composition and grade by using conveyor systems, front-end loaders,
crane-mounted electromagnets and claw-like grapples.
• Cutting - Pieces of over-sized ferrous scrap material, such as obsolete steel girders and used pipe, which are too large
for other processing, are cut with hand torches.
•
Shredding – We shred large pieces of ferrous scrap material, such as automobiles and major appliances, in our shredder
by hammer mill action into pieces of a workable size that pass through magnetic separators to separate metal from
synthetic foam, fabric, rubber, stone, dirt, etc. The metal we recover from the shredding process we sell directly to
customers or reuse in some other metal blend. The substantially non-metallic residue by-product is usually referred to
as “automobile shredder residue” (ASR) or “shredder fluff”. We dispose of the non-metal components, which can reduce
the volume of the scrap as much as 25.0%, in a landfill. We began using the shredder system July 1, 2009.
• Baling - We process light-gauge ferrous materials such as clips, sheet iron and by-products from industrial and commercial
processes, such as stampings, clippings and excess trimmings, by baling these materials into large, uniform blocks. We
use cranes and conveyors to feed the material into a hydraulic press, which compresses the material into uniform blocks.
Ferrous Scrap Sales - We sell processed ferrous scrap material to end-users such as steel mini-mills, integrated steel
makers and foundries, and brokers who aggregate materials for other large users. Most customers purchase processed ferrous
scrap material through negotiated spot sales contracts, which establish the quantity purchased for the month and the pricing.
The price we charge for ferrous scrap materials depends upon market supply and demand, as well as quality and grade of the
scrap material. We deliver all scrap ourselves or using third party carriers via truck, rail car, and/or barge. Some customers choose
to send their own delivery trucks. These trucks are weighed and loaded at one of our sites based on the sales order.
Non-Ferrous Operations
Non-Ferrous Scrap Purchasing - We purchase non-ferrous scrap from two primary sources: (i) industrial and commercial
non-ferrous scrap material providers who generate or sell waste aluminum, copper, stainless steel, other nickel-bearing metals,
brass and other metals; and (ii) peddlers, scrap dealers, generators and collectors who deliver directly to our facilities material
that they collect from a variety of sources. We also collect non-ferrous scrap from sources other than those that are delivered
directly to our processing facilities by placing retrieval boxes at these sources. We subsequently transport the boxes to our
processing facilities.
Non-Ferrous Scrap Processing - We prepare non-ferrous scrap metals, principally aluminum, copper, brass and stainless
steel to sell by sorting, cutting, shredding or baling.
•
Sorting - Our sorting operations separate and identify non-ferrous scrap by using front-end loaders, grinders, hand torches
and spectrometers. Our ability to identify metallurgical composition maximizes margins and profitability. We sort non-
ferrous scrap material for further processing according to type, grade, size and chemical composition. Throughout the
sorting process, we determine whether the material requires further processing before we sell it.
• Cutting - Pieces of over-sized non-ferrous scrap material, which are too large for other processing methods, are cut with
hand torches.
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•
Shredding – We shred large pieces of nonferrous scrap material, such as steel drums, copper and aluminum cable, tubing,
sheet metal, extrusions, and baled aluminum, in our shredder by hammer mill action into pieces of a workable size that
pass through magnetic separators to separate metal from synthetic foam, fabric, rubber, stone, dirt, etc. The metal we
recover from the shredding process we sell directly to customers or reuse in some other metal blend. We dispose of the
non-metal components, which can reduce the volume of the scrap as much as 25.0%, in a landfill. We began using the
shredder system July 1, 2009.
• Baling - We process non-ferrous metals such as aluminum cans, sheet and siding by baling these materials into large
uniform blocks. We use front-end loaders and conveyors to feed the material into a hydraulic press, which compresses
the material into uniform blocks.
Non-Ferrous Scrap Sales - We sell processed non-ferrous scrap material to end-users such as foundries, aluminum sheet
and ingot manufacturers, copper refineries and smelters, steel mini-mills, integrated steel makers, steel foundries and refineries,
and brass and bronze ingot manufacturers. Prices for the majority of non-ferrous scrap materials change based upon the daily
publication of spot and futures prices on COMEX or the London Metals Exchange. We deliver all scrap ourselves or using third
party carriers via truck, rail car, and/or barge. Some customers choose to send their own delivery trucks. These trucks are weighed
and loaded at one of our sites based on the sales order.
Waste Services Operations
Our Waste Services operations are in the business of commercial, retail and industrial waste and recycling management
services (operating under the name “Computerized Waste Systems” or “CWS”) and commercial and industrial waste and recycling
handling equipment sales, rental and maintenance (operating under the name “Waste Equipment Sales and Service Company”
or “WESSCO”). CWS offers a “total package” concept to commercial, retail and industrial customers for their waste and
recycling management needs. Combining waste reduction and diversion, and waste equipment technology, CWS creates waste
and recycling programs tailored to each customer’s needs. The services we offer include locating and contracting with a hauling
company and recycler at a reasonable cost for each participating location. CWS does not own waste-transporting trucks or
landfills. We do not operate or partner with any of the national hauling or recycling companies, and none of these companies
own us. We are able to maintain a neutral position for the benefit of our customers. We have designed and developed proprietary
computer software that provides our personnel with relevant information on each customer’s locations, as well as pertinent
information on service providers, disposal rates, costs of equipment, including installation and shipping, disposal rates and
recycling prices. This software has allowed us to build a database for serving our customers that have locations nationwide as
well as in Canada. This software enables us to generate detailed monthly customized billing reports, and price tracking to
accommodate our customers’ needs.
Our commercial waste services division provides our customers evaluation, management, monitoring, auditing, cost
reduction and containment of non-hazardous solid waste removal and recycling services. CWS has an active network of over
7,000 service companies and vendors in our database, which include haulers and recyclers, landfill and disposal facilities, and
equipment manufacturers and maintenance service providers throughout the United States and Canada. Through this network,
we are able to provide pricing estimates for current and potential customers. CWS customer service representatives have access
to this information through the computer software designed and developed to enhance the value offered to our customers. Through
this information retrieval system and database, customer service representatives review and audit the accuracy of recent billings
for hauling, landfill and recycling rates.
By offering competitively priced waste and recycling handling equipment from a number of different manufacturers,
WESSCO is able to tailor equipment packages for individual customer needs. We do not manufacture any equipment, but we
do refurbish, recondition and add options when necessary. We sell, rent and repair all types of industrial and commercial waste
and recycling handling equipment such as trash compactors, balers and containers.
“Total Package” Concept
Our management services division has third party service providers delivering timely service for waste removal and
recycling services for our customers. Our recycling division purchases ferrous and nonferrous materials on a daily basis. The
products or services have value to the customer on a standalone basis. These services make up the “total package” concept.
6
Company Background
ISA was incorporated in October 1953 in Florida under the name Alson Manufacturing, Inc. In 1979, the Board of
Directors and the shareholders of Alson commenced liquidation of all the tangible assets of Alson. On October 27, 1983, Harry
Kletter, our former Chief Executive Officer, acquired 629,250 shares of ISA Common Stock.
Alson originally designed and manufactured various forms of electrical products, and then ISA moved into the solid
waste handling and disposal equipment sales arena in 1984. In 1985, we began offering solid waste management consultations.
We began focusing on ferrous and non-ferrous scrap metal recycling in 1997 and expanded into the stainless steel and high-
temperature alloys recycling business in 2009.
In July of 2010, we purchased certain intangibles, including the customer list and trade name, from Venture Metals, LLC,
a company in the stainless steel and high-temperature alloys recycling business from which we had purchased certain inventories
and fixed assets in a previous year, and entered into a non-compete agreement to protect our market position. In the fourth
quarter of 2013, we discontinued blending stainless steel, which is a subset of the stainless steel market.
On July 2, 2012, we opened the ISA Pick.Pull.Save used automobile yard, which is considered a new product line within
the recycling segment.
Industry Background
The waste collection and disposal business in the United States is a multi-billion dollar industry. The size of this industry
has increased for the past several years and should continue to increase as landfill space decreases. Although society and industry
have developed an increased awareness of 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. We believe we are in a position to represent the best interest of our customers and find
competitive pricing for their waste collection and disposal needs.
In addition to increasing landfill costs, regulatory measures and more stringent control of material bound for disposal
are making the management of solid waste an increasingly difficult problem. The United States Environmental Protection Agency
("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 that would require industrial and commercial companies to recycle a
minimum percentage of their waste stream and restrict the percentage of recyclable materials in any commercial load of 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. ISA management believes that these restrictions may create additional
marketing opportunities as waste disposal needs become more specialized. Some large industrial and commercial companies
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. We offer
these establishments a solution to this increasing burden.
Competition
The metal recycling business is highly competitive and is subject to significant changes in economic and market
conditions. At the end of 2013, analysts reported business and consumer confidence was strengthening with increased economic
growth in the second half of the year. Analysts reported increases in exports, inventory stockpiles and housing during the year
and increases in retail sales, financial services and dining out in the fourth quarter. The European market began to grow while
China's growth continued, but at a slower rate than previous years. Metal prices, specifically nickel, were volatile throughout
the year, and ended the year slightly lower than they began, hitting lows in July. Pricing and proximity to a metal source are
the major competitive factors in the metal recycling business. We compete for the purchase and sale of scrap metal with large,
well-financed recyclers of scrap metal as well as smaller metal facilities and brokers/dealers. Although we expanded our facilities
and increased our processing efficiencies in prior years, certain of our competitors have greater financial, marketing and physical
resources. There can be no assurance that we will be able to obtain our desired market share based on the competitive nature of
this industry.
On a commercial/industrial waste management level, we have competition from a variety of sources. Much of it is from
companies that concentrate their efforts on a regional level and two of the major national waste haulers. We have positioned
ourselves to work with the national and independent haulers and recyclers to efficiently service our customers on a nationwide
basis.
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Along with positioning ourselves to efficiently service our customers, our management services division methods of
competition include offering our clients competitive pricing, superior customer service and industry expertise. We strive to be
known for our exemplary service to our clients and timely payments to our vendors. We are able to offer management programs
and tailor-made reports for our clients’ specific needs.
There is also competition from some equipment manufacturers and the major waste haulers for management services as
well as waste/recycling equipment purchases and rental programs. Prospective customers look for cost justification when
procuring management programs and waste or recycling equipment.
Dependence on Major Customer
Sales to North American Stainless ("NAS"), our largest customer, represented approximately 37.5% and 41.2% of our
net sales for the years ended December 31, 2013 and 2012, respectively. Our cash flow experiences a significant decline between
the time we acquire scrap metal for processing and the time we receive payment for these goods. As a result of the capital
requirements inherent in stainless steel blending and our reliance on NAS to purchase substantially all of our blends, we made
a decision in the fourth quarter of 2013 to reduce our activity in this line of business. We believe that focusing on our core
ferrous and non-ferrous scrap recycling activities will reduce the risk profile of our business as well as our capital needs.
Employees
As of March 23, 2014, we had one hundred eight (108) full-time employees as follows: recycling 54, management
services 11, sales/leasing 3, drivers 12, maintenance 5, and administration/information technology 23. None of our employees
are a member of a union.
Effect of State and Federal Environmental Regulations
Most environmental regulatory liabilities relating to our operations are generally borne by the customers with whom we
contract and the service providers in their capacity as transporters, disposers and recyclers. Although we believe that our business
model adequately protects us from potential environmental liability, we also continue to use our 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 has
not historically constituted a material expense to us.
The collection and disposal of solid waste and rendering of related environmental services as well as recycling operations
and issues 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 hauling, disposal and recycling 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. 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 administer
those regulations.
We strive to conduct our operations in compliance with applicable laws and regulations. While such amounts expended
in the past or that we anticipate spending in the future have not had and are not expected to have a material adverse effect on
our 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 we operate 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 the volume of solid waste landfills through waste planning,
composting, recycling, or other programs. Several states have recently enacted these laws. 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.
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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 courts have declared unconstitutional laws that overtly discriminate
against out of state waste, courts have upheld some laws that are less overtly discriminatory. Challenges to other such laws are
pending. The outcome of pending litigation and the likelihood that jurisdictions will adopt other such laws that will survive
constitutional challenge are uncertain.
Item 1A. Risk Factors
This Annual Report on Form 10-K includes “forward-looking statements” within the meaning of Section 21E of the
Securities Exchange Act of 1934, as amended, including, in particular, certain statements about our plans, strategies and prospects.
Although we believe that our plans, intentions and expectations reflected in or suggested by such forward-looking statements
are reasonable, we cannot assure you that such plans, intentions or expectations will be achieved. Important factors that could
cause our actual results to differ materially from our forward-looking statements include those set forth in this Risk Factors
section. All forward-looking statements attributable to us or any persons acting on our behalf are expressly qualified in their
entirety by the cautionary statements set forth below. Unless the context requires otherwise, all references to the “company,”
“we,” “us” or “our” include Industrial Services of America, Inc. and subsidiaries.
If any of the following risks, or other risks not presently known to us or that we currently believe to not be significant,
develop into actual events, then our business, financial condition, results of operations, cash flows or prospects could be materially
adversely affected.
Risks Related to Our Operations
Our business has increasing involvement in ferrous and non-ferrous metals. This market is extremely competitive and
prices are volatile. Changes in prices, demand, including foreign demand, regulation, economic slowdowns or increased
competition could result in a reduction of our revenue and consequent decrease in our common stock price.
The metal recycling business is highly competitive and is subject to significant changes in economic and market
conditions. Metal prices, specifically nickel, were volatile throughout the year, and ended the year slightly lower than they
began, hitting lows in July. Pricing and proximity to a metal source are the major competitive factors in the metal recycling
business. Many companies offer or are engaged in the development of products or the provisions of services that may be or are
competitive with our current products or services. Although we expanded our facilities and increased our processing efficiencies
in previous years, certain of our competitors have greater financial, technical, manufacturing, marketing, distribution, and other
resources and assets than we possess. In addition, the industry is constantly changing as a result of consolidation, which may
create additional competitive pressures in our business environment. There can be no assurance that we will be able to maintain
our current market share or obtain our desired market share based on the competitive nature of this industry.
Volatility in market prices of our scrap metal recycling inventory may cause us to re-assess the carrying value of our
inventory and adversely affect our balance sheet.
We make certain assumptions regarding future demand and net realizable value in order to assess that we record our
stainless steel, ferrous and non-ferrous inventory properly at the lower of cost or market. We base our assumptions on historical
experience, current market conditions and current replacement costs. If the anticipated future selling prices of scrap metal and
finished steel products should decline due to the cyclicality of the business or otherwise, we would re-assess the recorded net
realizable value of such inventory and make any adjustments we feel necessary in order to reduce the value of such inventory
(and increase cost of sales) to the lower of cost or market.
An increase in the price of fuel may adversely affect our business.
Our operations are dependent upon fuel, which we generally purchase in the open market on a daily basis. Direct fuel
costs include the cost of fuel and other petroleum-based products used to operate our shredder, fleet of cranes and heavy equipment.
We are also susceptible to increases in indirect fuel costs which include fuel surcharges from vendors. When we have experienced
increases in the cost of fuel and other petroleum-based products in the past, we were able to pass a portion of these increases
on to our customers. However, because of the competitive nature of the industry, there can be no assurance that we will be able
to pass on current or future increases in fuel prices to our customers. In 2013, the nationwide average price for one gallon of
regular gasoline decreased by twelve cents as compared to the nationwide average price for one gallon of regular gasoline in
2012 in part due to expanded production of crude oil, a decrease in crude oil prices, increased access to refineries and more fuel
9
efficient automobiles. Although analysts forecast a continued decrease in the average price for gasoline in 2014, there can be
no assurance of a decrease and a significant increase in fuel costs could adversely affect our business.
We could incur substantial costs in order to comply with, or to address any violations under, environmental laws that
could significantly increase our operating expenses and reduce our operating income.
Our operations are subject to various environmental statutes and regulations, including laws and regulations addressing
materials used in the processing of our products. In addition, certain of our operations are subject to federal, state and local
environmental laws and regulations that impose limitations on the discharge of pollutants into the air and water and establish
standards for the treatment, storage and disposal of solid and hazardous wastes. Failure to maintain or achieve compliance with
these laws and regulations or with the permits required for our operations could result in substantial operating costs and capital
expenditures, in addition to fines and civil or criminal sanctions, third party claims for property damage or personal injury,
cleanup costs or temporary or permanent discontinuance of operations. Certain of our facilities have been in operation for many
years and, over time, we and other predecessor operators of these facilities have generated, used, handled and disposed of
hazardous and other regulated wastes. Material environmental liabilities could exist, including cleanup obligations at these
facilities or at off-site locations where we disposed of materials from our operations, which could result in future expenditures
that we cannot currently estimate and which could reduce our profits.
Our financial statements are based upon estimates and assumptions that may differ from actual results.
We have prepared our financial statements in accordance with U.S. generally accepted accounting principles and
necessarily include amounts based on estimates and assumptions we made. Actual results could differ from these amounts.
Significant items subject to such estimates and assumptions include the carrying value of long-lived assets, valuation allowances
for accounts receivable, lower of cost or market, stock option values, liabilities for potential litigation, claims and assessments,
and liabilities for environmental remediation and deferred taxes.
We depend on our senior management team and the loss of any member could prevent us from implementing our business
strategy.
Our success is dependent on the management and leadership skills of our senior management team. The loss of any
members of our management team or the failure to attract and retain additional qualified personnel could prevent us from
implementing our business strategy and continuing to grow our business at a rate necessary to maintain future profitability.
The concentration of our customers could have a material adverse effect on our results of operations and financial
condition.
Sales to North American Stainless, our largest customer, represented approximately 37.5% and 41.2% of our net sales
for the years ended December 31, 2013 and 2012, respectively. Our cash flow experiences a significant decline between the
time we acquire scrap metal for processing and the time we receive payment for these goods. The loss of this or other significant
customers or our inability to collect accounts receivable would negatively impact our revenues and profitability and could
materially and adversely affect our results of operations and financial condition.
Our exposure to credit risk could have a material adverse effect on our results of operations and financial condition.
Our business is subject to the risks of nonpayment and nonperformance by our customers. Downturns in the economy
led to bankruptcy filings by many of our customers in previous years, which could occur again and cause us to recognize more
allowances for doubtful accounts receivable. While we believe our allowance for doubtful accounts is adequate, changes in
economic conditions or any weakness in the steel and metals industries could cause potential credit losses from our significant
customers, which could adversely impact our future earnings or financial condition.
Our debt may increase our vulnerability to economic or business downturns.
We are vulnerable to higher interest rates because interest expense on certain of our borrowings is based on margins over
a variable base rate. We may experience material increases in our interest expense as a result of increases in general interest rate
levels. If we were to breach covenants in our lending facilities, our lenders could exercise their remedies related to any material
breaches, including acceleration of our payments and taking action with respect to their loan security. For the year ended
December 31, 2013, we were not in compliance with two of our debt covenants under our primary credit facility with Fifth Third
Bank. We received a waiver from the bank for failing to meet these requirements as of December 31, 2013. We cannot ensure
that the bank would provide additional waivers if we are not in compliance with our debt covenants in the future.
10
From time to time, we have relied upon and will rely on borrowings under various credit facilities and from other lenders
to operate our business. However, the recent financial crisis has adversely affected many financial institutions and, as a result,
such financial institutions have ceased or reduced the amount of lending they have made available to their customers. As a result,
we may not have the ability to borrow from other lenders to operate our business.
Seasonal changes may adversely affect our business and operations.
Our operations may be adversely affected by periods of inclement weather, which could decrease the collection and
shipment volume of recycling materials.
Risks Related to Our Common Stock
Future sales of our common stock could depress our market price and diminish the value of your investment.
Future sales of shares of our common stock could adversely affect the prevailing market price of our common stock. If
our existing shareholders sell a large number of shares, or if we issue a large number of shares, the market price of our common
stock could significantly decline. Moreover, the perception in the public market that our existing shareholders and in particular
members of the Kletter family might sell shares of common stock could depress the market for our common stock.
The market price for our common stock may be volatile.
In recent periods, there has been volatility in the market price for our common stock. In addition, the market price of our
common stock could fluctuate substantially in the future in response to a number of factors, including the following:
• Our quarterly operating results or the operating results of our companies in the waste management or stainless steel,
ferrous, non-ferrous and fiber recycling industry;
• Changes in general conditions in the economy, the financial markets or the stainless steel, ferrous, non-ferrous and
fiber recycling industry;
• Loss of significant customers and
• Increases in materials and other costs.
In addition, in recent years the stock market has experienced extreme price and volume fluctuations. This volatility has
had a significant effect on the market prices of securities issued by many companies for reasons unrelated to their operating
performance. These broad market fluctuations may materially adversely affect our stock price, regardless of our operating results.
Item 2.
Properties.
The following table outlines our principal properties:
Property Address
6709 Grade Lane, Louisville, KY
7021-7103 Grade Lane, Louisville, KY
Lease or own
Own
Own
7020/7100 Grade Lane, Louisville, KY
Lease (K&R) (1)
7110 Grade Lane, Louisville, KY
7124 Grade Lane, Louisville, KY
7017 Grade Lane, Louisville, KY
7200-7210 Grade Lane, Louisville, KY
3409 Camp Ground Road, Louisville, KY
1565 E. 4th Street, Seymour, IN
1617 State Road 111, New Albany, IN
Own
Own
Own
Own
Own
Own
Own
11
Segment
Recycling
Recycling
Recycling,
Waste Services,
and Other
Recycling
Recycling
Recycling
Recycling
Recycling
Recycling
Recycling
Acreage
4.491
2.530
14.23
10.723
5.120
1.501
15.52
5.670
5.003
1.300
(1) On February 16, 1998 our Board of Directors ratified and formalized an existing relationship in connection with our
leasing of facilities from K&R, LLC ("K&R"), which is wholly-owned by Kletter Holding, LLC, the sole member of
which was Harry Kletter. As of December 31, 2013, Mr. Kletter was our principal shareholder and former Chief Executive
Officer. After Mr. Kletter's passing in January 2014, our Chairman of the Board and interim Chief Executive Officer,
Orson Oliver, assumed an advisory position in connection with K&R transactions with the Company. See also Note 2
- "Management Services Agreement with Algar, Inc." and Note 5 - "Lease Commitments" for additional information
regarding Mr. Oliver's role as the executor of Mr. Kletter's trust and an Irrevocable Proxy he received from Mr. Kletter,
K&R and the Harry Kletter Family Limited Partnership. The rent beginning January 1, 2008 became $582.0 thousand
per annum, payable at the beginning of each month in an amount equal to $48.5 thousand. This fixed minimum rent
adjusts each five years in accordance with the consumer price index ("CPI"). Effective January 1, 2013, the lease amount
increased to $53.8 thousand per month based on the CPI as stated in the lease agreement. The fixed minimum rent also
increases to $750.0 thousand per annum, in an amount equal to $62.5 thousand per month in the event of our change in
control. We must pay, as additional rent, all real estate taxes, insurance, utilities, maintenance and repairs, replacements
(including replacement of roofs if necessary) and other expenses. Under the lease, we must also cover any damages
arising out of our use of the leased property, unless such damages are caused by K&R’s negligence. In an addendum to
the K&R lease as of January 1, 2005, the rent was increased $4.0 thousand as a result of the improvements made to the
property in 2004. For years 2005 through 2012, the payments to K&R by the Company of $4.0 thousand for additional
rent and the monthly payment from K&R to the Company of $3.9 thousand for a promissory note were offset. As of
December 31, 2012, this note was paid in full.
These properties total 66.088 acres, which provides adequate space necessary to perform administrative and retail operation
processes and store inventory. All facilities are well-maintained and insured. We do not expect any major land or building
additions will be needed to increase capacity for our operations in the foreseeable future.
Item 3. Legal Proceedings.
We have litigation from time to time, including employment-related claims, none of which we currently believe to be material.
Our operations are subject to various environmental statutes and regulations, including laws and regulations addressing materials
used in the processing of our products. In addition, certain of our operations are subject to federal, state and local environmental
laws and regulations that impose limitations on the discharge of pollutants into the air and water and establish standards for the
treatment, storage and disposal of solid and hazardous wastes. Failure to maintain or achieve compliance with these laws and
regulations or with the permits required for our operations could result in substantial operating costs and capital expenditures,
in addition to fines and civil or criminal sanctions, third party claims for property damage or personal injury, cleanup costs or
temporary or permanent discontinuance of operations. Certain of our facilities have been in operation for many years and, over
time, we and other predecessor operators of these facilities have generated, used, handled and disposed of hazardous and other
regulated wastes. Environmental liabilities in material amounts could exist, including cleanup obligations at these facilities or
at off-site locations where we disposed of materials from our operations, which could result in future expenditures that we cannot
currently estimate and which could reduce our profits. ISA records liabilities for remediation and restoration costs related to
past activities when our obligation is probable and the costs can be reasonably estimated. Costs of future expenditures for
environmental remediation are not discounted to their present value. Recoveries of environmental remediation costs from other
parties are recorded as assets when their receipt is deemed probable. Costs of ongoing compliance activities related to current
operations are expensed as incurred. Such compliance has not historically constituted a material expense to us.
Item 4.
Mine Safety Disclosures.
Not applicable.
12
PART II
Item 5.
Market for ISA’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities.
ISA common stock is traded on the NASDAQ Capital Market under the symbol “IDSA.” On May 3, 2010, the Board
of Directors declared a 3-for-2 stock split effected by a 50% stock dividend. The stock dividend was issued to holders of record
as of May 17, 2010, and paid June 1, 2010. All share numbers and prices in this Form 10-K have been adjusted to reflect the
impact of this stock split. High and low sales price of the common stock price is summarized as follows:
Quarter Ended
March 31
June 30
September 30
December 31
2013
2012
High
Low
High
Low
$
$
$
$
3.82
3.49
2.64
3.45
$
$
$
$
2.35
2.53
1.47
1.74
$
$
$
$
6.95
5.66
5.22
3.94
$
$
$
$
4.76
4.43
3.02
2.03
There were approximately 153 shareholders of record as of December 31, 2013.
Our Board of Directors did not declare any dividends in 2013 or 2012.
Under our loan agreement with Fifth Third Bank, ISA may make restricted payments constituting dividends if, and to
the extent, that each of the following conditions have been met (i) our Board of Directors has approved them; (ii) such restricted
payments made in any fiscal year do not exceed $750.0 thousand; (iii) if, after giving effect to such restricted payments, revolving
loan availability is equal to or greater than an aggregate amount equal to $1.0 million; (iv) after giving effect to the proposed
restricted payments, no default or event of default has occurred and is continuing as of the date such restricted payment occurs,
and (v) ISA is in compliance with the financial covenants on a pro forma basis, after giving effect to such restricted payment.
On November 15, 2005, our Board of Directors authorized a program to repurchase up to 300.0 thousand shares of our
common stock at current market prices. We did not repurchase any shares in 2013 or 2012. There are approximately 133.3
thousand shares still available for repurchase under this program.
Item 6.
Selected Financial Data.
Selected Financial Data
(Amounts in thousands, except per share data)
Year ended December 31:
2013
2012
2011
Total revenue
Net (loss) income
Earnings (loss) per common share:
Basic
Diluted
Cash dividends declared per common share
At year end:
Total assets
Long term debt and capital lease obligations,
net of current maturities
$
$
$
$
$
$
$
136,753
$
194,232
(13,816) $
(6,620) $
$ 277,213
$
(3,881) $
(1.96) $
(1.96) $
— $
(0.95) $
(0.95) $
— $
(0.56) $
(0.56) $
— $
2010
344,169
8,053
1.22
1.21
$
$
$
$
— $
2009
181,925
5,285
0.91
0.91
—
44,032
16,889
$
$
63,323
23,369
$
$
80,970
26,688
$
$
106,162
43,623
$
$
66,674
16,654
13
The recycling and waste management businesses are highly competitive and are subject to various market and company risks.
See Item 1A. - "Risk Factors" for a discussion of the material risks related to our operations. Due to these risks, past performance
is not necessarily indicative of future financial condition or results of operations.
In 2009, ISA expanded into the stainless steel and high-temperature alloys recycling business by acquiring certain operating
assets and hiring key employees. ISA also began our shredder operations in mid-2009. These events increased our revenues by
expanding our sales and improving our product efficiencies. In 2011, the price of nickel, the key metal in stainless steel blends,
decreased in the second quarter, reaching its low in November of that year. Demand for stainless steel also decreased. In response
to these conditions, we made an adjustment of $3.4 million in the third quarter of 2011 to lower our inventory value to lower of
cost or market. These events negatively affected our sales and net income in 2011. Although we were not required to adjust
inventory values in 2012, the price of nickel remained low, averaging only $7.91 per pound for the year as compared to an
average of $10.35 per pound in 2011. Demand for stainless steel also remained low. These events negatively affected our sales
and net income in 2012. We did not have a lower of cost or market adjustment in 2012; however, we recorded a goodwill
impairment loss of $6.8 million. As a result of changes in our long-term projections for stainless steel sales due to decreasing
demand for stainless steel and other nickel-based metals, the recycling reporting unit's fair value did not exceed its carrying
value.
In 2013, demand for stainless steel and nickel prices remained low. In the third quarter of 2013, a continuing reduction in market
demand and prices for stainless steel blends occurred, which led to a reduction in stainless steel sales volumes and average
stainless steel selling prices. Nickel averaged $6.97 per pound for the nine month period ended September 30, 2013. Management
determined that the continued decline in demand and prices caused an impairment in our stainless steel inventory value as of
September 30, 2013. A lower of cost or market assessment was performed for our nickel content inventories in the fourth quarter
of 2013. The assessment embodied the assumption of immediate sale of these blends in their current state. We recorded an
inventory write-down of $1.9 million at September 30, 2013. Based on the final sale price of the remaining inventory in the
fourth quarter of 2013 and the first quarter of 2014, we recorded an additional NRV inventory write-down of $325.0 thousand
at December 31, 2013. In the fourth quarter of 2013, management discontinued the production of stainless steel blends, which
is a subset of the stainless steel market, and recorded an impairment loss for the remaining intangibles carrying value, net of
amortization, relating to the acquisition of the stainless business of approximately $3.5 million. These events negatively affected
our sales and net income in 2013.
14
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis should be read in conjunction with the information set forth under Item 6, “Selected
Financial Data” and our consolidated financial statements and the accompanying notes thereto included elsewhere in this
report.
The following discussion and analysis contains certain financial predictions, forecasts and projections which constitute “forward-
looking statements” within the meaning of the federal securities laws. Actual results could differ materially from those financial
predictions, forecasts and projections and there can be no assurance that we will achieve such financial predictions, forecasts
and projections. Please see Item 1A, “Risk Factors” for items that could affect our financial predictions, forecasts and projections.
General
On December 2, 2013, we entered into a Management Services Agreement (the “Management Agreement”) with Algar,
Inc. ("Algar"). Under the Management Agreement, Algar provides us with day-to-day senior executive level operating
management supervisory services. Algar also provides business, financial, and organizational strategy and consulting services,
as our board of directors may reasonably request from time to time. We expect management fees to Algar to be $25.0 thousand
to $35.0 thousand per month.
On April 1, 2013, we entered into a Management Services Agreement with Blue Equity, LLC (the "Blue Equity
Management Agreement"). The Blue Equity Management Agreement also provided that Blue Equity would provide business,
financial, and organizational strategy and consulting services, as our board of directors might request from time to time. The
Blue Equity Management Agreement was terminated effective July 31, 2013. We paid Blue Equity $85.0 thousand per month
during the term of the agreement.
We are primarily focusing our attention now and in the future towards our Recycling segment. We sell processed ferrous
and non-ferrous scrap material to end-users such as steel mini-mills, integrated steel makers, foundries and refineries. We purchase
ferrous and non-ferrous scrap material primarily from industrial and commercial generators of steel, iron, aluminum, copper,
stainless steel and other metals as well as from other scrap dealers who deliver these materials directly to our facilities. We
process these materials by sorting, shredding, cutting and/or baling. We will also continue to focus on initiating growth in our
management services business segment and our waste and recycling equipment sales, service and leasing division.
In 2009, we expanded into the stainless steel recycling market for super alloys and high temperature metals by purchasing
inventories and related equipment from Venture Metals, LLC ("Venture") and hiring two of its key executives. Through November
of 2013, we bought and sold stainless steel and high-temperature alloys to steel mills like North American Stainless, our primary
customer. The multi-million-dollar shredder project, completed in June 2009, expanded our processing capacity, and allows us
to offer specialty grades of scrap and improves end-product quality. The shredder began operations on July 1, 2009. In the last
quarter of 2009, we improved the Grade Lane location and added a new entrance for our ISA Alloys operations, which we moved
from the Camp Ground Road location to 7100 Grade Lane in November 2009. In July 2010, we purchased certain Venture
intangibles, including the customer list and trade name, and entered into a non-compete agreement to protect our market position.
In the fourth quarter of 2013, management discontinued the production of stainless steel blends within this division. Stainless
steel blends are a subset of the stainless steel market. On July 2, 2012, we opened the ISA Pick.Pull.Save used automobile yard,
which is considered a new product line within the recycling segment.
We continue to pursue a growth strategy in the waste management services arena by adding new locations of existing
customers as well as marketing our services to potential customers. Currently, we service approximately 900 customer locations
throughout the United States and Canada and we utilize an active database of over 7,000 service companies and vendors, which
include haulers and recyclers, landfill and disposal facilities, and equipment manufacturers and maintenance service providers
to provide timely, thorough and cost-effective service to our customers.
Although our focus is principally on the recycling industry, our goal is to remain dedicated to the recycling, management
services, and equipment industry as well, while sustaining steady growth at an acceptable profit, adding to our net worth, and
providing positive returns for stockholders. We intend to increase efficiencies and productivity in our core business while
remaining alert for possible acquisitions, strategic partnerships, mergers and joint-ventures that would enhance our profitability.
We have operating locations in Louisville, Kentucky, and Seymour and New Albany, Indiana. We do not have operating
locations outside the United States.
15
Liquidity and Capital Resources
Our cash requirements generally consist of working capital, capital expenditures and debt service. Our primary sources
of liquidity are cash flows generated from operations and the various borrowing and factoring arrangements described below,
including our revolving credit facility. We actively manage our working capital and associated cash requirements and continually
seek more effective use of cash.
As of December 31, 2013, we held cash and cash equivalents of $1.6 million. We maintain a cash account on deposit
with BB&T which serves as collateral for our swap agreements. As of December 31, 2013, the balance in this account was $75.6
thousand. Other than this balance, our cash accounts are available to us without restriction.
Factoring arrangements
We have entered into factoring agreements with various European financial institutions to sell our accounts receivable
under non-recourse agreements. These transactions are accounted for as a reduction in accounts receivable because the agreements
transfer effective control over and risk related to the receivables to the buyers. We do not service any factored accounts after
the factoring has occurred. We utilize factoring arrangements as an integral part of our financing for working capital. The
aggregate gross amount factored under these facilities was $31.9 million, $59.9 million and $99.1 million for the years ended
December 31, 2013, 2012 and 2011, respectively. The cost of factoring such accounts receivable for the years
ended December 31, 2013, 2012 and 2011 was $121.6 thousand, $199.5 thousand and $342.8 thousand, respectively. Any
change in the availability of these factoring arrangements could have a material adverse effect on our financial condition.
Credit facilities and notes payable
On February 21, 2014, the Company entered into a Seventh Amendment to Credit Agreement (the “Seventh
Amendment”) with Fifth Third Bank (the “Bank”) which amended the July 30, 2010 Credit Agreement (the “Credit Agreement”),
including the First Amendment to Credit Agreement dated as of April 14, 2011, the Second Amendment to Credit Agreement
dated as of November 16, 2011, the Third Amendment to Credit Agreement dated as of March 2, 2012, the Fourth Amendment
to Credit Agreement dated as of August 13, 2012, the Fifth Amendment to Credit Agreement dated as of November 14, 2012
and the Sixth Amendment to Credit Agreement dated as of April 1, 2013 (collectively, the "Previous Amendments") as follows.
Pursuant to the Credit Agreement, as amended, the Bank has provided the Companies a revolving credit facility and a term loan
described below. The Seventh Amendment extended the maturity date of both the revolving credit facility and the term loan
from April 30, 2014 to July 31, 2015. The Seventh Amendment decreased the interest rate on both the revolving credit facility
and term loan by 1.00% to equal the one month LIBOR plus four hundred basis points (4.00%) through June 30, 2014. The
interest rate will increase effective July 1, 2014 by 2.00% to equal the one month LIBOR plus six hundred basis points (6.00%)
through September 30, 2014. The interest rate will increase effective October 1, 2014 by an additional 2.00% to equal the one
month LIBOR plus eight hundred basis points (8.00%) and continuing thereafter. The Seventh Amendment decreased the
maximum revolving commitment by $10.0 million to $15.0 million until September 30, 2014. On October 1, 2014, the maximum
revolving commitment will decrease by $2.5 million to $12.5 million through the termination date. The Seventh Amendment
increased the eligible inventory available for calculating the borrowing base effective February 21, 2014 to 60.0% of up to $12.5
million in eligible inventory. The Seventh Amendment decreased the principal payment on the term loan by $80.0 thousand to
$25.0 thousand per month on March 1, and April 1, 2014. Principal payments then increase by $25.0 thousand to $50.0 thousand,
payable on the first day of each month until the sale of certain real estate owned by ISA, at which time a new payment will be
calculated based on net proceeds from the sale. The Seventh Amendment reduced the ratio of adjusted EBITDA for the preceding
twelve months to aggregate cash payments of interest expense and scheduled payment of principal in the preceding twelve
months (the "Fixed Charge Coverage Ratio") to no less than 1.0 to 1.0 for the period ending September 30, 2014. The Seventh
Amendment also provided a waiver of the Fixed Charge Coverage Ratio covenant default for the quarters ended June 30,
September 30 and December 31, 2013. The Seventh Amendment requires that unfunded capital expenditures should not exceed
$500.0 thousand. The Seventh Amendment also requires that the sum of the Company's cash balances plus the amount of unused
revolving line of credit availability under the borrowing base equal or exceed a specified amount in the aggregate for certain
time periods ("Minimum Liquidity Covenant") as follows: $200.0 thousand for any month end beginning February 28 and
ending on June 30, 2014; $500.0 thousand for any month end beginning on July 31 and ending on December 31, 2014; and $1.0
million for any month end beginning on or after January 31, 2015. The Seventh Amendment added a minimum consolidated
adjusted EBITDA ("Minimum EBITDA") requirement stating that the Minimum EBITDA shall not fall below (i) $250.0 thousand
for the calendar year to date period ending on March 31, 2014, (ii) $500.0 thousand for the calendar year to date period ending
on June 30, 2014 (iii) $750.0 thousand for the calendar year to date period ending on September 30, 2014, and (iv) $1.0 million
for each calendar year to date ending on or after December 31, 2014. The Seventh Amendment requires ISA to periodically
provide the Bank with a business plan and its strategy for obtaining certain growth metrics. In addition, the Company also
16
agreed to perform other customary commitments and pay a fee totaling $200.0 thousand to the Bank by the end of the year. All
other terms of the Credit Agreement and Previous Amendments remain in effect. In connection with the Seventh Amendment,
the Company amended and restated both the term loan not (the "Amended and Restated Term Loan Note") and the revolving
loan note (the "Amended and Restated Revolving Loan Note"), issued to the Bank under the Credit Agreement.
On October 15, 2013, WESSCO, LLC ("WESSCO"), a wholly-owned subsidiary of the Company, signed two
promissory notes (collectively, the "KY Bank Notes") in favor of The Bank of Kentucky, Inc. ("KY Bank"), one in the amount
of $3.0 million (the "Term Note") and one in the amount of $1.0 million (the "Line of Credit Note"). The Company used the
proceeds from the Term Note to pay the Bank $3.0 million against the Company’s loan from that bank (the “Fifth Third Loan”).
WESSCO expects to use the Line of Credit Note to purchase additional equipment. The Company is a guarantor of the KY
Bank Notes. The Company has also signed a $3.0 million demand promissory note (the “Company Note”) in favor of WESSCO
in exchange for the proceeds of WESSCO’s Term Note.
In connection with these transactions, WESSCO executed a Reaffirmation of Guaranty and Security (the “Fifth Third
Security Document”), through which it guarantees the Fifth Third Loan and grants Fifth Third Bank a security interest in its
assets.
As security for the KY Bank Notes, WESSCO provided KY Bank a first priority security interest in all of its assets,
including the Company Note, pursuant to a Security Agreement (the “Security Agreement”). The KY Bank Notes impose a
Fixed Charge Coverage Ratio Covenant on WESSCO under which: (i) the sum of (a) WESSCO’s earnings before interest, taxes,
depreciation, rent, and interest expense, less distributions and (b) unfunded capital expenditures, divided by (ii) the sum of (x)
the current portion of long term debt due for the period, (y) interest expense and (z) rent expense is required to be at least 1.15
to 1 at all times. KY Bank will test this ratio annually measured for periods starting January 1 and ending December 31. The
Security Agreement also contains other customary covenants.
The interest rate on the KY Bank Notes and the Company Note is equal to the one month LIBOR plus three and one-
half percent (3.50%) adjusted automatically on the first day of each month during the term of the KY Bank Notes, which have
a final maturity date of October 14, 2019. As of December 31, 2013, the interest rate was 3.67%. In the event of a default, the
interest rate under the KY Bank Notes (but not the Company Note) will increase by five percent (5.00%). Events of default
under the KY Bank Notes include (a) the failure to pay (i) any installment of principal or interest payable pursuant to the Term
Note or the Line of Credit Note on the date when due, or (ii) any other amount payable to KY Bank under the KY Bank Notes,
the Security Agreement or any of the other Loan Documents within five (5) days after the date when any such payment is due
in accordance with the terms thereof; (b) the occurrence of any default under the Fifth Third Security Document; (c) the occurrence
of any default under any of the documents evidencing or securing any other loan made to WESSCO or the Company (except
that if there is an event of default under the documents evidencing the Fifth Third Loan, it will not constitute an event of default
under the KY Bank Notes if Fifth Third Bank and the Company enter into a forbearance agreement within sixty (60) days of
that event of default); and (d) the occurrence of any other “Event of Default” under the Security Agreement or any of the other
Loan Documents. The only event of default under the Company Note is the failure of the Company to pay all funds due to
WESSCO on demand.
The principal under the Term Note is payable in sixty (60) monthly installments as follows: $45.3 thousand for the
first year, $47.5 thousand for the second year, $49.9 thousand for the third year, $52.4 thousand for the fourth year, and $54.4
thousand for the eleven months of the final year. Interest will be calculated as noted above and paid each month. The first
payment commenced November 1, 2013, and the final unpaid principal amount of $60.0 thousand, together with all accrued
and unpaid interest, charges, fees, or other advances, if any, is to be paid on November 1, 2018. As of December 31, 2013, the
outstanding balance on the Term Note was $2.9 million. With respect to the Line of Credit Note, WESSCO may request advances
up to $1.0 million for twelve (12) months after the effective date of the Line of Credit Note (the "Draw Period"). Advances are
limited to eighty percent (80%) of the purchase price for equipment. Advances made to WESSCO that have been repaid may
be re-borrowed during the Draw Period. During the Draw Period, interest-only payments in the amount of all accrued and
unpaid interest on the principal balance of the Line of Credit Note must be made monthly. The total of all advances, less any
repayments, through the end of the Draw Period, will equal the principal balance of the Line of Credit Note, and no further
advances may be made after the Draw Period. At the conclusion of the Draw Period, the principal and interest is payable in
sixty (60) monthly installments commencing on the first day of the month immediately following the end of the Draw Period.
Any unpaid principal amount due, together with all accrued and unpaid interest, charges, fees, or other advances, if any, must
be paid by October 14, 2019. As of December 31, 2013, the outstanding balance on the Line of Credit Note was $307.7 thousand.
17
WESSCO cannot make demand for payment of the Company Note before December 31, 2016. In connection with
these transactions, WESSCO paid loan fees totaling $20.0 thousand and other customary fees.
The Sixth Amendment extended the maturity date of both the revolving credit facility and the term loan from October
31, 2013 to April 30, 2014. The Sixth Amendment also provided a waiver of the ratio of debt to adjusted EBITDA for the
preceding twelve months (the "Senior Leverage Ratio") and the ratio of adjusted EBITDA for the preceding twelve months to
aggregate cash payments of interest expense and scheduled payment of principal in the preceding twelve months (the "Fixed
Charge Coverage Ratio") covenant defaults for the quarter ended December 31, 2012. The Sixth Amendment eliminated the
Senior Leverage Ratio for the remaining term of the loan. The Sixth Amendment reduced our covenant to maintain the Fixed
Charge Coverage Ratio to 0.6 to 1.0 for the quarter ended March 31, 2013. This ratio was calculated using a trailing 3-month
basis for that quarter. Beginning with the quarter ended June 30, 2013, the Fixed Charge Coverage Ratio requirement returned
to 1.20 to 1.0 and was tested on a trailing 12-month basis as of each quarter end date. The Sixth Amendment increased our
interest rate on both the revolving credit facility and term loan by 1.75% and 1.50%, respectively, to equal the one month LIBOR
plus five hundred basis points (5.00%) per annum, adjusted monthly on the first day of each month. For the quarter ended March
31, 2013, the Sixth Amendment required a Minimum Liquidity Covenant of at least $3.0 million. The Sixth Amendment
decreased the eligible inventory available for calculating the borrowing base effective April 1, 2013 to 57.5% of eligible inventory
up to $12.5 million, and then to 55.0% of eligible inventory up to $12.5 million effective June 18, 2013 upon the delivery of the
May 31, 2013 borrowing base certificate.
The Fifth Amendment decreased our maximum revolving commitment by $5.0 million to $25.0 million and provided
a waiver of the Senior Leverage Ratio and the Fixed Charge Coverage Ratio covenant defaults for the quarter ended September
30, 2012.
The Fourth Amendment decreased our maximum revolving commitment by $10.0 million to $30.0 million and extended
the maturity date of both the revolving credit facility and the term loan from July 31, 2013 to October 31, 2013. The Fourth
Amendment also provided a waiver of the Senior Leverage Ratio and Fixed Charge Coverage Ratio covenant defaults for the
quarter ended June 30, 2012. The Fourth Amendment also changed our covenant to maintain the Fixed Charge Coverage Ratio
from not less than 1.20 to 1 to not less than 1.0 to 1 for the third quarter of 2012, and to not less than 1.50 to 1 for the fourth
quarter of 2012. The Fourth Amendment also increased the interest rate for both the revolving credit facility and the term loan
by fifty basis points (0.50%) to 3.50% and 3.75%, respectively.
The Third Amendment redefined the calculation period for the purpose of measuring compliance with our Senior
Leverage Ratio and Fixed Charge Coverage Ratio such that each ratio would be calculated quarterly for the period beginning
January 1, 2012 through the end of each quarter of 2012. Prior to the Third Amendment, the ratios were calculated on a rolling
12-month basis. The Third Amendment also changed the Senior Leverage Ratio. The Third Amendment also increased the
unused line fee by 0.25% to 0.75% and provided a waiver of the Senior Leverage Ratio and Fixed Charge Coverage Ratio
covenant defaults for the quarter ended December 31, 2011.
The First Amendment (i) increased the maximum revolving commitment and the maximum amount of eligible inventory
advances in the calculation of the borrowing base, (ii) changed the due date of the first excess cash flow payment to April 30,
2012, and (iii) amended certain other provisions of the Credit Agreement and certain of the other loan documents. Under the
April Amendment, the Company was permitted to borrow the lesser of $45.0 million (the "Maximum Revolving Commitment")
or the borrowing base, consisting of the sum of 85% of eligible accounts plus 60% of eligible inventory up to $18.0 million.
The Second Amendment decreased our Maximum Revolving Commitment to $40.0 million.
Under the original Credit Agreement, we were permitted to borrow via a revolving credit facility the lesser of $40.0
million or the borrowing base, consisting of the sum of 85% of eligible accounts plus 60% of eligible inventory up to $17.0
million. Eligible accounts are generally those receivables that are less than ninety days from the invoice date. As security for
the revolving credit facility, we provided the Bank a first priority security interest in the accounts receivable from most of our
customers and in our inventory. We also cross collateralized the revolving line of credit with an $8.8 million term loan, entered
into to replace several notes payable with another bank. Proceeds of the original revolving credit facility in the amount of $33.4
million were used to repay the outstanding principal balance of the prior obligations with another bank. We used additional
proceeds of the revolving credit facility to pay closing costs and for funding temporary fluctuations in accounts receivable of
most of our customers and inventory.
18
With respect to the revolving credit facility, the interest rate at December 31, 2013 was one month LIBOR plus five
hundred basis points (5.00%) per annum, adjusted monthly on the first day of each month. As of December 31, 2013, the interest
rate was 5.25%. We also paid a fee of 0.75% on the unused portion. Under the Seventh Amendment the revolving credit facility
expires on July 31, 2015. As of December 31, 2013, the outstanding balance on the revolving line of credit was $13.3 million.
Beginning with the Sixth Amendment, the original $8.8 million term loan provides for an interest rate that is equal to
the interest rate for the revolving credit facility and was 5.25% as of December 31, 2013. Principal and interest is payable
monthly, originally in 36 consecutive installments of approximately $125.0 thousand. The first such payment commenced
September 1, 2010 and continued through February 2014. The Seventh Amendment then changed the payment schedule as
described above. In addition, the term loan agreement provides that we are to make an annual payment equal to 25% of (i) our
adjusted EBITDA, minus (ii) our aggregate cash payments of interest expense and scheduled payments of principal (including
any prepayments of the term loan), minus (iii) any non-financed capital expenditures, in each case for the Company’s prior fiscal
year. Based on 2013 operating results, no annual payment will be required in 2014 for the 2013 fiscal year. The next annual
payment will be due on April 30, 2015 (or earlier, upon completion of the Companies' financial statements for the fiscal year
ending December 31, 2014). Any such payments will be applied to remaining installments of principal under the term loan in
the inverse order of maturity and to accrued but unpaid interest thereon. As security for the term loan, we provided the Bank a
first priority security interest in all equipment other than the rental fleet that we own. As of December 31, 2013, the outstanding
balance on the term loan was $1.5 million.
In addition, we provided a first mortgage on the property at the following locations: 3409 Campground Road, 6709,
7023, 7025, 7101, 7103, 7110, 7124, 7200 and 7210 Grade Lane, Louisville Kentucky, 1565 East Fourth Street, Seymour, Indiana
and 1617 State Road 111, New Albany, Indiana. The Company also cross collateralized the term loan with the revolving credit
facility and all other existing debt the Company owes to the Bank.
In our original Credit Agreement with the Bank, we agreed to certain covenants, including (i) maintenance of the Senior
Leverage Ratio of not more than 3.50 to 1 (or, if measured as of December 31 of any fiscal year, 4.0 to 1), (ii) maintenance of
the Fixed Charge Coverage Ratio of not less than 1.20 to 1, and (iii) a limitation on capital expenditures of $4.0 million in any
fiscal year. Pursuant to the Third Amendment, the Senior Leverage Ratio increased to 4.25 to 1 for the period ended March 31,
2012. The Senior Leverage Ratio decreased to 3.50 to 1 for the period ended June 30, 2012. Pursuant to the Fourth Amendment,
the Senior Leverage Ratio increased to 4.75 to 1 for the period ended September 30, 2012 and decreased to 3.25 to 1 for the
period ended December 31, 2012. The Senior Leverage Ratio was eliminated after December 31, 2013 by the Sixth Amendment.
In 2012, the Senior Leverage Ratio was, in each quarter, calculated using a measurement period beginning January 1, 2012 and
ending at the end of the quarterly measurement period. The Sixth Amendment reduced the Fixed Charge Coverage Ratio
requirements and added a Minimum Liquidity Covenant requirement, as noted above. The Seventh Amendment decreased our
Fixed Charge Coverage Ratio, decreased the limitation on capital expenditures, added Minimum Liquidity Covenant requirements
and added Minimum EBITDA requirements, as noted above.
As of December 31, 2013, we were not in compliance with the Fixed Charge Coverage ratio for the quarter due to
insufficient earnings. As of December 31, 2013, our ratio of adjusted EBITDA to aggregate cash payments of interest expense
and scheduled principal payments was (0.58) and our capital expenditures totaled $1.1 million. As of December 31, 2013, we
have $1.1 million under our existing credit facilities that we can use based on the bank waiver received.
On April 12, 2011, we entered into a Loan and Security Agreement with the Bank pursuant to which the Bank agreed
to provide the Company with a Promissory Note (the “April Note”) in the amount of $226.9 thousand for the purpose of purchasing
operating equipment. The interest rate is 5.68% per annum. Principal and interest is payable in 48 equal monthly installments
of $5.3 thousand, each due on the 20th day of each calendar month. Payment commenced on the 20th day of May, 2011, and
the entire unpaid principal amount, together with all accrued and unpaid interest, charges, fees or other advances, if any, comes
due on or before April 20, 2015. As security for the April Note, we granted the Bank a first priority security interest in the
equipment purchased with the proceeds of the April Note. As of December 31, 2013, the outstanding balance of the April Note
was $75.3 thousand.
On August 9, 2011, we entered into a Loan and Security Agreement (the “August Agreement”) with the Bank pursuant
to which the Bank agreed to loan the Company funds pursuant to a Promissory Note (the “August Note”) in the amount of $115.0
thousand for the purpose of purchasing operating equipment. The interest rate is 5.95% per annum. Principal and interest is
payable in 48 equal monthly installments of $2.7 thousand. The first such payment commenced on September 12, 2011, and the
entire unpaid principal amount, together with all accrued and unpaid interest, charges, fees or other advances, if any, becomes
due no later than August 12, 2015. As security for the August Note, we granted the Bank a first priority security interest in the
19
equipment purchased with the proceeds of the Note. As of December 31, 2013, the outstanding balance of the August Note was
$51.3 thousand.
On October 19, 2010, we entered into a Promissory Note (the “October Note”) with the Bank in the amount of $1.3
million for the purpose of purchasing equipment. The interest rate is 5.20% per annum. Principal and interest is payable in 48
equal monthly installments of $30.5 thousand with the first such payment commencing November 15, 2010, and the final unpaid
principal amount due, together with all accrued and unpaid interest, charges, fees, or other advances, if any, to be paid on October
15, 2014. As security for the October Note, we provided the Bank a first priority security interest in the equipment purchased
with the proceeds. As of December 31, 2013, the outstanding balance on the October Note was $297.9 thousand.
Swap agreements
In previous years, we entered into three interest rate swap agreements with BB&T swapping variable rates based on
LIBOR for fixed rates. The first swap agreement covers approximately $3.6 million in debt and commenced April 7, 2009 and
matures on April 7, 2014. The second swap agreement commenced October 15, 2008 and no longer covers any debt as it matured
on May 7, 2013. The third swap agreement commenced October 22, 2008 and no longer covers any debt as it matured on October
22, 2013. The one remaining swap agreement with BB&T fixes our interest rate at 5.89%. At December 31, 2013, we recorded
the estimated fair value of the liability related to the remaining swap at approximately $49.1 thousand. We maintain a cash
account on deposit with BB&T which serves as collateral for the swap agreement. As of December 31, 2013, the balance in
this account was $75.6 thousand.
In October 2013, we entered into an interest rate swap agreement with KY Bank swapping a variable rate based on
LIBOR for a fixed rate. This swap agreement covers approximately $2.9 million in debt, commenced October 17, 2013 and
matures on October 1, 2018. The swap agreement fixes our interest rate at 4.74%. At December 31, 2013, we recorded the
estimated fair value of the liability related to this swap at approximately $22.2 thousand.
We entered into the swap agreements for the purpose of hedging the interest rate market risk for the respective notional
amounts and forecasted amounts. See Note 1 – “Summary of Significant Accounting Policies – Derivative and Hedging
Activities” in the Notes to Consolidated Financial Statements for additional information about these derivative instruments.
During 2013, we paid $1.1 million for improvements, property and equipment. We paid $185.0 thousand for dirt,
gravel, landscaping, concrete and building improvements. In the recycling segment we paid $213.4 thousand for containers,
nitron analyzers, hoppers and other equipment and improvements. In the equipment sales, leasing and service segment, we
purchased $614.0 thousand in rental equipment that we located at customer sites. This rental fleet equipment consists of solid
waste handling and recycling equipment such as compactors, balers and containers. It is our intention to continue to pursue this
market. We put into service an ATM and security system for which we paid $42.0 thousand in the prior year, and we purchased
and upgraded vehicles for $74.6 thousand. We received $129.7 thousand in proceeds from the sale of property and equipment.
We received $770.0 thousand from the sale of an intangible asset, and we received $500.0 thousand as a deposit for the potential
purchase of a piece of real property by a related party.
We expect that existing cash flow from operations and available credit under our existing credit facilities will be sufficient
to meet our cash needs for the next year and beyond, assuming compliance with the covenants in our Credit Agreement, as
amended or continued waivers thereof and assuming compliance with the covenant in our KY Bank Notes. See “Financial
condition at December 31, 2013 compared to December 31, 2012” section for additional discussion and details relating to cash
flow from operating, investing, and financing activities. We do not have any material capital expenditure commitments as of
December 31, 2013.
Critical Accounting Policies
In preparing financial statements in conformity with accounting principles generally accepted in the United States
("GAAP"), we make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses
during the reporting period. We believe that we consistently apply judgments and estimates and that such consistent application
results in financial statements and accompanying notes that fairly represent all periods presented. However, any errors in these
judgments and estimates may have a material impact on our statement of operations and financial condition. Critical accounting
policies, as defined by the Securities and Exchange Commission, are those that are most important to the portrayal of our financial
condition and results of operations and require our most difficult and subjective judgments and estimates of matters that are
inherently uncertain.
20
Estimates
In preparing the consolidated financial statements in conformity with GAAP, 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. Examples of estimates include the allowance for doubtful accounts, estimates associated
with annual impairment tests, estimates of realizability of deferred income tax assets and liabilities, estimates of inventory
balances, and estimates of stock option values. The Company also uses estimates when assessing fair values of assets and
liabilities acquired in business acquisitions as well as any fair value and any related impairment charges related to the carrying
value of inventory and machinery and equipment, and other long-lived assets. Despite the Company’s intention to establish
accurate estimates and use reasonable assumptions, actual results may differ from these estimates.
Revenue recognition
We recognize revenues from processed ferrous and non-ferrous scrap metal sales when title passes to the customer, which
generally is upon delivery of the related materials. We recognize revenues from services as the service is performed. We accrue
sales adjustments related to price and weight differences and allowances for uncollectible receivables against revenues as incurred.
Fair Value of Financial Instruments
We estimate the fair value of our financial instruments 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 these estimates. As of December 31, 2013, the estimated
fair value of our debt instruments approximated book value. The fair value of our debt approximates its carrying value because
the majority of our debt bears a floating rate of interest based on the LIBOR rate. There is no readily available market by which
to determine fair value of our fixed term debt; however, based on existing interest rates and prevailing rates as of each year end,
we have determined that the fair value of our fixed rate debt approximates book value.
We carry certain of our financial assets and liabilities at fair value on a recurring basis. These financial assets and
liabilities are composed of cash and cash equivalents and derivative instruments. Long-term debt is carried at cost, and the fair
value is disclosed herein. In addition, we measure certain assets, such as goodwill and other long-lived assets, at fair value on
a non-recurring basis to evaluate those assets for potential impairment. Fair value is defined as the price that would be received
to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
In accordance with applicable accounting standards, we categorize our financial assets and liabilities into the following
fair value hierarchy:
Level 1 – Financial assets and liabilities with values based on unadjusted quoted prices for identical assets or liabilities in an
active market. Examples of level 1 financial instruments include active exchange-traded equity securities and certain U.S.
government securities.
Level 2 – Financial assets and liabilities with values based on quoted prices for similar assets and liabilities in active markets,
and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or
liability. Examples of level 2 financial instruments include commercial paper purchased from the State Street-administered asset-
backed commercial paper conduits, various types of interest-rate and commodity-based derivative instruments, and various types
of fixed-income investment securities. Pricing models are utilized to estimate fair value for certain financial assets and liabilities
categorized in level 2.
Level 3 – Financial assets and liabilities with values based on prices or valuation techniques that require inputs that are both
unobservable in the market and significant to the overall fair value measurement. These inputs reflect management’s judgment
about the assumptions that a market participant would use in pricing the asset or liability, and are based on the best available
information, some of which is internally developed. Examples of level 3 financial instruments include certain corporate debt
with little or no market activity and a resulting lack of price transparency.
When determining the fair value measurements for financial assets and liabilities carried at fair value on a recurring
basis, we consider the principal or most advantageous market in which we would transact and consider assumptions that market
participants would use when pricing the asset or liability. When possible, we look to active and observable markets to price
identical assets or liabilities. When identical assets and liabilities are not traded in active markets, we look to market observable
data for similar assets and liabilities. Nevertheless, certain assets and liabilities are not actively traded in observable markets,
and we use alternative valuation techniques to derive fair value measurements.
21
We use the fair value methodology outlined in the related accounting standard to value the assets and liabilities for
cash, debt and derivatives. All of our cash is defined as Level 1 and all our debt and derivative contracts are defined as Level 2.
In accordance with this guidance, the following tables represent our fair value hierarchy for financial instruments, in
thousands, at December 31, 2013 and 2012:
2013:
Assets:
Cash and cash equivalents
Liabilities
Long term debt
Derivative contract - interest rate swap
2012:
Assets:
Cash and cash equivalents
Liabilities
Long term debt
Derivative contract - interest rate swap
Fair Value at Reporting Date Using
Quoted Prices in
Active Markets for
Identical Assets
Level 1
Significant Other
Observable
Inputs
Level 2
Significant
Unobservable
Inputs
Level 3
Total
$
$
1,589
$
— $
— $
1,589
— $
—
(18,486) $
(71)
— $
—
(18,486)
(71)
Fair Value at Reporting Date Using
Quoted Prices in
Active Markets for
Identical Assets
Level 1
Significant Other
Observable
Inputs
Level 2
Significant
Unobservable
Inputs
Level 3
Total
$
$
1,926
$
— $
— $
1,926
— $
—
(25,056) $
(250)
— $
—
(25,056)
(250)
We have had no transfers in or out of Levels 1 or 2 fair value measurements. Other than the 2013 impairment of
intangibles and the 2012 impairment of goodwill, we have had no activity in Level 3 fair value measurements for the years
ended December 31, 2013 or 2012. For Level 3 assets, goodwill, if any, is subject to impairment analysis each year end in
accordance with ASC guidance. We use an annual capitalized earnings computation to evaluate Level 3 assets for impairment.
See also Note 3 –“Goodwill and Intangibles” in the Notes to Consolidated Financial Statements for additional information on
third party valuations and the impairment losses for goodwill and intangibles in 2013 and 2012.
Accounts receivable and allowance for doubtful accounts receivable
Accounts receivable consists primarily of amounts due from customers from product and brokered sales. The allowance
for doubtful accounts totaled $100.0 thousand at December 31, 2013 and December 31, 2012. Our determination of the allowance
for doubtful accounts includes a number of factors, including the age of the balance, estimated settlement adjustments, past
experience with the customer account, changes in collection patterns and general economic and industry conditions. Interest is
not normally charged on receivables nor do we normally require collateral for receivables.
Potential credit losses from our significant customers could adversely affect our results of operations or financial
condition. General weakness in the steel and metals sectors in the past led to bankruptcy filings by many of our customers, which
caused us to recognize additional allowances for doubtful accounts receivable. While we believe our allowance for doubtful
accounts is adequate, changes in economic conditions or any weakness in the steel and metals industry could adversely impact
our future earnings.
22
Inventory
Our inventories primarily consist of ferrous and non-ferrous, including stainless steel, scrap metals and fiber scrap and
are valued at the lower of average purchased cost or market using the specific identification method based on individual scrap
commodities. Quantities of inventories are determined based on our inventory systems and are subject to periodic physical
verification using estimation techniques including observation, weighing and other industry methods. We recognize inventory
impairment when the market value, based upon current market pricing, falls below recorded value or when the estimated volume
is less than the recorded volume of inventory. We record the loss in cost of sales in the period during which we identified the
loss. Prices of commodities we own may be volatile. We are exposed to risks associated with fluctuations in the market price
for both ferrous and non-ferrous metals, which are at times volatile. We attempt to mitigate this risk by seeking to rapidly turn
our inventories.
We make certain assumptions regarding future demand and net realizable value in order to assess whether inventory
is properly recorded at the lower of cost or market. We base our assumptions on historical experience, current market conditions
and current replacement costs. If the anticipated future selling prices of scrap metal and finished steel products should decline,
we would re-assess the recorded net realizable value of our inventory and make any adjustments we feel necessary in order to
reduce the value of our inventory (and increase cost of sales) to the lower of cost or market.
In the third quarter of 2013, a continuing reduction in market demand and prices for stainless steel occurred, which led
to a reduction in stainless steel sales volumes and average stainless steel selling prices, resulting in ISA recording a net realizable
value (“NRV”) inventory write-down of $1.9 million at September 30, 2013. Based on the final sale price of the remaining
inventory in the fourth quarter of 2013 and the first quarter of 2014, we recorded an additional NRV inventory write-down of
$325.0 thousand at December 31, 2013. As a result of reduced market prices and management's determination to discontinue
the production of stainless steel blends, a lower of cost or market assessment was performed for our nickel content inventories
as described above. The assessment embodied the assumption of immediate sale of these blends in their current state. A write-
down was not necessary in 2012.
As of June 2012, we adopted a new method for estimating residual value amounts for automotive vehicle parts and
appliances held in inventory. The new method was adopted due to the ongoing evaluation of our experience with the materials
produced from our shredder operations. This change in estimate provides a more accurate value of these residual values in
inventory and was applied prospectively in accordance with the Financial Accounting Standards Board's ("FASB") authoritative
guidance titled “Accounting Standards Codification ("ASC") Topic 250 - Accounting Changes and Error Corrections." The
impact of this change resulted in a one-time increase in the cost of sales of $352.1 thousand during the quarter of implementation.
Property and Equipment
We carry the value of land on our books at cost. We report premises and equipment at cost less accumulated depreciation
and amortization. We charge depreciation and amortization for financial reporting purposes to operating expense using the
straight-line method over the estimated useful lives of the assets. We depreciate some assets over a one year period. Estimated
useful lives are up to 40 years for buildings and leasehold improvements, 1 to 10 years for office and operating equipment, and
5 years for rental equipment. Our determination of estimated useful life includes past experience and normal deterioration. We
include maintenance and repairs in selling, general and administrative expenses. We include gains and losses on disposition of
premises and equipment in gain (loss) on sale of assets.
Valuation of long-lived assets and goodwill
We regularly review the carrying value of certain long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be realizable. If an evaluation is required, we compare the estimated
future undiscounted cash flows associated with the asset to the asset’s carrying amount to determine if an impairment of such
asset is necessary. The effect of any impairment would be to expense the difference between the fair value of such asset and its
carrying value.
We review goodwill and intangibles at least annually for impairment based on the fair value method prescribed in FASB’s
authoritative guidance in ASC Topic 350 - "Intangibles - Goodwill and Other" and ASC Topic 360 - "Property, Plant, and
Equipment." In 2012, as a result of changes in our long-term projections for stainless steel sales due to decreasing demand for
stainless steel and other nickel-based metals, we recorded a goodwill impairment loss of approximately $6.8 million.
See Note 3 - "Goodwill and Intangible Assets" in the Notes to Consolidated Financial Statements for additional
information regarding the goodwill impairment loss.
23
Intangibles
Purchased intangible assets are initially recorded at cost and finite life intangible assets are amortized over their useful
economic lives on a straight line basis. Intangible assets having indefinite lives and intangible assets that are not yet ready for
use are not amortized and are reviewed annually for impairment as required by the FASB's ASC.
Intangible assets are considered to have indefinite lives when, based on an analysis of all of the relevant factors, there
is no foreseeable limit to the period over which the asset is expected to generate cash flows for the Company. The factors
considered in making this determination include the existence of contractual rights for unlimited terms and the life cycles of the
products and processes that depend on the asset. The Company has no intangible assets having indefinite lives.
Due to the continued decline in market-dependent variables, including prices of stainless steel materials, management
determined the Company should discontinue production of stainless steel blends, a subset of the stainless steel market, in the
fourth quarter of 2013. With this change in strategy, management determined the value of the intangible assets related to the
stainless steel blend business was fully impaired. The Company recorded an impairment loss of approximately $3.5 million for
the remaining value of these intangible assets in that quarter. See also Note 1 – “Summary of Significant Accounting Policies
– Intangibles,” and Note 3 –“Goodwill and Intangibles” in the Notes to Consolidated Financial Statements.
Derivative Instruments
Beginning in October 2008, we began to utilize derivative instruments in the form of interest rate swaps to assist in
managing our interest rate risk. We do not enter into any interest rate swap derivative instruments for trading purposes. We
recognize as an adjustment to interest expense the differential paid or received on interest rate swaps. We include in other
comprehensive income the change in the fair value of the interest rate swap, which is established as an effective hedge.
Beginning in July 2012 and ending in October 2012, we briefly used derivative instruments in the form of commodity
hedges to assist in managing our commodity price risk. We do not enter into any commodity hedges for trading purposes. We
include the gain or loss on the hedged items and the offsetting loss or gain on the related commodity hedge in cost of sales. We
assess the effectiveness of a commodity hedge contract based on changes in the contracts fair value. The changes in the market
value of such contracts have historically been, and are expected to continue to be, highly effective at offsetting changes in the
price of the hedged items. The amounts representing the ineffectiveness of these hedges are not expected to be significant.
See also Note 1 - "Summary of Significant Accounting Policies - Derivative and Hedging Activities" in the Notes to
Consolidated Financial Statements for additional information regarding these derivative instruments.
Income Taxes
We account for income taxes under the asset and liability method. We recognize deferred tax assets and liabilities for
the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and tax credit carry-forwards. We measure deferred tax assets and
liabilities using enacted tax rates expected to apply to taxable income in the years in which we expect to recover or settle those
temporary differences. We recognize the effect on deferred tax assets and liabilities of a change in tax rates in income in the
period that includes the enactment date. We recognize interest accrued related to unrecognized tax positions in interest expense
and penalties in operating expenses, if appropriate. We use the deferral method of accounting for the available state tax credits
relating to the purchase of the shredder equipment.
We recognize uncertain income tax positions using the "more-likely-than-not" approach as defined in the ASC. The
amount recognized is subject to estimate and management’s judgment with respect to the most likely outcome for each uncertain
tax position. The amount that is ultimately sustained for an individual uncertain tax position or for all uncertain tax positions in
the aggregate could differ from the amount recognized. We have no liability for uncertain tax positions recognized as of
December 31, 2013 and 2012.
See also Note 8 - "Income Taxes" in the Notes to Consolidated Financial Statements for additional information regarding
income taxes and related assets.
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Stock Option Plans
We have an employee stock option plan under which we may grant options for up to 2.4 million shares of common
stock, which are reserved by the board of directors for issuance of stock options. We account for this plan based on FASB’s
authoritative guidance titled "ASC Topic 718 - Compensation - Stock Compensation." We recognize share-based compensation
expense for the fair value of the awards, as estimated using the Modified Black-Scholes-Merton Model, on the date granted on
a straight-line basis over their vesting term. Compensation expense is recognized only for share-based payments expected to
vest. We estimate forfeitures at the date of grant based on our historical experience and future expectations. The maximum term
of the option is five years.
Results of Operations
The following table presents, for the years indicated, the percentage relationship that certain captioned items in our
Consolidated Statements of Income bear to total revenues and other pertinent data:
Year ended December 31,
Consolidated Statements of Income Data:
Total revenue
Total cost of sales
Selling, general and administrative expenses
Impairment loss, intangibles and goodwill
Loss before other income (expense)
2013
2012
2011
100.0 %
100.0 %
5.7 %
2.5 %
(8.2)%
100.0 %
97.0 %
4.1 %
3.5 %
(4.6)%
100.0 %
98.3 %
3.1 %
— %
(1.4)%
The 3.0% increase in cost of sales as a percentage of revenue in 2013 as compared to 2012 is mainly due to the $2.2
million lower of cost or market inventory write down incurred in 2013 as well as a 29.6% decrease in revenue due to continued
lower demand of stainless steel and other metals, but only a 27.5% decrease in cost of sales. The lower percentage decrease in
cost of sales is partially due to the fact that we did not incur a lower of cost or market inventory write down in 2012 as compared
with the $2.2 million write down in 2013. The 1.6% increase in selling, general and administrative expenses as a percentage of
revenue in 2013 as compared to 2012 is mainly due to increased management, consulting and legal fees in 2013 as compared
to 2012. In 2013, as a result of changes in our long-term strategy to discontinue the production of stainless steel blends, a subset
of the stainless steel market, due to continued low demand for stainless steel and other nickel-based metals, we recorded an
intangibles impairment loss of $3.5 million. In 2012, as a result of changes in our long-term projections for stainless steel sales
due to low demand for stainless steel and other nickel-based metals, the recycling reporting unit's fair value did not exceed its
carrying value. We recorded a goodwill impairment loss of $6.8 million.
The 1.3% decrease in cost of sales as a percentage of revenue in 2012 as compared to 2011 is mainly due to a 29.9%
decrease in revenue due to continued lower demand of stainless steel and other metals with a 30.9% decrease in cost of sales.
The higher percentage decrease in cost of sales is partially due to the fact that we did not incur a lower of cost or market inventory
write down in 2012 as compared with the $3.4 million write down in 2011 and we had lower direct labor cost in 2012 as compared
to 2011 due to fewer employees, less overtime, and decreased production as a result of continued lower demand of stainless
steel and other metal products. We did not record any impairment losses in 2011.
Accumulated Other Comprehensive Income (Loss)
Comprehensive income is net income plus certain other items that are recorded directly to shareholders’ equity. Amounts
included in other accumulated comprehensive loss for our derivative instruments are recorded net of the related income tax
effects. Refer to Note 1 – “Summary of Significant Accounting Policies - Derivative and Hedging Activities” in the Notes to
Consolidated Financial Statements for additional information about our derivative instruments.
25
The following table gives further detail regarding the composition of other accumulated comprehensive income (loss)
at December 31, 2013 and 2012.
Total accumulated other comprehensive loss as of 1/1/12
Unrealized gain on derivative instruments, net of tax, during 2012
$
Total accumulated other comprehensive loss as of 12/31/12
Unrealized gain on derivative instruments during 2013
(290)
140
(150)
79
Total accumulated other comprehensive loss as of 12/31/13
$
(71)
Year Ended December 31, 2013 Compared to Year Ended December 31, 2012
Total revenue decreased $57.4 million or 29.6% to $136.8 million in 2013 compared to $194.2 million in 2012. With
respect to the Recycling segment, Recycling revenue decreased $57.6 million or 30.8% to $129.4 million in 2013 compared to
$187.0 million in 2012. This change was primarily due to a 31.6 million pound or 38.0% decrease in the volume of stainless
steel shipments. Substantially all of our stainless steel sales are to one customer. We do not have any long-term contracts with
this customer or any other customer. We negotiate sale and purchase orders on a daily and monthly basis in the ordinary course
of business. In response to the overall decrease in demand for stainless steel, this customer decreased our sales orders received
beginning in the second quarter of 2011 and continuing through 2012 and the first quarter of 2013. Although sales orders received
from this customer increased in the second quarter of 2013, they decreased again in the third quarter of 2013. Due to the high
level of uncertainty regarding the economic environment and stainless steel market, management does not expect the sales
volume of stainless steel blends, a subset of the stainless steel market, to increase in the foreseeable future. In the fourth quarter
of 2013, management determined to discontinue the production of these blends, which contributed to the decrease in sales orders
in that quarter. The volume of ferrous and nonferrous materials shipments also decreased by 11.5 thousand gross tons, or 8.0%,
and 2.3 million pounds, or 6.8%, respectively.
While some scrap buyers provide consistently competitive prices from year to year, others may provide competitive
pricing one year but not the next. This market-driven competition causes our preferred buyer base to fluctuate from year to year.
In 2013, sales to repeat Recycling scrap buyers decreased by approximately $57.3 million, or 31.0% as compared to 2012. Within
the amount sold to all Recycling scrap buyers in 2013, 3.3% of these sales were to new and competitively-priced, intermittent
scrap buyers. In 2012, 5.2% of sales to all Recycling scrap buyers were to new and competitively-priced, intermittent scrap
buyers. Sales during 2012 to non-recurring Recycling scrap buyers in 2013 totaled 6.7% of 2013 sales to all Recycling scrap
buyers. Sales during 2011 to non-recurring Recycling scrap buyers in 2012 totaled 7.8% of 2012 sales to all Recycling scrap
buyers. In addition to the reduction in volume, total revenue was also affected by the decrease in overall average commodity
prices for all materials shipped by $172.30 per gross ton, or 21.2%. Specifically, the year-to-date average nickel price per pound
on the London Metal Exchange in 2013 decreased 14.0% as compared to the year-to-date average nickel price per pound in
2012. Nickel is a key commodity used in stainless steel blends.
With respect to the Waste Services segment, Waste Services revenue increased $0.2 million or 2.8% to $7.4 million in
2013 compared to $7.2 million in 2012, primarily due to increased management and rental revenue of approximately $0.2 million
in 2013. Many of our customers grew and their business per location increased in 2013, which required higher volumes of
service and increased management revenue by $114.3 thousand as compared to 2012. Our rental revenue increased by $82.7
thousand and equipment sales increased by $32.3 thousand in 2013 as compared to 2012. The average cardboard price was
$10.21 per ton higher in 2013 as compared to 2012, which also increased cardboard recycling revenue. In general, the timing
of services provided or equipment installed will cause fluctuations in Waste Services revenue between periods.
Total cost of sales decreased $51.5 million or 27.3% to $136.8 million in 2013 compared to $188.3 million in 2012. With
respect to the Recycling segment, Recycling cost of sales decreased $51.6 million or 28.2% to $131.4 million in 2013 compared
to $183.0 million in 2012. This decrease was primarily due to decreases in the volume of purchases of stainless steel, ferrous,
and nonferrous materials of 37.2 million pounds, or 45.4%, 22.9 thousand gross tons, or 14.6% and 5.9 million pounds, or 15.9%,
respectively, along with the decreased volume of shipments noted above.
26
Other decreases in cost of sales were as follows:
• a decrease of $0.6 million in direct labor costs and employment taxes and fees due to fewer average employees on
the weekly payroll in 2013 as compared to 2012 and decreased production due to the continued decline in market
demand for stainless steel and other metals;
• a decrease of $0.3 million in fuel, lubricants, and hauling expenses;
• a decrease of $0.3 million in depreciation;
• a decrease of $0.2 million in operating supplies, including uniforms and torching materials due to fewer employees
and decreased production;
• a decrease of $0.1 million in repairs and maintenance expense; and
• a decrease of $0.1 million in advertising, marketing, and entertainment expenses primarily due to the opening of the
automobile parts yard in 2012.
In 2013, we incurred a lower of cost or market write-down of $2.2 million, which partially offset the decreases above.
See Note 1 - "Summary of Significant Accounting Policies - Inventories" in the Notes to Consolidated Financial Statements for
additional information. These decreases were also partially offset by an increase in the overall average commodity prices for
materials purchased of $402.80 per gross ton, or 40.1%, and an increase of $0.3 million in processing costs.
With respect to the Waste Services segment, Waste Services cost of sales increased $0.1 million or 1.9% to $5.4 million
in 2013 compared to $5.3 million in 2012, primarily due to costs related to increased equipment sales as well as an increase in
service and repair expenses on equipment sold and rental equipment.
We have reclassified certain expenses in our income statement to more accurately reflect segment performance and we
have reclassified cost of sales and selling, general and administrative expenses for the years ended December 31, 2012 and 2011
to be consistent with current presentation. These reclassifications had no effect on previously reported net loss.
We make certain assumptions regarding future demand, current replacement costs and net realizable value in order to
assess that we have properly recorded inventory at the lower of cost or market. We base our assumptions on historical experience,
current market conditions and current replacement costs. Due to declines in the anticipated future selling prices of scrap metal
and finished steel products, we recorded net realizable value inventory adjustments of $2.2 million in the third quarter of 2013
to reduce the value of our inventory (and increase cost of sales) to the lower of cost or market. No such adjustment was made
in 2012.
Selling, general and administrative ("SG&A") expenses decreased $0.3 million or 3.8% to $7.7 million in 2013 compared
to $8.0 million in 2012. The decrease in SG&A expenses was primarily due to the following:
•
•
•
•
•
•
•
a net decrease in labor, benefit and bonus expenses of $1.0 million due to fewer average employees on the weekly
payroll in 2013 as compared to 2012 and several managers and senior level officers leaving the Company in 2012 and
2013 without being replaced;
a decrease in depreciation expense of $0.2 million;
a decrease in insurance expense of $137.8 thousand;
a decrease in repairs and maintenance of $130.5 thousand;
a decrease in travel and meeting expenses of $61.3 thousand;
a decrease in utilities, telephone and other office expenses of $58.1 thousand; and
a decrease in employer taxes and fees of $49.9 thousand.
27
These decreases were partially offset by the following:
•
•
a net increase in the management fee, directors’ fees, and consulting fees of $1.0 million primarily due to consulting
expenses required by our lender and management fees paid to Blue Equity, LLC in 2013;
a net increase in legal and accounting fees of $0.3 million primarily relating to review of the management services
agreements entered into in 2013; and
•
a net increase in administrative and office supplies of $93.4 thousand.
As a percentage of total revenue, selling, general and administrative expenses were 5.7% in 2013 compared to 4.1%
in 2012.
Interest expense decreased $0.1 million or 5.0% to $1.9 million in 2013 compared to $2.0 million in 2012 due to lower
levels of debt held in 2013 as compared to 2012. The decrease in debt relates to principal payments made on existing debt in
2013 and holding a lower balance on the revolving credit facility with the Bank in 2013 as compared to 2012. The maximum
revolving commitment was $25.0 million in 2013 and 2012. This revolving credit facility allows for funding temporary
fluctuations in accounts receivable and inventory. We did not purchase any additional equipment using new term debt facilities
in 2013 or 2012.
Other income was $74.6 thousand in 2013 compared to zero in 2012, an increase in other income of $74.6 thousand, as
outlined in the table below describing the significant components for each year.
Significant components of other income (expense), in thousands, were as follows:
Description Other Income (Expense)
Write off old, outstanding checks
Other
Total other income, net
$
$
Fiscal Year Ended
December 31,
2013
2012
65.4
9.2
74.6
$
$
—
—
—
The income tax benefit decreased $5.6 million to a tax provision of $1.4 million in 2013 compared to a tax benefit of
$4.2 million in 2012. The effective tax rates, including the goodwill and intangible impairment losses and the deferred tax asset
valuation allowance, in 2013 and 2012 were (11.2)% and 38.6%, respectively, based on federal and state statutory rates. In 2013,
management determined that only a portion of the state recycling equipment tax credit carry forwards would be realized and
recorded a reserve for all other net deferred tax assets. This reserve increased income tax expense for the year. In 2011, the
Internal Revenue Service conducted an examination of our 2009 income tax return and, per the final report, proposed changes
amounting to approximately $735.0 thousand of additional taxes due for which we received an invoice early in 2012. This
adjustment arose from our use of bonus depreciation rules for certain additions to shredding equipment which were determined
to be disqualified for bonus depreciation. This resulting adjustment to 2009 depreciation deductions allowed us to file an amended
U.S. tax return for 2010, pursuant to which we claimed additional depreciation deductions and resulting in a claim for a refund
of income taxes paid amounting to approximately $113.0 thousand. The additional tax and refund due were accrued as of
December 31, 2011. The payment was netted against the refund received in 2012 due to the 2012 net loss. The refund due was
received in 2012 as well. Refer to Note 8 – “Income Taxes” in the Notes to Consolidated Financial Statements.
Financial Condition at December 31, 2013 compared to December 31, 2012
Cash and cash equivalents decreased $0.3 million to $1.6 million as of December 31, 2013 compared to $1.9 million as
of December 31, 2012.
Net cash from operating activities was $5.5 million for the year ended December 31, 2013. The net cash from operating
activities is primarily due to decreases in inventories of $7.7 million, receivables of $1.8 million, income tax receivable of $1.4
million and deferred income taxes of $1.0 million, and an increase in accounts payable of $0.3 million. Although shipping
volumes of all materials increased by 705.4 gross tons, or 1.7%, in the fourth quarter of 2013 as compared to the fourth quarter
of 2012, the overall average commodity prices for all materials shipped decreased by $121.43 per gross ton, or 17.6% for the
same time period, which affected the accounts receivable balance. We also decreased purchasing activity for all materials by
6.7 thousand gross tons, or 16.4%, in the fourth quarter of 2013 as compared to the fourth quarter of 2012. The decrease in
28
purchasing activity affects the accounts payable balance. Accounts receivable and payable balances are also affected by the
timing of shipments, receipts, and payments throughout the quarter. We received tax refunds of $1.0 million in 2013 as compared
to tax refunds of $2.8 million during 2012.
Net cash from investing activities was $0.3 million for the year ended December 31, 2013. During 2013, we paid $1.1
million for improvements, property and equipment. We paid $185.0 thousand for dirt, gravel, landscaping, concrete and building
improvements. In the recycling segment we paid $213.4 thousand for containers, nitron analyzers, hoppers and other equipment
and improvements. In the equipment sales, leasing and service segment, we purchased $614.0 thousand in rental equipment
that we located at customer sites. This rental fleet equipment consists of solid waste handling and recycling equipment such as
compactors, balers and containers. It is our intention to continue to pursue this market. We put into service an ATM and security
system for which we paid $42.0 thousand in the prior year, and we purchased and upgraded vehicles for $74.6 thousand. We
received $129.7 thousand in proceeds from the sale of property and equipment. We received $770.0 thousand from the sale of
an intangible asset, and we received $500.0 thousand as a deposit for the potential purchase of a piece of real property by a
related party.
We used net cash in financing activities of $6.2 million in the year ended December 31, 2013. During 2013, we made
payments on debt obligations of $9.9 million and received $3.3 million in new borrowings. We also received $0.5 million in
proceeds from the sale of our common stock. There were no cash dividends paid or common stock repurchases in 2013 or 2012.
Trade accounts receivable after allowances for doubtful accounts decreased $1.8 million or 13.9% to $11.5 million as
of December 31, 2013 compared to $13.3 million as of December 31, 2012. This change was primarily due to the decreased
overall average commodity prices for all materials shipped in the fourth quarter of 2013 as compared to the fourth quarter of
2012. In general, the accounts receivable balance fluctuates due to the timing of shipments and receipt of customer payments.
Recycling accounts receivable decreased $2.0 million or 15.7% to $10.5 million as of December 31, 2013 compared to
$12.5 million as of December 31, 2012. The volume of stainless steel material shipments decreased by 10.5 million pounds, or
63.4%, and the volume of nonferrous material shipments decreased by 84.7 thousand pounds, or 1.0% during the fourth quarter
of 2013 as compared to the fourth quarter of 2012. These decreases were partially offset by an increase in the volume of ferrous
material shipments of 5.4 thousand gross tons, or 17.9% during the fourth quarter of 2013 as compared to the fourth quarter of
2012. The overall average commodity prices for all materials shipped in the fourth quarter of 2013 as compared to the fourth
quarter of 2012 decreased as well.
Waste Services’ accounts receivable decreased $70.0 thousand or 7.9% to $960.0 thousand as of December 31, 2013
compared to $890.0 thousand as of December 31, 2012. In general, the accounts receivable balance fluctuates due to the timing
of services and receipt of customer payments.
Inventories for sale consist principally of stainless steel alloys, ferrous and nonferrous scrap materials and waste equipment
machinery held for resale. We value inventory at the lower of cost or market. We use the replacement parts included in inventory
within a one-year period as these parts wear out quickly due to the high-volume and intensity of the shredder function. We
depreciate these replacement parts over a one-year life. Inventory decreased $7.7 million or 46.9% to $8.8 million as of
December 31, 2013 compared to $16.5 million as of December 31, 2012. As the demand for stainless steel and other metals
remained low in 2013, we decreased both shipping and purchasing activity throughout 2013 as compared to 2012, which affects
our inventory levels. Specifically, in the fourth quarter of 2013, we decreased the volume of stainless steel and ferrous material
purchases by 11.3 million pounds, or 92.9% and 2.2 thousand gross tons, or 11.3, respectively, as compared to the fourth quarter
of 2012. Also, we shipped 17.7 million pounds, or 22.7%, of material more than we purchased, which decreased our inventory.
Lower demand also put downward pressure on metal prices. The overall average price of commodities purchased in the fourth
quarter of 2013 was $112.43, or 17.18%, lower than in the fourth quarter of 2012.
29
Inventories, in thousands, as of December 31, 2013 and December 31, 2012 consisted of the following:
Stainless steel, ferrous, and non-ferrous materials $
Waste equipment machinery
Other
Total inventories for sale
Replacement parts
Total inventories
$
2013
7,153
49
30
7,232
1,550
8,782
2012
14,894
57
36
14,987
1,542
16,529
$
$
As of December 31, 2013, stainless steel inventory consisted of 4.0 million pounds at a unit cost of $0.54 per pound. As
of December 31, 2012, stainless steel inventory consisted of 11.8 million pounds at a unit cost of $0.777 per pound, which
includes processing costs. As of December 31, 2013, ferrous inventory consisted of 6.7 thousand gross tons at a unit cost,
including processing costs, of $309.61 per gross ton. As of December 31, 2012, ferrous inventory consisted of 9.6 thousand
gross tons at a unit cost, including processing costs, of $365.34 per gross ton. As of December 31, 2013, nonferrous inventory
consisted of 1.9 million pounds with a unit cost, including processing costs, of $1.31 per pound. As of December 31, 2012,
nonferrous inventory consisted of 1.7 million pounds at a unit cost, including processing costs, of $1.307 per pound.
We make certain assumptions regarding future demand and net realizable value in order to assess whether inventory is
properly recorded at the lower of cost or market. We base our assumptions on historical experience, current market conditions
and current replacement costs. Due to declines in the anticipated future selling prices of scrap metal and finished steel products,
we recorded non-cash net realizable value (NRV) inventory adjustments totaling $2.2 million in the third and fourth quarters of
2013 to reduce the value of our inventory (and increase cost of sales) to the lower of cost or market. No adjustment was made
in 2012.
Year
Inventory Type
Pounds
Unit Cost
Amount
2013 Stainless Steel
4,072,677
2012 Stainless Steel
11,764,546
$
$
0.538
$ 2,190,595
0.777
$ 9,135,348
Year
Inventory Type Gross Tons
Unit Cost
Amount
2013 Ferrous
2012 Ferrous
8,794
9,644
$
$
323.427
$ 2,844,214
365.337
$ 3,523,355
Year
Inventory Type
Pounds
Unit Cost
Amount
2013 Non-ferrous
1,942,104
2012 Non-ferrous
1,710,374
$
$
1.090
$ 2,117,228
1.307
$ 2,235,564
30
Inventory aging for the period ended December 31, 2013 (Days Outstanding):
Description
1 - 30
31 - 60
61 - 90 Over 90
Total
(in thousands)
Stainless steel, ferrous and non-ferrous materials
Replacement parts
Waste equipment machinery
Other
Total
$ 3,703
1,550
—
30
$ 5,283
$
$
757
—
—
—
757
$
$
861
—
—
—
861
$ 1,832
—
49
—
$ 1,881
$ 7,153
1,550
49
30
$ 8,782
Inventory aging for the period ended December 31, 2012 (Days Outstanding):
Description
1 - 30
31 - 60
61 - 90 Over 90
Total
(in thousands)
Stainless steel, ferrous and non-ferrous materials
Replacement parts
Waste equipment machinery
Other
Total
$ 8,070
1,542
—
36
$ 9,648
$ 1,417
—
6
—
$ 1,423
$
$
470
—
—
—
470
$ 4,937
—
51
—
$ 4,988
$ 14,894
1,542
57
36
$ 16,529
Inventory in the "Over 90 days" category as of December 31, 2012 included several materials that were bought in bulk
that had intrinsic values for stainless steel blends. We purchased a majority of the bulk materials in the second quarter of 2011
in anticipation of continued high demand for stainless steel shipments as well as other specialty metal shipments. These materials
are low value items that can only be used in limited quantities. With continued low demand for stainless steel blends, we recorded
an adjustment of $2.2 million to lower our stainless steel inventory to market value as of December 31, 2013. We sold the
remaining stainless steel inventory in this category of approximately $1.2 million in the first quarter of 2014. This balance also
includes $0.3 million in older automobile inventory held at the ISA Pick.Pull.Save automobile yard ("PPS") for continued
harvesting of parts by retail customers and $0.3 million in an item we intend to process and sell.
Accounts payable trade increased $0.2 million or 3.5% to $6.6 million as of December 31, 2013 compared to $6.4 million
as of December 31, 2012. Recycling accounts payable decreased $0.4 million or 7.8% to $4.7 million as of December 31, 2013
compared to $5.1 million as of December 31, 2012. This decrease was primarily due to decreased purchasing activity for stainless
steel and ferrous materials near the end of the year. The volume of purchases of stainless steel, ferrous, and nonferrous materials
decreased by 11.3 million pounds, or 92.9% and 2.2 thousand gross tons, or 11.3%, respectively, in the fourth quarter of 2013
as compared to the same period in 2012. The overall average commodity purchase prices for all materials decreased by $112.43
per gross ton, or 17.2%. Our accounts payable payment policy in the recycling segment is consistent between years. In general,
the timing of payments made to our vendors will also affect the accounts payable balance.
Waste Services accounts payable decreased $0.1 million or 8.3% to $1.1 million as of December 31, 2013 compared to
$1.2 million as of December 31, 2012. This change was primarily due to the timing of payments.
Working capital decreased $12.3 million to $12.8 million as of December 31, 2013 compared to $25.1 million as of
December 31, 2012. Decreases in inventories of $7.7 million, in net accounts receivable of $1.8 million, in income taxes
receivable of $1.4 million, in deferred tax assets of $0.3 million, in cash of $0.3 million and in prepaid expenses of $0.2 million,
and increases in current maturities of long-term debt of $0.5 million, in related party deposits of $0.5 million, and in accounts
payable of $0.2 million were positive contributors to working capital in 2013, partially offset by a decrease in the interest rate
swaps of $0.2 million. During 2013, we used the positive working capital contributors to purchase property and equipment of
$1.1 million and to decrease our term loans and revolving debt.
31
Contractual Obligations
The following table provides information with respect to our known contractual obligations for the year ended
December 31, 2013:
Payments due by period (in thousands)
Total
Less than
1 year
1 - 3 years
3 - 5 years
More than
5 years
Obligation Description (2)
Long-term debt obligations
Operating lease obligations (1)
Deposit from related party
Total
$
$
18,486
2,948
500
21,934
$
$
1,597
823
500
2,920
$
$
15,706
1,479
—
17,185
$
$
1,183
646
—
1,829
$
$
—
—
—
—
(1) We lease our Louisville, Kentucky facility from K&R, LLC ("K&R"), which is wholly-owned by Kletter Holding,
LLC, the sole member of which as of December 31, 2013 was Harry Kletter, our principal shareholder and former
Chief Executive Officer, under an operating lease that, as of December 31, 2012, automatically renewed for a five-year
option period under terms of the lease agreement 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. The rent was adjusted in January 2008 per the
agreement to monthly payments of $48.5 thousand through December 2012. Effective January 1, 2013, the lease
amount increased to $53.8 thousand per month based on the CPI index as stated in the lease agreement. In the event
of a change of control, the monthly payments become $62.5 thousand. See Item 2. Properties -- Related Parties
Agreements.
We also lease equipment from K&R for which monthly payments of $5.5 thousand are due through October 2015
and monthly payments of $5.0 thousand are due through April 2016.
We lease a management services operations facility and various pieces of equipment in Dallas, Texas for which
monthly payments of $1.0 thousand are due through September 2014.
We subleased the Lexington property to an unaffiliated third party for a term that commenced March 1, 2007 and
ended January 31, 2012 for $4.5 thousand per month. We leased this property from an unrelated party for $4.5
thousand per month. The lease terminated on February 10, 2012.
We lease a lot in Louisville, KY for a term that commenced in March 2012 and ends in February 2016. The monthly
payment amount from March 2012 through February 2014 was $3.5 thousand. The monthly payment amount then
increased to $3.8 thousand for the remaining term.
(2) All interest commitments under interest-bearing debt are included in this table, excluding the interest rate swaps, for
which changes in value are accounted for in other comprehensive income.
Year Ended December 31, 2012 Compared to Year Ended December 31, 2011
Total revenue decreased $83.0 million or 29.9% to $194.2 million in 2012 compared to $277.2 million in 2011. With
respect to the Recycling segment, Recycling revenue decreased $82.8 million or 30.7% to $187.0 million in 2012 compared to
$269.8 million in 2011. This change was primarily due to a 24.7 million pound or 23.0% decrease in the volume of stainless
steel shipments due to a decrease in worldwide stainless steel demand beginning in the second quarter of 2011 and continuing
throughout 2012. Substantially all of our stainless steel sales are to one customer. In response to the overall decrease in demand
for stainless steel, this customer decreased our sales orders received beginning in the second quarter of 2011 and continuing
through 2012. The volume of ferrous materials shipments also decreased by 63.7 thousand gross tons, or 30.5%.
While some scrap buyers provide consistently competitive prices from year to year, others may provide competitive
pricing one year but not the next. This market-driven competition causes our preferred buyer base to fluctuate from year to year.
In 2012, sales to repeat Recycling scrap buyers decreased by approximately $87.6 million, or 33.5% as compared to 2011. Within
the amount sold to all Recycling scrap buyers in 2012, 5.2% of these sales were to new and competitively-priced, intermittent
32
scrap buyers. In 2011, 6.1% of sales to all Recycling scrap buyers were to new and competitively-priced, intermittent scrap
buyers. Sales during 2011 to non-recurring Recycling scrap buyers in 2012 totaled 7.8% of 2012 sales to all Recycling scrap
buyers. Sales during 2010 to non-recurring Recycling scrap buyers in 2011 totaled 2.6% of 2011 sales to all Recycling scrap
buyers. In addition to the reduction in volume, total revenue was also affected by the decrease in overall average commodity
prices for all materials shipped by $75.78 per gross ton, or 8.5%. Specifically, the year-to-date average nickel price per pound
on the London Metal Exchange in 2012 decreased 23.6% as compared to the year-to-date average nickel price per pound in
2011. Nickel is a key commodity used in stainless steel blends. These decreases were partially offset by a 3.4 million pound,
or 11.2%, increase in the volume of nonferrous shipments.
With respect to the Waste Services segment, Waste Services revenue decreased $0.2 million or 2.7% to $7.2 million in
2012 compared to $7.4 million in 2011, primarily due to lower rental revenue, which decreased by $174.6 thousand in 2012 as
compared to 2011. One customer was taken over by another company which decided they no longer needed the containers the
customer was renting through us beginning in May of 2012. The average cardboard price was $19.79 per ton lower in 2012 as
compared to 2011, which also decreased cardboard recycling revenue. In general, the timing of services provided or equipment
installed will cause fluctuations in Waste Services revenue between periods.
Total cost of sales decreased $84.2 million or 30.9% to $188.3 million in 2012 compared to $272.5 million in 2011.
Recycling cost of sales decreased $84.0 million or 31.5% to $183.0 million in 2012 compared to $267.0 million in 2011. This
decrease was primarily due to decreases in the volume of purchases of stainless steel, ferrous, and nonferrous materials of 8.3
million pounds, or 9.1%, 87.9 thousand gross tons, or 35.1% and 4.6 million pounds, or 11.0%, respectively, along with the
decreased volume of shipments noted above. Also, in 2011, we incurred a lower of cost or market write-down of $3.4 million,
which we did not in 2012. Other decreases in cost of sales were as follows:
• a decrease of $1.2 million in direct labor costs due to fewer average employees on the weekly payroll in 2012 as
compared to 2011 and decreased production due to the continued decline in market demand for stainless steel and
other metals;
• a decrease of $0.5 million in repairs and maintenance expense; and
• a decrease of $0.3 million in fuel, lubricants, and hauling expenses.
These decreases were partially offset by an increase in the overall average commodity prices for materials purchased
of $14.15 per gross ton, or 1.9%, as well as the following:
• an increase of $0.3 million in processing costs; and
• an increase of $0.1 million in advertising, marketing, and entertainment expenses primarily due to the opening of
the automobile parts yard.
Waste Services cost of sales decreased $0.2 million or 3.6% to $5.3 million in 2012 compared to $5.5 million in 2011,
primarily due to lower rental expense beginning in May of 2012 when we no longer needed to rent certain containers for one
customer's use. That customer was taken over by another company which determined they no longer needed the containers the
customer was renting through us. Also, depreciation expense for our rental equipment decreased by $80.3 thousand in 2012 as
compared to 2011 as 61.1% of the rental equipment was fully depreciated as of December 31, 2012 and 57.2% of the rental
equipment was fully depreciated as of December 31, 2011.
We have reclassified certain expenses in our income statement to more accurately reflect segment performance and we
have reclassified cost of sales and selling, general and administrative expenses for the years ended December 31, 2012 and 2011
to be consistent with current presentation. These reclassifications had no effect on previously reported net loss.
We make certain assumptions regarding future demand, current replacement costs and net realizable value in order to
assess that we have properly recorded inventory at the lower of cost or market. We base our assumptions on historical experience,
current market conditions and current replacement costs. Due to declines in the anticipated future selling prices of scrap metal
and finished steel products, we recorded non-cash net realizable value inventory adjustments of $3.4 million in the third quarter
of 2011 to reduce the value of our inventory (and increase cost of sales) to the lower of cost or market. No such adjustment was
made in 2012.
33
Selling, general and administrative ("SG&A") expenses decreased $1.0 million or 11.5% to $7.7 million in 2012 compared
to $8.7 million in 2011. The decrease in SG&A expenses was primarily due to the following:
•
•
•
•
•
•
•
a net decrease in the management fee, directors’ fees, and consulting fees of $0.5 million;
a net decrease in legal and accounting fees of $0.3 million;
a net decrease in fuel, lubricants and hauling of $0.2 million;
a decrease in license, taxes, and fees of $0.1 million;
a decrease in operating supplies of $0.1 million;
a decrease in lease and rental expenses of $0.1 million; and
a decrease in advertising, marketing, and entertainment of $47.6 thousand.
These decreases were partially offset by a net increase in labor, benefits and bonus expenses of $0.5 million.
As a percentage of total revenue, selling, general and administrative expenses were 5.5% in 2012 compared to 4.2%
in 2011.
Interest expense decreased $0.5 million or 20.0% to $2.0 million in 2012 compared to $2.5 million in 2011 due to lower
levels of debt held in 2012 as compared to 2011. The decrease in debt relates to principal payments made on existing debt in
2012 and holding a lower balance on the revolving credit facility with the Bank in 2012 as compared to 2011. The maximum
revolving commitment was decreased to $25.0 million in November of 2012 from $40.0 million in 2011. This revolving credit
facility allows for funding temporary fluctuations in accounts receivable and inventory. We did not purchase any additional
equipment using new term debt facilities in 2012; however, in 2011, we purchased operating equipment totaling $331.9 thousand
using new term debt facilities.
Other income was zero in 2012 compared to other loss of $566.0 thousand in 2011, a decrease in other loss of $566.0
thousand, as outlined in the table below describing the significant components for each year. The $566.0 thousand decrease in
other expense in 2012 resulted primarily from the need to cancel purchase contracts due to the decrease in demand for stainless
steel in the second quarter of 2011. These contracts required us to pay $500.0 thousand in termination fees in 2011 that we did
not need to pay in 2012. Management chose to terminate these purchase contracts because the purchase contracts canceled were
valued at approximately $2.4 million, an amount well above the prevailing market price of the underlying commodities. Because
we could purchase these commodities in the market at lower cost when needed to fill new shipment orders, management
determined that we could benefit from market volatility by canceling these contracts, even after paying the termination fees.
Significant components of other income (expense), in thousands, were as follows:
Description Other Income (Expense)
Lennox Industries legal settlement
Fee to cancel purchase contracts
Other
Total other income, net
$
$
Fiscal Year Ended
December 31,
2012
2011
— $
—
—
— $
(84.5)
(500.0)
18.5
(566.0)
The income tax benefit decreased $1.1 million to a credit of $4.2 million in 2012 compared to a credit of $3.0 million
in 2011. Excluding the $6.8 million goodwill impairment loss, we reported a smaller loss in 2012 as compared to 2011, which
included the inventory write-down of $3.4 million in 2011. The effective tax rates, including the goodwill impairment loss, in
2012 and 2011 were 38.6% and 43.9%, respectively, based on federal and state statutory rates. In 2011, the Internal Revenue
Service conducted an examination of our 2009 income tax return and, per the final report, proposed changes amounting to
approximately $735.0 thousand of additional taxes due for which we received an invoice early in 2012. This adjustment arose
from our use of bonus depreciation rules for certain additions to shredding equipment which were determined to be disqualified
34
for bonus depreciation. This resulting adjustment to 2009 depreciation deductions allowed us to file an amended U.S. tax return
for 2010, pursuant to which we claimed additional depreciation deductions and resulting in a claim for a refund of income taxes
paid amounting to approximately $113.0 thousand. The additional tax and refund due were accrued as of December 31, 2011.
The payment was netted against the refund received in 2012 due to the 2012 net loss. The refund due was received in 2012 as
well. Refer to Note 8 – “Income Taxes” in the Notes to Consolidated Financial Statements.
Financial Condition at December 31, 2012 compared to December 31, 2011
Cash and cash equivalents decreased $0.4 million to $1.9 million as of December 31, 2012 compared to $2.3 million as
of December 31, 2011.
Net cash from operating activities was $5.0 million for the year ended December 31, 2012. The net cash from operating
activities is primarily due to decreases in receivables of $3.8 million, income tax receivable of $2.5 million and inventories of
$2.0 million, partially offset by decreases in accounts payable of $4.3 million and a decrease in deferred income taxes of $4.2
million. The decrease in receivables relates to the decrease in shipping volumes of all materials of 31.1 million pounds, or 25.1%,
in the fourth quarter of 2012 as compared to the fourth quarter of 2011. We also decreased purchasing activity for all materials
by 129.1 million pounds, or 24.3%, in the fourth quarter of 2012 as compared to the fourth quarter of 2011. The decrease in
purchasing activity affects the accounts payable balance. Accounts receivable and payable balances are also affected by the
timing of shipments, receipts, and payments throughout the quarter. We received tax refunds of $2.8 million during 2012. No
refunds were received in 2011.
We used net cash in investing activities of $1.6 million for the year ended December 31, 2012. During 2012, we paid
$1.7 million for improvements, property and equipment. We paid $730.3 thousand for fencing, road and building improvements.
In the recycling segment we paid $371.2 thousand for cranes, balers, trucks, trailers, racks, ramps, forklifts, containers, and other
operating equipment and improvements. In the equipment sales, leasing and service segment, we purchased $380.5 thousand
in rental equipment that we located at customer sites. This rental fleet equipment consists of solid waste handling and recycling
equipment such as compactors, balers, containers, boxes and carts. It is our intention to continue to pursue this market. We
purchased $113.1 thousand in office equipment, cameras, and software, and we purchased and upgraded vehicles for $90.6
thousand. We paid deposits of $42.0 thousand on machinery and equipment.
We used net cash in financing activities of $3.7 million in the year ended December 31, 2012. During 2012, we made
payments on debt obligations of $3.5 million. There were no cash dividends paid or common stock repurchases in 2012 or 2011.
Trade accounts receivable after allowances for doubtful accounts decreased $3.9 million or 22.7% to $13.3 million as
of December 31, 2012 compared to $17.2 million as of December 31, 2011. This change was primarily due to the decreased
volume of shipments in the fourth quarter of 2012 as compared to the volume of shipments in the fourth quarter of 2011. In
general, the accounts receivable balance fluctuates due to the timing of shipments and receipt of customer payments.
Recycling accounts receivable decreased $3.8 million or 23.3% to $12.5 million as of December 31, 2012 compared to
$16.3 million as of December 31, 2011. The volume of stainless steel material shipments decreased by 2.8 million pounds, or
11.3%, and the volume of ferrous material shipments decreased by 12.8 thousand gross tons, or 29.9% during the fourth quarter
of 2012 as compared to the fourth quarter of 2011. These decreases were partially offset by an increase in nonferrous material
shipments of 446.7 thousand pounds, or 5.1%, and an overall average cost increase for materials shipped of $69.75 per gross
ton, or 9.2%, in the fourth quarter of 2012 compared to the same period in 2011.
Waste Services’ accounts receivable decreased $50.0 thousand or 5.3% to $890.0 thousand as of December 31, 2012
compared to $940.0 thousand as of December 31, 2011. In general, the accounts receivable balance fluctuates due to the timing
of services and receipt of customer payments.
Inventories for sale consist principally of stainless steel alloys, ferrous and nonferrous scrap materials and waste equipment
machinery held for resale. We value inventory at the lower of cost or market. We use the replacement parts included in inventory
within a one-year period as these parts wear out quickly due to the high-volume and intensity of the shredder function. We
depreciate these replacement parts over a one-year life. Inventory decreased $2.0 million or 10.8% to $16.5 million as of
December 31, 2012 compared to $18.5 million as of December 31, 2011. As the demand for stainless steel and other metals
remained low in 2012, we decreased both shipping and purchasing activity throughout 2012 as compared to 2011, which affects
our inventory levels. Specifically, in the fourth quarter of 2012, we decreased the volume of stainless steel, ferrous and nonferrous
material purchases by 3.6 million pounds, or 22.8%, 10.7 thousand gross tons, or 23.5%, and 3.8 million pounds, or 33.8%,
respectively, as compared to the fourth quarter of 2011. Also, we shipped 972.2 million pounds, or 1.1%, of material more than
35
we purchased, which decreased our inventory. Lower demand also put downward pressure on metal prices. The overall average
price of commodities purchased in the fourth quarter of 2012 was $52.84, or 7.5%, lower than in the fourth quarter of 2011.
Inventories, in thousands, as of December 31, 2012 and December 31, 2011 consisted of the following:
Stainless steel, ferrous, and non-ferrous materials $
Waste equipment machinery
Other
Total inventories for sale
Replacement parts
Total inventories
$
2012
14,894
57
36
14,987
1,542
16,529
2011
16,819
39
63
16,921
1,623
18,544
$
$
As of December 31, 2012, stainless steel inventory consisted of 11.8 million pounds at a unit cost of $0.777 per pound,
which includes processing costs. As of December 31, 2011, stainless steel inventory consisted of 14.3 million pounds at a unit
cost of $0.691 per pound, which includes processing costs. As of December 31, 2012, ferrous inventory consisted of 9.6 thousand
gross tons at a unit cost, including processing costs, of $365.34 per gross ton. As of December 31, 2011, ferrous inventory
consisted of 9.9 thousand gross tons at a unit cost, including processing costs, of $449.74 per gross ton. As of December 31,
2012, nonferrous inventory consisted of 1.7 million pounds at a unit cost, including processing costs, of $1.307 per pound. As
of December 31, 2011, nonferrous inventory consisted of 2.3 million pounds with a unit cost, including processing costs, of
$1.087 per pound.
We make certain assumptions regarding future demand and net realizable value in order to assess whether inventory is
properly recorded at the lower of cost or market. We base our assumptions on historical experience, current market conditions
and current replacement costs. Due to declines in the anticipated future selling prices of scrap metal and finished steel products,
we recorded a non-cash net realizable value (NRV) inventory adjustment of $3.4 million in the third quarter 2011 to reduce the
value of our inventory (and increase cost of sales) to the lower of cost or market. No adjustment was made in 2012.
Year
Inventory Type
Pounds
Unit Cost
Amount
2012 Stainless Steel
11,764,546
2011 Stainless Steel
14,333,732
$
$
0.777
$ 9,135,348
0.691
$ 9,911,380
Year
Inventory Type Gross Tons
Unit Cost
Amount
2012 Ferrous
2011 Ferrous
9,644
9,885
$
$
365.337
$ 3,523,355
449.741
$ 4,445,821
Year
Inventory Type
Pounds
Unit Cost
Amount
2012 Non-ferrous
1,710,374
2011 Non-ferrous
2,265,388
$
$
1.307
$ 2,235,564
1.087
$ 2,461,694
36
Inventory aging for the period ended December 31, 2012 (Days Outstanding):
Description
1 - 30
31 - 60
61 - 90 Over 90
Total
(in thousands)
Stainless steel, ferrous and non-ferrous materials
Replacement parts
Waste equipment machinery
Other
Total
$ 8,070
1,542
—
36
$ 9,648
$ 1,417
—
6
—
$ 1,423
$
$
470
—
—
—
470
$ 4,937
—
51
—
$ 4,988
$ 14,894
1,542
57
36
$ 16,529
Inventory aging for the period ended December 31, 2011 (Days Outstanding):
Description
1 - 30
31 - 60
61 - 90 Over 90
Total
(in thousands)
Stainless steel, ferrous and non-ferrous materials
Replacement parts
Waste equipment machinery
Other
Total
$ 11,160
1,623
—
63
$ 12,846
$ 1,475
—
—
—
$ 1,475
$
$
424
—
—
—
424
$ 3,760
—
39
—
$ 3,799
$ 16,819
1,623
39
63
$ 18,544
Inventory in the "Over 90 days" category as of December 31, 2011 included several materials that were bought in bulk
that had intrinsic values for stainless steel blends. We purchased a majority of the bulk materials in the second quarter of 2011
in anticipation of continued high demand for stainless steel shipments as well as other specialty metal shipments. These materials
are low value items that can only be used in limited quantities. With continued low demand for stainless steel blends, restrictions
on blend content and high penalties on certain metals, we will continue to work them out of the system as demand allows.
Inventory controls have been put in place to assure proper turnover ratios.
Accounts payable trade decreased $4.3 million or 40.2% to $6.4 million as of December 31, 2012 compared to $10.7
million as of December 31, 2011. Recycling accounts payable decreased $4.4 million or 46.3% to $5.1 million as of December 31,
2012 compared to $9.5 million as of December 31, 2011. This decrease was primarily due to decreased purchasing activity for
all materials near the end of the year. The volume of purchases of stainless steel, ferrous, and nonferrous materials decreased
by 3.5 million pounds, or 22.8%, 10.7 thousand gross tons, or 23.5%, and 3.8 million pounds, or 33.8%, respectively, in the
fourth quarter of 2012 as compared to the same period in 2011. The overall average commodity purchase prices for all materials
decreased by $52.84 per gross ton, or 7.5%. Our accounts payable payment policy in the recycling segment is consistent between
years. In general, the timing of payments made to our vendors will also affect the accounts payable balance.
Waste Services accounts payable increased $0.1 million or 9.1% to $1.2 million as of December 31, 2012 compared to
$1.1 million as of December 31, 2011. This change was primarily due to the timing of payments.
Working capital decreased $4.3 million to $25.1 million as of December 31, 2012 compared to $29.4 million as of
December 31, 2011. Decreases in net accounts receivable of $3.8 million, in income taxes receivable of $2.5 million, in inventories
of $2.0 million, and in cash of $0.3 million were positive contributors to working capital in 2012, partially offset by a decrease
in accounts payable of $4.3 million. During 2012, we used these positive working capital contributors to purchase or make
deposits on property and equipment of $1.7 million and to decrease our term loans and revolving debt.
Inflation and Prevailing Economic Conditions
To date, inflation has not and is not expected to have a significant impact on our operation in the near term. We have no
long-term fixed-price contracts and we believe we will be able to pass through most cost increases resulting from inflation to
our customers. We are susceptible to the cyclical nature of the commodity business. In response to these economic conditions,
we have expanded the recycling area of the business and continue to focus on the management consulting area of the business
and are working to liquidate inventories while we make efforts to enhance gross margins.
37
Impact of Recently Issued Accounting Standards
As of December 31, 2013, there are no recently issued accounting standards not yet adopted that would have a material
effect on the Company’s financial statements.
In February 2013, the FASB issued ASU 2013-2, Comprehensive Income: Reporting of Amounts Reclassified Out of
Accumulated Other Comprehensive Income. This update requires that the effect of significant reclassifications out of accumulated
other comprehensive income be reported on the respective line items in net income if the amount being reclassified is required
under U.S. generally accepted accounting principles to be reclassified in its entirety in the same reporting period to net income.
For reclassifications involving other amounts, cross references would be required to other disclosures provided under generally
accepted accounting principles on such items. This update is effective prospectively for annual reporting periods beginning after
December 15, 2012 and interim periods within those years. No reclassification events occurred during the year ended
December 31, 2013. The effect on the Company would be immaterial due to insignificant amounts involved.
In July 2013, the FASB issued ASU 2013-11, Presentation of Unrecognized Tax Benefit When a Net Operating Loss
Carry forward, a Similar Tax Loss, or a Tax Credit Carry forward Exists, an amendment to FASB ASC Topic 740, Income Taxes.
This update clarifies that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the
financial statements as a reduction to a deferred tax asset for a net operating loss carry forward, a similar tax loss, or a tax credit
carry forward if such settlement is required or expected in the event the uncertain tax position is disallowed. In situations where
a net operating loss carry forward, a similar tax loss, or a tax credit carry forward is not available at the reporting date under the
tax law of the applicable jurisdiction or the tax law of the jurisdiction does not require, and the entity does not intend to use, the
deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability
and should not be combined with deferred tax assets. This ASU is effective prospectively for fiscal years, and interim periods
within those years, beginning after December 15, 2013. Retrospective application is permitted. The Company will comply with
the presentation requirements of this ASU for the quarter ending March 31, 2014. The Company does not expect the impact of
adopting this ASU to be material to the Company's financial position, results of operations or cash flows as we do not currently
have any uncertain tax positions that were unrecognized.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk.
Fluctuating commodity prices affect market risk in our recycling segment. We mitigate this risk by selling our product
on a monthly contract basis. Each month we negotiate selling prices for all commodities. Based on these monthly agreements,
we determine purchase prices based on a margin needed to cover processing and administrative expenses.
We are exposed to commodity price risk, mainly associated with variations in the market price for stainless steel, ferrous
and nonferrous metal, and other commodities. The timing and magnitude of industry cycles are difficult to predict and general
economic conditions impact the cycles. We respond to changes in recycled metal selling prices by adjusting purchase prices on
a timely basis and by turning rather than holding inventory in expectation of higher prices. However, an adverse impact on our
financial results may occur if selling prices fall more quickly than we can adjust purchase prices or if levels of inventory have
an anticipated net realizable value that is below average cost.
Our floating rate borrowings expose us to interest rate risk.
In previous years, we entered into three interest rate swap agreements with BB&T swapping variable rates based on
LIBOR for fixed rates. The first swap agreement covers approximately $3.6 million in debt and commenced April 7, 2009 and
matures on April 7, 2014. The second swap agreement commenced October 15, 2008 and no longer covers any debt as it matured
on May 7, 2013. The third swap agreement commenced October 22, 2008 and no longer covers any debt as it matured on October
22, 2013. The one remaining swap agreement fixes our interest rate at 5.89%. At December 31, 2013, we recorded the estimated
fair value of the liability related to the remaining swap at approximately $49.1 thousand. We maintain a cash account on deposit
with BB&T which serves as collateral for the swap agreement. As of December 31, 2013, the balance in this account was $75.6
thousand.
In October 2013, we entered into an interest rate swap agreement with KY Bank swapping a variable rate based on
LIBOR for a fixed rate. This swap agreement covers approximately $2.9 million in debt, commenced October 17, 2013 and
matures on October 1, 2018. The swap agreement fixes our interest rate at 4.74%. At December 31, 2013, we recorded the
estimated fair value of the liability related to this swap at approximately $22.2 thousand. See Note 4 – “Notes Payable to Bank”
in the Notes to Consolidated Financial Statements for an outline of the notional amounts relating to these agreements.
38
We are exposed to market risk from changes in interest rates in the normal course of business. Our interest income and
expense are most sensitive to changes in the general level of U.S. interest rates and the LIBOR rate. In order to manage this
exposure, we use a combination of debt instruments, including the use of derivatives in the form of interest rate swap agreements.
We do not enter into any derivatives for trading purposes. The use of the interest rate swap agreement is intended to convert the
variable rate to a fixed rate.
Item 8.
Financial Statements and Supplementary Data.
Our consolidated financial statements required to be included in this Item 8 are set forth in Item 15 of this report.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A.
Controls and Procedures.
(a) Disclosure controls and procedures.
ISA’s management, including ISA’s principal executive officer and principal financial officer, have evaluated the
effectiveness of our “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) promulgated under
the Securities Exchange Act of 1934. Based upon their evaluation, our principal executive officer and principal financial
officer concluded that, as of December 31, 2013, ISA’s disclosure controls and procedures were effective for the purpose
of ensuring that the information required to be disclosed in the reports that ISA files under the Exchange Act with the
Securities and Exchange Commission (1) is recorded, processed, summarized and reported within the time periods
specified in the SEC’s rules and forms, and (2) is accumulated and communicated to ISA’s management, including our
principal executive and principal financial officers, as appropriate to allow timely decisions regarding the required
disclosure.
(b)
Internal controls over financial reporting.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as
such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act). Our internal control over financial reporting
includes the process designed by, or under the supervision of, our CEO and CFO, and effected by our Board of Directors,
management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting principles
and includes those policies and procedures that:
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect our transactions
and dispositions of our assets;
provide reasonable assurance that our transactions are recorded as necessary to permit preparation of our
financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in
accordance with authorizations of our management and directors; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of our assets that could have a material effect on our financial statements.
Because of its inherent limitations, internal control over financial reporting cannot prevent or detect every potential
misstatement. Therefore, even those systems determined to be effective can provide only reasonable assurances with
respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may decline.
Our management conducted an evaluation of the effectiveness of our internal control over financial reporting, based on
the framework and criteria established in Internal Control -- Integrated Framework, issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our management assessed the
effectiveness of our internal control over financial reporting for the year ended December 31, 2013, and concluded that
such internal control over financial reporting was effective as of December 31, 2013.
39
This Annual Report on Form 10-K does not include an attestation report of our registered public accounting firm regarding
internal control over financial reporting. Management’s report was not subject to attestation by our registered public
accounting firm pursuant to rules of the SEC that require only management’s report in this Annual Report on Form 10-
K.
(c) Changes to internal control over financial reporting.
There were no changes in ISA’s internal control over financial reporting during the year ended December 31, 2013 that
have materially affected, or are reasonably likely to affect ISA’s internal control over financial reporting.
Item 9B.
Other Information.
None.
PART III
Item 10.
Directors, Executive Officers and Corporate Governance. *
Item 11.
Executive Compensation *
Item 12.
Security Ownership of Certain Beneficial Owners, Management and Related Stockholder Matters. *
Item 13.
Certain Relationships and Related Transactions, and Director Independence. *
Item 14.
Principal Accountant Fees and Services. *
* The information required by Items 10, 11, 12, 13 and 14 is or will be set forth in the definitive proxy statement relating to the
2014 Annual Meeting of Shareholders of ISA which is to be filed with the Securities and Exchange Commission pursuant to
Regulation 14A within 120 days after ISA’s year end for the year covered by this report under the Securities Exchange Act of
1934, as amended. Such definitive proxy statement relates to an annual meeting of shareholders and the portions therefrom
required to be set forth in this Form 10-K by Items 10, 11, 12, 13 and 14 are incorporated herein by reference pursuant to General
Instruction G(3) to Form 10-K.
40
Item 15.
Exhibits and Consolidated Financial Statement Schedules.
PART IV
(a)(1) The following consolidated financial statements of Industrial Services of America, Inc. are filed as a part of this
report:
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2013 and 2012
Consolidated Statements of Income for the years ended December 31, 2013, 2012 and 2011
Consolidated Statements of Comprehensive Income for the years ended December 31, 2013, 2012 and
2011
Page
F-1
F-2
F-4
F-5
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2013, 2012 and 2011
F-6
Consolidated Statements of Cash Flows for the years ended December 31, 2013, 2012 and 2011
Notes to Consolidated Financial Statements
(a)(2) Consolidated Financial Statement Schedules.
F-7
F-8
Schedule II--Valuation and Qualifying Accounts for the years ended December 31, 2013, 2012 and 2011
F-39
(a)(3) List of Exhibits
Exhibits filed with, or incorporated by reference herein, this report are identified in the Index to Exhibits appearing
in this report. Each management agreement or compensatory plan required to be filed as exhibits to this Form 10-
K pursuant to Item 15(b) is noted by an asterisk (*) in the Index to Exhibits.
(b) Exhibits.
The exhibits listed on the Index to Exhibits are filed as a part of this report.
(c) Consolidated Financial Statement Schedules.
Schedule II—Valuation and Qualifying Accounts for the years ended December 31, 2013, 2012 and 2011 are
incorporated by reference at page F-39 of the ISA Consolidated Financial Statements.
41
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.
SIGNATURES
INDUSTRIAL SERVICES OF AMERICA, INC.
Dated:
March 31, 2014
By :
/s/ Orson Oliver
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:
Orson Oliver, Chairman of the Board and Interim Chief Executive Officer
Signature
Title
Date
/s/ Orson Oliver
Orson Oliver
Chairman of the Board and Interim Chief Executive Officer
March 31, 2014
(Principal Executive Officer)
/s/ Alan Schroering
Vice-President of Finance and Interim Chief Financial Officer
March 31, 2014
Alan Schroering
(Principal Financial Officer and Principal Accounting Officer)
/s/ Albert Cozzi
Albert Cozzi
Director
/s/ Francesca Scarito
Director
Francesca Scarito
/s/ Alan Gildenberg
Director
Alan Gildenberg
/s/ Ronald Strecker
Director
Ronald Strecker
March 31, 2014
March 31, 2014
March 31, 2014
March 31, 2014
42
Exhibit
Number
INDEX TO EXHIBITS
Description of Exhibits
3.1
Industrial Services of America, Inc. Amended and Restated Articles of Incorporation.
3.2 ** Amended and Restated Bylaws of ISA, dated January 19, 2012 are incorporated by reference herein, to Exhibit
3.3 on Form 10-K of ISA, filed March 7, 2012.
10.1 ** Lease Agreement, dated January 1, 1998, by and between ISA and K&R, is incorporated by reference herein,
to Exhibit 10.10 on Form 8-K of ISA, filed March 3, 1998 (File No. 0-20979).
10.2 ** Consulting Agreement, dated as of January 2, 1998, by and between ISA and K&R, is incorporated by reference
herein, to Exhibit 10.11 on Form 8-K of ISA, filed March 3, 1998 (File No. 0-20979).*
10.3 ** Promissory Note for K&R, LLC in favor of ISA in the principal amount of $302,160, dated March 25, 2005,
and effective December 31, 2004, is incorporated by reference herein to Exhibit 10.32 of ISA’s report on Form
10-K for the year ended December 31, 2004, as filed on March 31, 2005 (File No. 0-20979).
10.4 ** Asset Purchase Agreement dated as of August 2, 2007, between ISA and Industrial Logistic Services, LLC,
including exhibits thereto, is incorporated by reference herein to Exhibit 10.1 of ISA’s report on Form 8-K for
the event reported on August 2, 2007, as filed on August 8, 2007 (File No. 0-20979).
10.5 ** Executive Employment Agreement dated as of August 2, 2007, between ISA and Brian G. Donaghy is
incorporated by reference herein to Exhibit 10.2 of ISA’s report on Form 8-K for the event reported on August
2, 2007, as filed on August 8, 2007 (File No. 0-20979).*
10.6 ** Employment Agreement dated effective as of April 4, 2007, between ISA and James K. Wiseman, III is
incorporated by reference herein to Exhibit 10.3 of ISA’s report on Form 8-K for the event reported on August
2, 2007, as filed on August 8, 2007 (File No. 0-20979).*
10.7 ** Swap Confirmation, dated October 20, 2008, between ISA and Branch Banking and Trust Company in the
notional amount of $2,897,114.77 is incorporated by reference herein to Exhibit 10.4 of ISA’s Report on Form
10-Q for the quarter ended September 30, 2008, as filed on November 5, 2008 (File No. 0-20979).
10.8 ** Swap Confirmation, dated October 20, 2008, between ISA and Branch Banking and Trust Company in the
notional amount of $6,000,000 is incorporated by reference herein to Exhibit 10.5 of ISA’s Report on Form 10-
Q for the quarter ended September 30, 2008, as filed on November 5, 2008 (File No. 0-20979).
10.9 ** Agreement to Purchase Real Estate, dated as of April 2, 2009, between ISA and LUCA Investments, LLC, is
incorporated by reference herein to Exhibit 10.1 of ISA’s report on Form 8-K for the event reported on April 2,
2009, as filed on April 7, 2009.
10.10 ** ISA Asset Purchase Agreement, dated July 1, 2010, by and between ISA and Venture Metals, LLC, of Florida
is incorporated by reference herein to Exhibit 10.6 of ISA’s Report on Form 10-Q for the quarter ended March
31, 2010, as filed on May 10, 2010.
10.11 ** Amended and Restated Executive Employment Agreement, dated April 1, 2010, by and between ISA and Brian
Donaghy is incorporated by reference herein to Exhibit 10.7 of ISA’s Report on Form 10-Q for the quarter ended
March 31, 2010, as filed on May 10, 2010.
43
Exhibit
Number
Description of Exhibits
10.12 ** Amendment to the Asset Purchase Agreement of Venture Metals, LLC, dated July 1, 2010, by and between ISA
and Venture Metals, LLC, of Florida is incorporated by reference herein to Exhibit 10.3 of ISA’s Report on
Form 10-Q for the quarter ended June 30, 2010, as filed on August 9, 2010.
10.13 ** Credit Agreement, dated July 30, 2010, by and among Industrial Services of America, Inc., ISA Indiana, Inc.
and Fifth Third Bank is incorporated by reference herein to Exhibit 10.4 of ISA’s Report on Form 10-Q for the
quarter ended June 30, 2010, as filed on August 9, 2010.
10.14 ** Schedule 5.22 to Credit Agreement is incorporated by reference herein to Exhibit 10.5 of ISA’s Report on Form
10-Q for the quarter ended June 30, 2010, as filed on August 9, 2010.
10.15 ** Revolving Loan Note, dated July 30, 2010, in the amount of $40,000,000 payable to Fifth Third Bank is
incorporated by reference herein to Exhibit 10.6 of ISA’s Report on Form 10-Q for the quarter ended June 30,
2010, as filed on August 9, 2010.
10.16 ** Term Loan Note, dated July 30, 2010, in the amount of $8,800,000 payable to Fifth Third Bank is incorporated
by reference herein to Exhibit 10.7 of ISA’s Report on Form 10-Q for the quarter ended June 30, 2010, as filed
on August 9, 2010.
10.17 ** Security Agreement, dated as of July 30, 2010, by and among Fifth Third Bank, Computerized Waste Systems,
LLC, ISA Indiana Real Estate, LLC, ISA Logistics LLC, ISA Real Estate LLC, ISA Recycling, LLC, Waste
Equipment Sales & Service Co., LLC, 7021 Grade Lane LLC, 7124 Grade Lane LLC, and 7200 Grade Lane
LLC is incorporated by reference herein to Exhibit 10.8 of ISA’s Report on Form 10-Q for the quarter ended
June 30, 2010, as filed on August 9, 2010.
10.18 ** Guaranty, dated as of July 30, 2010, by Computerized Waste Systems, LLC, ISA Indiana Real Estate, LLC, ISA
Logistics LLC, ISA Real Estate LLC, ISA Recycling, LLC, Waste Equipment Sales & Service Co., LLC, 7021
Grade Lane LLC, 7124 Grade Lane LLC, and 7200 Grade Lane LLC is incorporated by reference herein to
Exhibit 10.9 of ISA’s Report on Form 10-Q for the quarter ended June 30, 2010, as filed on August 9, 2010.
10.19 ** Pledge Agreement, dated as of July 30, 2010, by and between Industrial Services of America, Inc. and Fifth
Third Bank is incorporated by reference herein to Exhibit 10.10 of ISA’s Report on Form 10-Q for the quarter
ended June 30, 2010, as filed on August 9, 2010.
10.20 ** Promissory Note, dated April 12, 2011, in the amount of $226,855 payable to Fifth Third Bank is incorporated
by reference herein to Exhibit 10.1 of ISA’s Report on Form 10-Q for the quarter ended March 31, 2011, as
filed on May 2, 2011.
10.21 ** Loan and Security Agreement dated April 12, 2011, by and between Fifth Third Bank and Industrial Services
of America, Inc. is incorporated by reference herein to Exhibit 10.2 of ISA’s Report on Form 10-Q for the quarter
ended March 31, 2011, as filed on May 2, 2011.
10.22 ** First Amendment to Credit Agreement, dated April 14, 2011, by and among Industrial Services of America,
Inc., ISA Indiana, Inc., and Fifth Third Bank is incorporated by reference herein to Exhibit 10.3 of ISA’s Report
on Form 10-Q for the quarter ended March 31, 2011, as filed on May 2, 2011.
10.23 ** Reaffirmation and Amendment of Guaranty and Reaffirmation of Security, dated April 14, 2011, by and among
Fifth Third Bank, ISA Indiana Real Estate, LLC, ISA Logistics LLC, ISA Real Estate, LLC, 7021 Grade Lane
LLC, 7124 Grade Lane LLC, 7200 Grade Lane LLC, Computerized Waste Systems, LLC, ISA Recycling LLC,
and Waste Equipment Sales & Service Co., LLC is incorporated by reference herein to Exhibit 10.4 of ISA’s
Report on Form 10-Q for the quarter ended March 31, 2011, as filed on May 2, 2011.
10.24 ** Amended and Restated Revolving Loan Note, dated April 14, 2011, in the amount of $45,000,000 payable to
Fifth Third Bank is incorporated by reference herein to Exhibit 10.5 of ISA’s Report on Form 10-Q for the
quarter ended March 31, 2011, as filed on May 2, 2011.
44
Exhibit
Number
Description of Exhibits
10.25 ** First Amendment to Credit Agreement, dated November 15, 2010 by and among Industrial Services of America,
Inc., ISA Indiana, Inc. and Fifth Third Bank is incorporated by reference herein to Exhibit 10.1 of ISA’s Report
on Form 10-Q for the quarter ended June 30, 2011, as filed on August 9, 2011.
10.26 ** Promissory Note, dated October 13, 2010, in the amount of $1,320,240 payable to Fifth Third Bank, and Loan
and Security Agreement, dated October 13, 2010, by and between Fifth Third Bank and Industrial Services of
America, Inc. is incorporated by reference herein to Exhibit 10.2 of ISA’s Report on Form 10-Q for the quarter
ended June 30, 2011, as filed on August 9, 2011.
10.27 ** Exhibit A of First Amendment to Credit Agreement, dated April 14, 2011: Amended and Restated Revolving
Loan Note, dated April 14, 2011, in the amount of $45,000,000 payable to Fifth Third Bank is incorporated by
reference herein to Exhibit 10.3 of ISA’s Report on Form 10-Q for the quarter ended June 30, 2011, as filed on
August 9, 2011.
10.28 ** Schedules 1.1 through 8.11 of Credit Agreement, dated July 30, 2010, by and among Industrial Services of
America, Inc., ISA Indiana, Inc. and Fifth Third Bank is incorporated by reference herein to Exhibit 10.5 of
ISA’s Report on Form 10-Q for the quarter ended June 30, 2011, as filed on August 9, 2011.
10.29 ** Exhibit A (Advance Request and Borrowing Notice) of Credit Agreement, dated July 30, 2010, by and among
Industrial Services of America, Inc., ISA Indiana, Inc. and Fifth Third Bank is incorporated by reference herein
to Exhibit 10.6 of ISA’s Report on Form 10-Q for the quarter ended June 30, 2011, as filed on August 9, 2011.
10.30 ** Exhibit B (Borrowing Base Certificate) of Credit Agreement, dated July 30, 2010, by and among Industrial
Services of America, Inc., ISA Indiana, Inc. and Fifth Third Bank is incorporated by reference herein to Exhibit
10.7 of ISA’s Report on Form 10-Q for the quarter ended June 30, 2011, as filed on August 9, 2011.
10.31 ** Exhibit C-1 (Form of Borrower Security Agreement) of Credit Agreement, dated July 30, 2010, by and among
Industrial Services of America, Inc., ISA Indiana, Inc. and Fifth Third Bank is incorporated by reference herein
to Exhibit 10.8 of ISA’s Report on Form 10-Q for the quarter ended June 30, 2011, as filed on August 9, 2011.
10.32 ** Exhibit C-2 (Form of Guarantor Security Agreement) of Credit Agreement, dated July 30, 2010, by and among
Industrial Services of America, Inc., ISA Indiana, Inc. and Fifth Third Bank is incorporated by reference herein
to Exhibit 10.9 of ISA’s Report on Form 10-Q for the quarter ended June 30, 2011, as filed on August 9, 2011.
10.33 ** Exhibit D (Compliance Certificate) of Credit Agreement, dated July 30, 2010, by and among Industrial Services
of America, Inc., ISA Indiana, Inc. and Fifth Third Bank is incorporated by reference herein to Exhibit 10.10
of ISA’s Report on Form 10-Q for the quarter ended June 30, 2011, as filed on August 9, 2011.
10.34 ** Exhibit E (Form of Pledge Agreement) of Credit Agreement, dated July 30, 2010, by and among Industrial
Services of America, Inc., ISA Indiana, Inc. and Fifth Third Bank is incorporated by reference herein to Exhibit
10.11 of ISA’s Report on Form 10-Q for the quarter ended June 30, 2011, as filed on August 9, 2011.
10.35 ** Exhibit F (Form of Revolving Loan Note) of Credit Agreement, dated July 30, 2010, by and among Industrial
Services of America, Inc., ISA Indiana, Inc. and Fifth Third Bank is incorporated by reference herein to Exhibit
10.12 of ISA’s Report on Form 10-Q for the quarter ended June 30, 2011, as filed on August 9, 2011.
10.36 ** Exhibit G (Form of Term Loan Note) of Credit Agreement, dated July 30, 2010, by and among Industrial Services
of America, Inc., ISA Indiana, Inc. and Fifth Third Bank is incorporated by reference herein to Exhibit 10.13
of ISA’s Report on Form 10-Q for the quarter ended June 30, 2011, as filed on August 9, 2011.
10.37 ** Exhibit H (Form of Guaranty) of Credit Agreement, dated July 30, 2010, by and among Industrial Services of
America, Inc., ISA Indiana, Inc. and Fifth Third Bank is incorporated by reference herein to Exhibit 10.14 of
ISA’s Report on Form 10-Q for the quarter ended June 30, 2011, as filed on August 9, 2011.
45
Exhibit
Number
Description of Exhibits
10.38 ** Exhibit I (Form of Agreement Regarding Insurance) of Credit Agreement, dated July 30, 2010, by and among
Industrial Services of America, Inc., ISA Indiana, Inc. and Fifth Third Bank is incorporated by reference herein
to Exhibit 10.15 of ISA’s Report on Form 10-Q for the quarter ended June 30, 2011, as filed on August 9, 2011.
10.39 ** Exhibit J (Assignment and Assumption) of Credit Agreement, dated July 30, 2010, by and among Industrial
Services of America, Inc., ISA Indiana, Inc. and Fifth Third Bank is incorporated by reference herein to Exhibit
10.16 of ISA’s Report on Form 10-Q for the quarter ended June 30, 2011, as filed on August 9, 2011.
10.40 ** Loan and Security Agreement, dated August 9, 2011, by and between Industrial Services of America, Inc. and
Fifth Third Bank is incorporated by reference herein to Exhibit 10.1 of ISA’s Report on Form 10-Q for the
quarter ended September 30, 2011, as filed on November 14, 2011.
10.41 ** Exhibit A to the Loan and Security Agreement: Promissory Note, including Schedule A, dated August 9, 2011,
in the amount of $115,010 payable to Fifth Third Bank is incorporated by reference herein to Exhibit 10.2 of
ISA’s Report on Form 10-Q for the quarter ended September 30, 2011, as filed on November 14, 2011.
10.42 ** Second Amendment to Credit Agreement, dated November 15, 2011, by and among Industrial Services of
America, Inc., ISA Indiana, Inc. and Fifth Third Bank is incorporated by reference herein to Exhibit 10.1 of
ISA’s Report on Form 8-K, as filed on December 12, 2011.
10.43 ** Amended and Restated Revolving Loan Note, dated November 15, 2011, by Industrial Services of America,
Inc. and ISA Indiana, Inc. in favor of Fifth Third Bank is incorporated by reference herein to Exhibit 10.2 of
ISA’s Report on Form 8-K, as filed on December 12, 2011.
10.44 ** Second Amendment to Consulting Agreement, dated as of February 23, 2012, by and between ISA and K&R,
LLC is incorporated by reference herein to Exhibit 10.1 of ISA's Report on Form 8-K, as filed on February 29,
2012.*
10.45 ** Third Amendment to Credit Agreement, dated as of March 2, 2012, by and among Industrial Services of America,
Inc., ISA Indiana, Inc. and Fifth Third Bank is incorporated by reference herein to Exhibit 10.54 of ISA's Report
on Form 10-K, as filed on March 7, 2012.
10.46 ** Fourth Amendment to Credit Agreement, dated as of August 13, 2012 by and among Industrial Services of
America, Inc., ISA Indiana, Inc. and Fifth Third Bank is incorporated by reference herein to Exhibit 10.1 of
ISA's Report on Form 10-Q, as filed on August 14, 2012.
10.47 ** Exhibit D (Compliance Certificate) of Fourth Amendment to Credit Agreement, dated as of August 13, 2012,
by and among Industrial Services of America, Inc., ISA Indiana, Inc. and Fifth Third Bank is incorporated by
reference to Exhibit 10.2 of ISA's Report on Form 10-Q, as filed on August 14, 2012.
10.48 ** Amended and Restated Revolving Loan Note, dated as of August 13, 2012, by Industrial Services of America,
Inc. and ISA Indiana, Inc. in favor of Fifth Third Bank is incorporated by reference herein to Exhibit 10.3, as
filed on August 14, 2012.
10.49 ** Fifth Amendment to Credit Agreement, dated as of November 14, 2012 by and among Industrial Services of
America, Inc., ISA Indiana, Inc. and Fifth Third Bank is incorporated by reference herein to Exhibit 99.1 of
ISA's Report on Form 8-K, as filed on November 20, 2012.
10.50 ** Amended and Restated Revolving Loan Note, dated as of November 14, 2012 by Industrial Services of America,
Inc. and ISA Indiana, Inc. in favor of Fifth Third Bank is incorporated by reference herein to Exhibit 99.2 of
ISA's Report on Form 8-K, as filed on November 20, 2012.
46
Exhibit
Number
Description of Exhibits
10.51 ** Sixth Amendment to Credit Agreement, dated as of April 1, 2013 by and among Industrial Services of America,
Inc., ISA Indiana, Inc. and Fifth Third Bank is incorporated by reference herein to Exhibit 10.53 of ISA's Report
on Form 10-K, as filed on April 1, 2013.
10.52 ** Renewed Revolving Loan Note, dated as of April 1, 2013 by Industrial Services of America, Inc. and ISA
Indiana, Inc. in favor of Fifth Third Bank is incorporated by reference herein to Exhibit 10.54 of ISA's Report
on Form 10-K, as filed on April 1, 2013.
10.53 ** Renewed Term Loan Note, dated as of April 1, 2013 by Industrial Services of America, Inc. and ISA Indiana,
Inc. in favor of Fifth Third Bank is incorporated by reference herein to Exhibit 10.55 of ISA's Report on Form
10-K, as filed on April 1, 2013.
10.54 ** Industrial Services of America, Inc. 2009 Long Term Incentive Plan is incorporated by reference herein to Annex
A of ISA's Report on Form DEF 14A, the 2009 Proxy Statement, as filed on April 30, 2009.*
10.55 ** Form of Stock Option Agreement issued in connection with the 2009 Long Term Incentive Plan is incorporated
by reference herein to Exhibit 10.57 of ISA's Report on Form 10-K, as filed on April 1, 2013.*
10.56 ** Management Services Agreement dated as of April 1, 2013, between the Company and Blue Equity, LLC,
including the Stock Option Agreement attached thereto as Attachment A is incorporated by reference herein to
Exhibit 10.1 of ISA's Report on Form 8-K, as filed on April 5, 2013.*
10.57 ** Termination and Consulting Agreement dated as of June 17, 2013, between the Company and Brian Donaghy
is incorporated by reference herein to Exhibit 10.1 of the Company's Report on Form 8-K, as filed on June 17,
2013.*
10.58 ** Promissory Note, dated October 15, 2013, by and between WESSCO, LLC and The Bank of Kentucky, Inc. in
the amount of $3,000,000 payable to The Bank of Kentucky, Inc. is incorporated by reference herein to Exhibit
10.1 of the Company's Report on Form 8-K, as filed on October 21, 2013.
10.59 ** Promissory Note, dated October 15, 2013, by and between WESSCO, LLC and The Bank of Kentucky, Inc. in
the amount of $1,000,000 payable to The Bank of Kentucky, Inc. is incorporated by reference herein to Exhibit
10.2 of the Company's Report on Form 8-K, as filed on October 21, 2013.
10.60 ** Security Agreement, dated as of October 15, 2013, by and among WESSCO, LLC and The Bank of Kentucky,
Inc. is incorporated by reference herein to Exhibit 10.3 of the Company's Report on Form 8-K, as filed on
October 21, 2013.
10.61 ** Guaranty of Payment, dated as of October 15, 2013, by and among Industrial Services of America, Inc. and The
Bank of Kentucky, Inc. is incorporated by reference herein to Exhibit 10.4 of the Company's Report on Form
8-K, as filed on October 21, 2013.
10.62 ** Assignment of Promissory Note, dated as of October 15, 2013, by and among Industrial Services of America,
Inc. and The Bank of Kentucky, Inc. is incorporated by reference herein to Exhibit 10.5 of the Company's Report
on Form 8-K, as filed on October 21, 2013.
10.63 ** Promissory Note, dated October 15, 2013, by and between Industrial Services of America, Inc., and WESSCO,
LLC, in the amount of $3,000,000 payable to WESSCO, LLC is incorporated by reference herein to Exhibit
10.6 of the Company's Report on Form 8-K, as filed on October 21, 2013.
10.64 ** Management Services Agreement dated as of December 1, 2013, between the Company and Algar, Inc., including
the Stock Option Agreement attached thereto as Attachment A is incorporated by reference herein to Exhibit
10.1 of the Company's Report on Form 8-K, as filed on December 4, 2013.*
47
Exhibit
Number
Description of Exhibits
10.65 ** Seventh Amendment to Credit Agreement, dated February 21, 2014, by and among Industrial Services of
America, Inc., ISA Indiana, Inc. and Fifth Third Bank is incorporated by reference herein to Exhibit 10.1 of
the Company's Report on Form 8-K, as filed on February 24, 2014.
10.66 ** Amended and Restated Revolving Loan Note, dated February 21, 2012 by Industrial Services of America,
Inc. and ISA Indiana, Inc. in favor of Fifth Third Bank is incorporated by reference herein to Exhibit 10.2 of
the Company's Report on Form 8-K, as filed on February 24, 2014.
10.67 ** Amended and Restated Term Loan Note, dated February 21, 2012 by Industrial Services of America, Inc. and
ISA Indiana, Inc. in favor of Fifth Third Bank is incorporated by reference herein to Exhibit 10.3 of the
Company's Report on Form 8-K, as filed on February 24, 2014.
10.68
Swap Confirmation, dated October 17, 2013, between WESSCO, LLC and The Bank of Kentucky, Inc. in the
notional amount of $3,000,000.
11
Statement of Computation of Earnings Per Share (See Note 10 to Notes to Consolidated Financial Statements).
21
List of subsidiaries of Industrial Services of America, Inc.
31.1
Rule 13a-14(a) Certification of Orson Oliver for the Form 10-K for the year ended December 31, 2013.
31.2
Rule 13a-14(a) Certification of Alan Schroering for the Form 10-K for the year ended December 31, 2013.
32.1
Section 1350 Certification of Orson Oliver and Alan Schroering for the Form 10-K for the year ended December
31, 2013.
101.INS
XBRL Instance Document***
101.SCH
XBRL Taxonomy Extension Schema Document***
101.CAL
XBRL Taxonomy Extension Calculation Document***
101.DEF
XBRL Taxonomy Extension Definitions Document***
101.LAB
XBRL Taxonomy Extension Labels Document***
101.PRE
XBRL Taxonomy Extension Presentation Document***
*Denotes a management contract of ISA required to be filed as an exhibit pursuant to Item 601(10)(iii) of Regulation S-K.
**Previously filed.
***Pursuant to Regulation S-T, this interactive data file is deemed not filed or part of a registration statement or prospectus for
purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities Exchange
Act of 1934, and otherwise is not subject to liability under these sections.
48
INDUSTRIAL SERVICES OF AMERICA, INC.
AND SUBSIDIARIES
Louisville, Kentucky
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013, 2012 and 2011
CONTENTS
REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED STATEMENTS OF INCOME
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUPPLEMENTARY INFORMATION
VALUATION AND QUALIFYING ACCOUNTS
F -1
F - 2
F - 4
F - 5
F - 6
F - 7
F - 8
F - 39
REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Industrial Services of America, Inc. and Subsidiaries
Louisville, Kentucky
We have audited the accompanying consolidated balance sheets of Industrial Services of America, Inc. and
Subsidiaries as of December 31, 2013 and 2012 and the related consolidated statements of income, comprehensive
income, shareholders’ equity and cash flows for each of the years in the three year period ended December 31, 2013.
Our audits also included the financial statement schedule listed in the Index at Item 15(a)2. The financial statements
and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. The Company is not required to have, nor were
we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements, 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 consolidated financial statements referred to above present fairly, in all material respects, the
consolidated financial position of Industrial Services of America, Inc. and Subsidiaries as of December 31, 2013 and
2012, and the consolidated results of their operations and their cash flows for each of the years in the three year
period ended December 31, 2013, in conformity with U. S. generally accepted accounting principles. Also, in our
opinion, the related consolidated financial statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
Mountjoy Chilton Medley LLP
/s/ Mountjoy Chilton Medley LLP
Louisville, Kentucky
March 31, 2014
F - 1
INDUSTRIAL SERVICES OF AMERICA, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2013 and 2012
ASSETS
Current assets
Cash and cash equivalents
Income tax receivable
Accounts receivable – trade (after allowance for doubtful accounts of $100.0 thousand in 2013 and
2012) (Note 1)
Inventories (Note 1)
Deferred income taxes (Note 8)
Prepaid expenses
Employee loans
Total current assets
Net property and equipment (Note 1)
Other assets
Intangible assets, net (Notes 1 and 3)
Deferred income taxes (Note 8)
Deposits
Total other assets
Total assets
2013
2012
(in thousands)
$
1,589
$
7
11,456
8,782
—
101
4
1,926
1,437
13,344
16,529
276
330
5
21,939
21,826
33,847
24,210
—
97
170
267
4,275
870
121
5,266
$ 44,032
$ 63,323
See accompanying notes to consolidated financial statements.
F-2
INDUSTRIAL SERVICES OF AMERICA, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2013 and 2012
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Current maturities of long-term debt (Note 4)
Accounts payable
Interest rate swap agreement liability (Note 1)
Deposit from related party (Note 11)
Other current liabilities
Total current liabilities
Long-term liabilities
Long-term debt (Note 4)
Total long-term liabilities
Shareholders’ equity
Common stock, $0.0033 par value: 20.0 million and 10.0 million shares authorized in 2013
and 2012, respectively; 7,192,479 shares issued in 2013 and 2012; 7,069,267 and
6,944,267 shares outstanding in 2013 and 2012, respectively
Additional paid-in capital
Retained (losses) earnings
Accumulated other comprehensive loss
Treasury stock at cost, 123,212 and 248,212 shares in 2013 and 2012, respectively
Total shareholders’ equity
Total liabilities and shareholders’ equity
2013
2012
(in thousands)
$
$
$
1,597
6,605
71
500
324
9,097
16,889
16,889
24
18,649
(379)
(71)
(177)
18,046
44,032
$
1,687
6,408
250
—
374
8,719
23,369
23,369
24
18,281
13,437
(150)
(357)
31,235
63,323
See accompanying notes to consolidated financial statements.
F-3
INDUSTRIAL SERVICES OF AMERICA, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 2013, 2012 and 2011
Revenue from services
Revenue from product sales
Total Revenue
Cost of sales for services
Cost of sales for product sales
Inventory adjustment for lower of cost or market (Note 1)
Total Cost of sales
Provision for employee terminations and severances
Other selling, general, and administrative expenses
Total selling, general and administrative expenses
Impairment loss, intangibles and goodwill (Note 3)
Loss before other income (expense)
Other income (expense)
$
$
2013
2011
2012
(in thousands, except per share information)
5,279
$
271,934
277,213
4,716
264,321
3,441
272,478
—
8,725
8,725
—
(3,990)
5,069
131,684
136,753
4,695
129,862
2,225
136,782
70
7,662
7,732
3,489
(11,250)
5,088
189,144
194,232
4,655
183,621
—
188,276
228
7,742
7,970
6,840
(8,854)
Interest expense, including factoring fees and loan fee amortization
Interest income
Gain on sale of assets
Gain on lawsuit settlement (Note 1)
Other income (loss), net
Total other expense
Loss before income taxes
Income tax provision (benefit) (Note 8)
Net loss
Basic loss per share
Diluted loss per share
(1,920)
2
40
625
75
(1,178)
(12,428)
1,388
(13,816) $
(1.96) $
(1.96) $
(1,976)
9
47
—
—
(1,920)
(10,774)
(4,154)
(6,620) $
(0.95) $
(0.95) $
$
$
$
(2,492)
19
107
—
(566)
(2,932)
(6,922)
(3,041)
(3,881)
(0.56)
(0.56)
See accompanying notes to consolidated financial statements.
F-4
INDUSTRIAL SERVICES OF AMERICA, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended December 31, 2013, 2012 and 2011
Net loss
Other comprehensive income (loss):
2013
2012
2011
(in thousands)
$
(13,816) $
(6,620) $
(3,881)
Unrealized gain on derivative instruments, net of tax in 2012 and 2011
79
140
63
Comprehensive loss
$
(13,737) $
(6,480) $
(3,818)
See accompanying notes to consolidated financial statements.
F-5
INDUSTRIAL SERVICES OF AMERICA, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Years ended December 31, 2013, 2012 and 2011
Common Stock
Shares
Amount
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Loss
Treasury Stock
Shares
Cost
Total
(in thousands, except share information)
Balance as of January 1, 2011
7,192,500
$
24
$
17,852
$
23,938
$
(353)
(402,583) $ (579) $ 40,882
Unrealized gain on derivative
instruments, net of tax
Stock bonuses
Contingent consideration
Reclass fractional shares
purchased after stock split
Net loss
Balance as of December 31,
2011
Unrealized gain on derivative
instruments, net of tax
Stock bonuses/options
Net loss
Balance as of December 31,
2012
Unrealized gain on derivative
instruments
Stock options
Securities issued
Net loss
Balance as of December 31,
2013
—
—
—
(21)
—
7,192,479
—
—
—
7,192,479
—
—
—
—
—
—
—
—
—
24
—
—
—
24
—
—
—
—
—
409
(130)
—
—
—
—
—
—
(3,881)
63
—
—
—
—
—
60,600
90,000
21
—
—
86
130
—
63
495
—
—
— (3,881)
18,131
20,057
(290)
(251,962)
(363)
37,559
—
150
—
—
—
(6,620)
140
—
—
—
3,750
—
—
6
140
156
— (6,620)
18,281
13,437
(150)
(248,212)
(357)
31,235
—
48
320
—
—
—
—
79
—
—
—
— 125,000
—
—
180
79
48
500
(13,816)
—
—
— (13,816)
7,192,479
$
24
$
18,649
$
(379) $
(71)
(123,212) $ (177) $ 18,046
See accompanying notes to consolidated financial statements.
F-6
INDUSTRIAL SERVICES OF AMERICA, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2013, 2012 and 2011
Cash flows from operating activities
Net loss
Adjustments to reconcile net income to net cash from operating activities:
2013
2012
(in thousands)
2011
$
(13,816) $
(6,620) $
(3,881)
Depreciation and amortization
Inventory write-down
Stock expense - bonuses and options
Deferred income taxes
Impairment loss, intangibles and goodwill
Gain on sale of property and equipment
Gain on sale of intangible asset
Amortization of loan fees included in interest expense
Change in assets and liabilities
Receivables
Net investment in sales-type leases
Inventories
Income tax receivable
Other assets
Accounts payable
Accrued bonuses
Income tax payable
Other current liabilities
Net cash from operating activities
Cash flows from investing activities
Proceeds from sale of property and equipment
Proceeds from lawsuit to cancel intangible asset
Purchases of property and equipment
Deposit from related party
Deposits on equipment
Payments from related party
Net cash from (used in) investing activities
Cash flows from financing activities
Loan fees capitalized
Proceeds from sale of securities
Proceeds from long-term debt
Payments on long-term debt
Net cash used in financing activities
Net change in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental disclosure of cash flow information:
Cash paid for interest
Tax refund received
Cash paid for taxes
Supplemental disclosure of noncash investing and financing activities:
Change in equipment purchases accrual
3,965
2,225
48
1,049
3,489
(40)
(625)
302
1,888
—
5,522
1,430
(60)
297
—
—
(151)
5,523
130
770
(1,087)
500
—
—
313
(103)
500
3,308
(9,878)
(6,173)
(337)
1,926
1,589
1,688
1,009
12
$
$
4,401
—
156
(4,234)
6,840
(47)
—
178
3,847
40
2,015
2,530
97
(4,271)
—
—
44
4,976
68
—
(1,686)
—
(48)
45
(1,621)
(243)
—
—
(3,453)
(3,696)
(341)
2,267
1,926
1,796
2,758
308
$
$
4,517
3,441
495
459
—
(107)
—
124
10,259
33
12,325
(3,967)
102
(724)
(1,175)
(2,909)
12
19,004
183
—
(2,456)
—
(37)
43
(2,267)
—
—
342
(17,280)
(16,938)
(201)
2,468
2,267
2,274
—
3,385
(100) $
(2) $
101
$
$
$
See accompanying notes to consolidated financial statements.
F-7
INDUSTRIAL SERVICES OF AMERICA, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013, 2012, and 2011
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business: The Recycling segment of Industrial Services of America, Inc. (a Florida Corporation) and its subsidiaries
("ISA" or "The Company") purchases and sells ferrous and nonferrous materials, including stainless steel, on a daily basis at
our two wholly-owned subsidiaries, ISA Recycling, LLC (located in Louisville, Kentucky) and ISA Indiana, Inc. (serving
southern Indiana). In the fourth quarter of 2013, management discontinued the production of stainless steel blends within this
segment (see the "Intangibles" heading under this note). Stainless steel blends are a subset of the stainless steel market. In July
2012, we opened the ISA Pick.Pull.Save used automobile yard, which is a new product line within the ISA Recycling segment
("Recycling" - see Segment information at Note 12). Through the Waste Services segment ("Waste Services" - see the Segment
information at Note 12), ISA also 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. This segment
maintains contracts with retail, commercial and industrial businesses to handle their waste disposal needs, primarily by
subcontracting with commercial waste hauling and disposal companies. Our customers and subcontractors are located throughout
the United States. This segment also installs or repairs equipment and rental equipment. Each of our segments bills separately
for its products or services. Generally, services and products are not bundled for sale to individual customers. The products or
services have value to the customer on a standalone basis.
The metal recycling business is highly competitive and is subject to significant changes in economic and market conditions.
Pricing and proximity to a metal source are the major competitive factors in the metal recycling business. Many companies offer
or are engaged in the development of products or the provisions of services that may be or are competitive with our current
products or services. Although we continue to expand our facilities and increase our processing efficiencies, certain of our
competitors have greater financial, technical, manufacturing, marketing, distribution, assets, and other resources than we possess
in the stainless steel, ferrous and non-ferrous recycling businesses. In addition, the industry is constantly changing as a result
of consolidation that may create additional competitive pressures in our business environment. There can be no assurance that
we will be able to obtain our desired market share based on the competitive nature of this industry.
Revenue Recognition: ISA records revenue for its recycling and equipment sales divisions upon delivery of the related materials
and equipment to the customer. We provide installation and training on all equipment and we charge these costs to the customer,
recording revenue in the period we provide the service. We are the middleman in the sale of the equipment and not a manufacturer.
Any warranty is the responsibility of the manufacturer and therefore we make no estimates for warranty obligations. Allowances
for equipment returns are made on a case-by-case basis. Historically, returns of equipment have not been material.
Our management services group provides our customers with evaluation, management, monitoring, auditing and cost reduction
consulting of our customers’ non-hazardous solid waste removal activities. We recognize revenue related to the management
aspects of these services when we deliver the services. We record revenue related to this activity on a gross basis because we
are ultimately responsible for service delivery, have discretion over the selection of the specific service provided and the amounts
to be charged, and are directly obligated to the subcontractor for the services provided. We are an independent contractor. If we
discover that third party service providers have not performed, either by auditing of the service provider invoices or
communications from our customers, we then resolve the service delivery dispute directly with the third party service supplier.
Fair Value of Financial Instruments: We estimate the fair value of our financial instruments 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 these estimates. As of
December 31, 2013, the estimated fair value of our debt instruments approximated book value. The fair value of our debt
approximates its carrying value because the majority of our debt bears a floating rate of interest based on the LIBOR rate. There
is no readily available market by which to determine fair value of our fixed term debt; however, based on existing interest rates
and prevailing rates as of each year end, we have determined that the fair value of our fixed rate debt approximates book value.
F - 8
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
We carry certain of our financial assets and liabilities at fair value on a recurring basis. These financial assets and liabilities are
composed of cash and cash equivalents and derivative instruments. Long-term debt is carried at cost, and the fair value is disclosed
herein. In addition, we measure certain assets, such as goodwill and other long-lived assets, at fair value on a non-recurring
basis to evaluate those assets for potential impairment. Fair value is defined as the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
In accordance with applicable accounting standards, we categorize our financial assets and liabilities into the following fair
value hierarchy:
Level 1 – Financial assets and liabilities with values based on unadjusted quoted prices for identical assets or liabilities in an
active market. Examples of level 1 financial instruments include active exchange-traded securities.
Level 2 – Financial assets and liabilities with values based on quoted prices for similar assets and liabilities in active markets,
and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or
liability. Examples of level 2 financial instruments include commercial paper purchased from the State Street-administered asset-
backed commercial paper conduits, various types of interest-rate and commodity-based derivative instruments, and various types
of fixed-income investment securities. Pricing models are utilized to estimate fair value for certain financial assets and liabilities
categorized in level 2.
Level 3 – Financial assets and liabilities with values based on prices or valuation techniques that require inputs that are both
unobservable in the market and significant to the overall fair value measurement. These inputs reflect management’s judgment
about the assumptions that a market participant would use in pricing the asset or liability, and are based on the best available
information, some of which is internally developed. Examples of level 3 financial instruments include certain corporate debt
with little or no market activity and a resulting lack of price transparency.
When determining the fair value measurements for financial assets and liabilities carried at fair value on a recurring basis, we
consider the principal or most advantageous market in which we would transact and consider assumptions that market participants
would use when pricing the asset or liability. When possible, we look to active and observable markets to price identical assets
or liabilities. When identical assets and liabilities are not traded in active markets, we look to market observable data for similar
assets and liabilities. Nevertheless, certain assets and liabilities are not actively traded in observable markets, and we use
alternative valuation techniques to derive fair value measurements.
We use the fair value methodology outlined in the related accounting standard to value the assets and liabilities for cash, debt
and derivatives. All of our cash is defined as Level 1 and all our debt and derivative contracts are defined as Level 2.
In accordance with this guidance, the following tables represent our fair value hierarchy for financial instruments, in thousands,
at December 31, 2013 and 2012:
Fair Value at Reporting Date Using
Quoted
Prices in
Active
Markets for
Identical
Assets
Level 1
Significant
Other
Observable
Inputs
Level 2
Significant
Unobservable
Inputs
Level 3
Total
$
$
1,589
$
— $
— $
1,589
— $
—
(18,486) $
(71)
— $
—
(18,486)
(71)
2013:
Assets:
Cash and cash equivalents
Liabilities
Long term debt
Derivative contract - interest rate swap
F - 9
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Fair Value at Reporting Date Using
Quoted
Prices in
Active
Markets for
Identical
Assets
Level 1
Significant
Other
Observable
Inputs
Level 2
Significant
Unobservable
Inputs
Level 3
Total
2012:
Assets:
Cash and cash equivalents
Liabilities
Long term debt
Derivative contract - interest rate swap
$
$
1,926
$
— $
— $
1,926
— $
—
(25,056) $
(250)
— $
—
(25,056)
(250)
We have had no transfers in or out of Levels 1 or 2 fair value measurements. Other than the 2013 impairment of intangibles and
the 2012 impairment of goodwill, we have had no activity in Level 3 fair value measurements for the years ended December 31,
2013 or 2012. For Level 3 assets, goodwill, if any, is subject to impairment analysis each year end in accordance with ASC
guidance. We use an annual capitalized earnings computation to evaluate Level 3 assets for impairment. See also Note 3
–“Goodwill and Intangibles” for additional information on third party valuations and the impairment losses for goodwill and
intangibles in 2013 and 2012.
Estimates: In preparing the consolidated financial statements in conformity with generally accepted accounting principles in
the United States of America ("GAAP"), 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. Examples
of estimates include the allowance for doubtful accounts, estimates associated with annual goodwill impairment tests, estimates
of realizability of deferred income tax assets and liabilities, estimates of inventory balances, and estimates of stock option values.
The Company also uses estimates when assessing fair values of assets and liabilities acquired in business acquisitions as well
as any fair value and any related impairment charges related to the carrying value of inventory and machinery and equipment,
and other long-lived assets. Despite the Company’s intention to establish accurate estimates and use reasonable assumptions,
actual results may differ from these estimates.
Principles of Consolidation: The consolidated financial statements include the accounts of the Company and its wholly-owned
subsidiaries. Upon consolidation, all inter-company accounts, transactions and profits have been eliminated.
Common Control: We conduct significant levels of business with K&R, LLC (“K&R”), which is wholly-owned by Kletter
Holding, LLC, the sole member of which as of December 31, 2013, was Harry Kletter, the Company's former Chief Executive
Officer and principal shareholder (see Note 11 - "Related Party Transactions"). Because these entities are under common control,
our operating results or our financial position may be materially different from those that would have been obtained if the entities
were autonomous.
Reclassifications: We have reclassified certain income statement items within the accompanying Consolidated Financial
Statements and Notes to Consolidated Financial Statements for the prior years and prior quarters in order to be comparable with
the current presentation. These reclassifications had no effect on previously reported income (loss) or shareholders' equity.
Cash and Cash Equivalents: Cash and cash equivalents includes cash in banks with original maturities of three months or less.
Cash and cash equivalents are stated at cost which approximates fair value, which in the opinion of management, are subject to
an insignificant risk of loss in value. We maintain a cash account on deposit with BB&T which serves as collateral for our
remaining interest rate swap agreement. This compensating balance arrangement is verbal only and does not legally restrict the
use of these funds. As of December 31, 2013, the balance in this account was $75.6 thousand. The Company maintains cash
balances in excess of federally insured limits.
F - 10
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Accounts Receivable and Allowance for Doubtful Accounts: Accounts receivable consists primarily of amounts due from
customers from product and brokered sales. The allowance for doubtful accounts totaled $100.0 thousand at December 31, 2013
and December 31, 2012. Our determination of the allowance for doubtful accounts includes a number of factors, including the
age of the balance, estimated settlement adjustments, past experience with the customer account, changes in collection patterns
and general economic and industry conditions. Interest is not normally charged on receivables nor do we normally require
collateral for receivables. Potential credit losses from our significant customers could adversely affect our results of operations
or financial condition. While we believe our allowance for doubtful accounts is adequate, changes in economic conditions or
any weakness in the steel and metals industry could adversely impact our future earnings. In general, we consider accounts
receivable past due which are 30 to 60 days after the invoice date. We charge off losses to the allowance when we deem further
collection efforts will not provide additional recoveries.
Major Customer: North American Stainless ("NAS") is a major customer in Recycling since 2009 and has historically accounted
for substantially all purchases of our stainless steel blends. Sales to NAS equaled 37.5% of our consolidated revenue in 2013,
and 41.2% of our consolidated revenue in 2012. The accounts receivable balance from NAS was $2.8 million and $4.5 million
as of December 31, 2013 and 2012, respectively. In the fourth quarter of 2013 we ceased producing stainless steel blends.
Inventories: Our inventories primarily consist of ferrous and non-ferrous scrap metals, including stainless steel, and are valued
at the lower of average purchased cost or market based on the specific scrap commodity. Quantities of inventories are determined
based on our inventory systems and are subject to periodic physical verification using estimation techniques including
observation, weighing and other industry methods. We recognize inventory impairment when the market value, based upon
current market pricing, falls below recorded value or when the estimated volume is less than the recorded volume of inventory.
We record the loss in cost of sales in the period during which we identified the loss.
We make certain assumptions regarding future demand and net realizable value in order to assess whether inventory is properly
recorded at the lower of cost or market. We base our assumptions on historical experience, current market conditions and current
replacement costs. If the anticipated future selling prices of scrap metal and finished steel products should decline, we would
re-assess the recorded net realizable value of our inventory and make any adjustments we feel necessary in order to reduce the
value of our inventory (and increase cost of sales) to the lower of cost or market.
In the third quarter of 2013, a continuing reduction in market demand and prices for stainless steel occurred, which led to a
reduction in stainless steel sales volumes and average stainless steel selling prices, resulting in ISA recording a net realizable
value (“NRV”) inventory write-down of $1.9 million at September 30, 2013. Based on the final sale price of the remaining
inventory in the fourth quarter of 2013 and the first quarter of 2014, we recorded an additional NRV inventory write-down of
$325.0 thousand at December 31, 2013. Due to the high level of uncertainty regarding the economic environment and stainless
steel market, as well as the Company's financing environment, in the fourth quarter of 2013, management determined to
discontinue the production of stainless steel blends. See Note 3 - "Goodwill and Intangible Assets" for additional information
regarding this decision. As a result of reduced market prices and management's determination to discontinue the production of
stainless steel blends, a lower of cost or market assessment was performed for our nickel content inventories as described above.
The assessment embodied the assumption of immediate sale of these blends in their current state. A write-down was not necessary
in 2012.
Some commodities are in saleable condition at acquisition. We purchase these commodities in small amounts until we have a
truckload of material available for shipment. Some commodities are not in saleable condition at acquisition. These commodities
must be torched, shredded or baled. We do not have work-in-process inventory that needs to be manufactured to become finished
goods. We include processing costs in inventory for all commodities by gross ton.
As of June 2012, we adopted a new method for estimating residual value amounts for automotive vehicle parts and appliances
held in inventory. The new method was adopted due to the ongoing evaluation of our experience with the materials produced
from our shredder operations. This change in estimate provides a more accurate value of these residual values in inventory and
was applied prospectively in accordance with the Financial Accounting Standards Board's ("FASB") authoritative guidance titled
“Accounting Standards Codification ("ASC") Topic 250 - Accounting Changes and Error Corrections." The impact of this
change resulted in a one-time increase in the cost of sales of $352.1 thousand during the quarter of implementation.
F - 11
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Inventories as of December 31, 2013 and 2012 consist of the following:
December 31, 2013
Raw
Materials
Finished
Goods
Processing
Costs
Total
Stainless steel, ferrous and non-ferrous materials $
Waste equipment machinery
Other
Total inventories for sale
Replacement parts
Total inventories
$
4,856
—
—
4,856
1,550
6,406
Raw
Materials
Stainless steel, ferrous and non-ferrous materials $
Waste equipment machinery
Other
Total inventories for sale
Replacement parts
Total inventories
$
12,519
—
—
12,519
1,542
14,061
$
$
$
$
$
(in thousands)
1,697
49
30
1,776
—
1,776
$
600
—
—
600
—
600
December 31, 2012
Finished
Goods
Processing
Costs
$
(in thousands)
1,412
57
36
1,505
—
1,505
$
963
—
—
963
—
963
$
$
$
$
7,153
49
30
7,232
1,550
8,782
Total
14,894
57
36
14,987
1,542
16,529
We allocated $599.7 thousand in processing costs to inventories as of December 31, 2013 and $962.9 thousand as of December 31,
2012.
Inventory also includes all types of industrial waste handling equipment and machinery held for resale such as compactors,
balers, and containers, which are valued based on cost. Replacement parts included in inventory are depreciated over a one-year
life and are used by the Company within the one-year period as these parts wear out quickly due to the high-volume and intensity
of the shredder function. Other inventory includes fuel and baling wire.
Property and Equipment: Property and equipment are stated at cost and depreciated on a straight-line basis over the estimated
useful lives of the related property.
Property and equipment, in thousands, as of December 31, 2013 and 2012 consist of the following:
Land
Equipment and vehicles
Office equipment
Rental equipment
Building and leasehold improvements
Less accumulated depreciation and amortization
Life
2013
2012
1-10 years
1-7 years
3-5 years
5-40 years
$
$
$
6,026
25,500
2,057
5,678
9,067
48,328
26,502
21,826
$
$
$
6,026
26,227
2,021
5,191
9,001
48,466
24,256
24,210
F - 12
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Depreciation expense for the years ended December 31, 2013, 2012 and 2011 was $3.3 million, $3.7 million, and $3.8 million,
respectively. Of the $3.3 million depreciation expense recognized in 2013, $2.6 million was recorded in cost of sales, and $0.7
million was recorded in general and administrative expense. Of the $3.7 million depreciation expense recognized in 2012, $2.9
million was recorded in cost of sales, and $0.8 million was recorded in general and administrative expense. Of the $3.8 million
depreciation expense recognized in 2011, $3.0 million was recorded in cost of sales, and $0.8 million was recorded in general
and administrative expense.
A typical term of our rental equipment leases is five years. The revenue stream is based on monthly usage and recognized in the
month of usage. We record purchased rental equipment, including all installation and freight charges, as a fixed asset. We are
typically responsible for all repairs and maintenance expenses on rental equipment.
Based on existing agreements, future operating lease revenue from rental equipment for each of the next five years, in thousands,
is estimated to be:
$
2014
2015
2016
2017
2018
1,790
1,507
1,175
743
255
$
5,470
Goodwill and Other Intangible Assets: Goodwill is the excess of cost over the fair value of the net assets of businesses acquired.
Goodwill and certain intangible assets are no longer amortized but are assessed at least annually for impairment with any such
impairment recognized in the period identified. We perform our goodwill impairment test at least annually at December 31,
unless there is a triggering event, in which case a test would be performed at the time that such triggering event occurs. We test
for goodwill impairment using a two-step process and at the level of the recycling reporting units to which all the goodwill is
related in accordance with ASC Topic 350 - Intangibles-Goodwill and Other. In the first step, we determine whether to impair
goodwill by comparing the fair value of the recycling reporting unit as a whole (the present value of expected cash flows) to its
carrying value including goodwill or by obtaining a valuation from an outside source. A reporting unit is an operating segment
or one level below an operating segment (referred to as a "component"). A component is considered a reporting unit for purposes
of goodwill testing if the component constitutes a business for which discrete financial information is available and segment
management regularly reviews the operating results of that component. We have identified two reporting units, and we obtained
a valuation from an outside source at December 31, 2012. If necessary, the second step of the goodwill impairment test compares
the implied fair value of the reporting unit's goodwill with the carrying amount of that goodwill. The implied fair value of
goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. In 2012, the
recycling reporting unit's fair value did not exceed its carrying value, thus, the second step of the impairment test was performed
and an impairment loss was recorded. See also Note 3 – “Goodwill and Intangibles” for additional information on the goodwill
valuation performed by an outside service and the impairment loss recorded in 2012. As of December 31, 2013, the Company
does not have any goodwill recorded on its balance sheet.
Intangibles: Purchased intangible assets are initially recorded at cost and finite life intangible assets are amortized over their
useful economic lives on a straight line basis. Intangible assets having indefinite lives and intangible assets that are not yet ready
for use are not amortized and are reviewed annually for impairment as required by the FASB's ASC. The Company had no
intangible assets having indefinite lives during 2013 or 2012.
Through November 2013, we had three finite-lived intangible assets for which we recorded amortization: a trade name, a non-
compete agreement, and a customer list relating to the acquisition of a business focusing on the stainless steel blends market.
We amortized the trade name and non-compete agreements using a method that reflected the pattern in which the economic
benefits were consumed or otherwise used over a 5-year life as stated in the agreements. We amortized the customer list on a
straight-line basis over a 10-year life as estimated by management. We incurred amortization expense related to these assets of
$641.0 thousand, $750.0 thousand and $750.0 thousand for the years ended December 31, 2013, 2012 and 2011, respectively.
Pursuant to a legal settlement, we canceled $144.7 thousand of our non-compete agreements balance effective February 28,
2013. A gain of $625.3 thousand was recorded as a result of this settlement.
F - 13
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The Court case relating to the legal settlement involved the competing claims for a declaratory judgment asking the Court to
determine whether a previous employee was bound by a one-year or five-year non-compete agreement. The employee's
employment with the Company ended in December 2010. The employee's interpretation of the non-compete agreement was
that it did not apply to him individually, but to a business entity previously owned by the employee. The Company's position
was that the non-compete agreement was required to be interpreted by the Court together with an asset purchase agreement, as
amended, which reference the employee and another individual receiving all of the stock and money in consideration for several
promised acts, including entering into the non-compete agreement. The Company also sought damages from the employee for
allegations he breached his non-compete agreement. The parties mediated the case successfully on January 25, 2013. Mutual
releases of all claims were entered by the parties, and the employee paid the Company $770.0 thousand in March 2013, which
released him from the non-compete agreement.
Due to the continued decline in market-dependent variables, including prices of stainless steel materials, management determined
the Company should discontinue production of stainless steel blends, a subset of the stainless steel market, in the fourth quarter
of 2013. With this change in strategy, management determined the value of the intangible assets related to the stainless steel
blend business was fully impaired. The Company recorded an impairment loss of approximately $3.5 million for the remaining
value of these intangible assets in that quarter. These assets were previously included in Recycling. As of December 31, 2013,
the Company has no intangible assets recorded on its balance sheet. See Note 3 - "Goodwill and Intangible Assets" for additional
information regarding the Company's decision to discontinue the production of stainless steel blends and the impairment loss
recorded.
As of December 31, 2013, we do not expect to have any additional amortization expense relating to intangible assets for the
next five fiscal years or thereafter.
Factoring Fees and Certain Banking Expenses: We have included factoring fees and certain banking expenses relating to our
loans and loan restructuring within interest expense. Prior to 2012, factoring fees were previously recorded as discounts taken,
a reduction in revenue, and totaled $121.6 thousand, $199.5 thousand, and $342.8 thousand for the years ended December 31,
2013, 2012 and 2011, respectively. Prior to 2013, the loan fees (and its amortization) were previously recorded as selling, general
and administrative expenses and totaled $301.5 thousand, $178.3 thousand, and $123.8 thousand for the years ended
December 31, 2013, 2012 and 2011, respectively.
We have entered into factoring agreements with various European financial institutions to sell our accounts receivable under
non-recourse agreements. These transactions are treated as a sale and are accounted for as a reduction in accounts receivable
because the agreements transfer effective control over and risk related to the receivables to the buyers. Thus, cash proceeds
from these arrangements are reflected in the change of accounts receivable in our statements of cash flows each period. We do
not service any factored accounts after the factoring has occurred. We do not have any servicing assets or liabilities. We utilize
factoring arrangements as an integral part of our financing for working capital. The aggregate gross amount factored under these
facilities was $31.9 million, $59.9 million and $99.1 million for the years ended December 31, 2013, 2012 and 2011, respectively.
Our loss on these transactions, the cost of factoring such accounts receivable, is reflected in the accompanying consolidated
statements of operations as interest expense with other financing costs. The cost of factoring such accounts receivable for the
years ended December 31, 2013, 2012 and 2011 was $121.6 thousand, $199.5 thousand and $342.8 thousand, respectively. Any
change in the availability of these factoring arrangements could have a material adverse effect on our liquidity and financial
condition.
Shipping and Handling Fees and Costs: Shipping and handling charges incurred by the Company are included in cost of sales
and shipping charges billed to the customer are included in revenues in the accompanying consolidated statements of income.
During 2013 we reclassified certain shipping costs from selling, general, and administrative to cost of sales and reclassified
prior periods for comparability.
Advertising Expense: Advertising costs are charged to expense in the period the costs are incurred. Advertising expense was
$36.3 thousand, $188.0 thousand, and $83.8 thousand for the years ended December 31, 2013, 2012, and 2011, respectively.
F - 14
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Derivative and Hedging Activities: We are exposed to market risk stemming from changes in metal commodity prices,
specifically nickel when producing stainless steel blends, and interest rates. In the normal course of business, we actively manage
our exposure to these market risks by entering into various hedging transactions, authorized under established policies that place
clear controls on these activities. Derivative financial instruments currently used by us consist of interest rate swap contracts.
Derivative financial instruments are accounted for under the provisions of the FASB's authoritative guidance titled “ASC 815
- Derivative and Hedging.” Under these standards, derivatives are carried on the balance sheet at fair value. Our interest rate
swaps are designated as a cash flow hedge, and the effective portions of changes in the fair value of the derivatives are recorded
as a component of other comprehensive income or loss and are recognized in the statement of operations when the hedged item
affects earnings. Ineffective portions of changes in the fair value of cash flow hedges are recognized in gain or loss on derivative
liabilities. Cash flows related to derivatives are included in operating activities.
Beginning in October 2008, we began to utilize derivative instruments in the form of interest rate swaps to assist in managing
our interest rate risk. We do not enter into any interest rate swap derivative instruments for trading purposes. We recognize as
an adjustment to interest expense the differential paid or received on interest rate swaps. We include in other comprehensive
income the change in the fair value of the interest rate swap, which is established as an effective hedge. We include the required
disclosures for interest rate swaps in Note 4 – “Notes Payable to Bank” of our Notes to Consolidated Financial Statements.
Beginning in July 2012 and ending in October 2012, we briefly used derivative instruments in the form of commodity hedges
to assist in managing our commodity price risk. We do not enter into any commodity hedges for trading purposes. We include
the gain or loss on the hedged items and the offsetting loss or gain on the related commodity hedge in cost of sales. We assess
the effectiveness of a commodity hedge contract based on changes in the contract's fair value. The changes in the market value
of such contracts have historically been, and are expected to continue to be, highly effective at offsetting changes in the price
of the hedged items. The amounts representing the ineffectiveness of these hedges are not expected to be significant. As of
December 31, 2013 and 2012, we did not have any commodity hedge contracts outstanding.
Income Taxes: Deferred income taxes are recorded to recognize the tax consequences on future years of differences between
the tax basis of assets and liabilities and their carrying amounts for financial reporting purposes, referred to as “temporary
differences,” and for net operating loss carry-forwards subject to an ongoing assessment of realizability. Deferred income taxes
are measured by applying current tax laws. We use the deferral method of accounting for available state tax credits relating to
the purchase of the shredder equipment.
The FASB has issued guidance, included in the ASC, related to the accounting for uncertainty in income taxes recognized in
financial statements. The Company recognizes uncertain income tax positions using the "more-likely-than-not" approach as
defined in the ASC. The amount recognized is subject to estimate and management’s judgment with respect to the most likely
outcome for each uncertain tax position. The amount that is ultimately sustained for an individual uncertain tax position or for
all uncertain tax positions in the aggregate could differ from the amount recognized. The Company has no liability for uncertain
tax positions recognized as of December 31, 2013 and 2012.
As a policy, the Company recognizes interest accrued related to unrecognized tax positions in interest expense and penalties in
operating expenses. The tax years 2012, 2011 and 2010 remain open to examination by the Internal Revenue Service and certain
state taxing jurisdictions to which the Company is subject. The tax year 2009 has been examined and is closed. See also Note
8 - "Income Taxes" for additional information relating to income taxes.
Earnings (Loss) Per Share: Basic earnings (loss) per share are computed by dividing net income (loss) by the weighted average
number of common shares outstanding during the year. Diluted earnings (loss) per share are computed by dividing net income
(loss) by the weighted average number of common shares outstanding plus the dilutive effect of stock options.
2013
2012
(in thousands, except per share information)
2011
Net loss
Net loss, as reported
Basic loss per share
As reported
Diluted loss per share
As reported
$
$
$
(13,816) $
(6,620) $
(3,881)
(1.96) $
(0.95) $
(0.56)
(1.96) $
(0.95) $
(0.56)
F - 15
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Accumulated Other Comprehensive Income (Loss): Comprehensive income (loss) is net income (loss) plus certain other items
that are recorded directly to shareholders’ equity. Amounts included in accumulated other comprehensive loss for our derivative
instruments are recorded net of the related income tax effects in 2012 and 2011. These amounts are not recorded net of tax in
2013 due to the valuation allowance recorded. See Note 8 - "Income Taxes" for additional information relating to the valuation
allowance.
Statement of Cash Flows: The statement of cash flows has been prepared using a definition of cash that includes deposits with
original maturities of three months or less.
Stock Option Plans: We have an employee stock option plan under which we may grant options for up to 2.4 million shares of
common stock, which are reserved by the board of directors for issuance of stock options. We provide compensation benefits
by granting stock options to employees and directors. The exercise price of each option is equal to the market price of our stock
on the date of grant. The maximum term of the option is five years. We account for this plan based on FASB’s authoritative
guidance titled "ASC 718 - Compensation - Stock Compensation." We recognize share-based compensation expense for the
fair value of the awards, as estimated using the Modified Black-Scholes-Merton Model, on the date granted on a straight-line
basis over their vesting term. Compensation expense is recognized only for share-based payments expected to vest. We estimate
forfeitures at the date of grant based on our historical experience and future expectations.
There are two significant inputs into the Modified Black-Scholes-Merton option-pricing model: expected volatility and expected
term. We estimate expected volatility based on traded option volatility of our stock over a term equal to the expected term of
the option granted. The expected term of stock option awards granted is derived from historical exercise experience under our
long-term incentive plan and represents the period of time that stock option awards granted are expected to be outstanding. The
assumptions used in calculating the fair value of stock-based payment awards represent management's best estimates, but these
estimates involve inherent uncertainties and the application of management's judgment. As a result, if factors change and we
use different assumptions, stock-based compensation expense could be materially different in the future. In addition, we are
required to estimate the expected forfeiture rate, and only recognize expense for those shares expected to vest. If our actual
forfeiture rate is materially different from its estimate, the stock-based compensation expense could be significantly different
from what we have recorded in the current period.
Following is a summary of stock option activity and number of shares reserved for outstanding options for the years ended
December 31, 2013, 2012 and 2011:
Options
Outstanding at January 1, 2011 (vested)
Granted
Outstanding at December 31, 2011
Granted on May 15, 2012 (vested)
Outstanding at December 31, 2012
Granted
Outstanding at December 31, 2013
Vested and expected to vest in the future at
December 31, 2013
Exercisable at December 31, 2013
Number of
shares
(in thousands)
Weighted
Average
Exercise Price
per Share
Weighted
Average
Remaining
Contractual
Term
Weighted
Average Grant
Date Fair
Value
90
—
90
90
180
—
180
180
180
$
$
$
$
$
4.23
—
4.23
4.94
4.59
—
4.59
3.5 years
—
2.5 years
5 years
2.9 years
—
1.9 years
$
$
$
$
1.05
—
1.05
1.71
1.38
—
1.38
4.59
1.9 years
$
1.38
Available for grant at December 31, 2013
2,095
As of July 1, 2009, we awarded options to purchase 30.0 thousand shares of our stock each to our three independent directors
for a total of 90.0 thousand shares at a per share exercise price of $4.23, the fair value as of the grant date. These options are
outstanding as of December 31, 2013.
F - 16
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
As of May 15, 2012, we awarded options to purchase 30.0 thousand shares of our stock each to our three new directors for a
total of 90.0 thousand shares at a per share exercise price of $4.94, the fair value as of the grant date. These options are outstanding
as of December 31, 2013.
As of December 1, 2013, subject to shareholder approval and vesting provisions, we granted options to purchase a total of 1.5
million shares of our Common Stock to Algar, Inc. at per share exercise price of $5.00 pursuant to a Management Services
Agreement (the "Management Agreement"). The closing price per share of the Company's Common Stock on the NASDAQ
Capital Market on December 2, 2013 was $2.54 per share. Per ASC Topic 718: Compensation - Stock Compensation, these
options are not deemed to be granted until shareholder approval is obtained. See Note 2 - "Management Services Agreement
with Algar, Inc." for additional information relating to the Management Agreement and the related Stock Option Agreement.
See also "Subsequent Events" below for an additional options award granted after year end to our new independent director.
As of December 31, 2013, we have no unrecognized stock-based compensation cost related to non-vested option awards. Stock
compensation charged to operations relating to stock options was $48.0 thousand and $96.0 thousand for the years ended
December 31, 2013 and 2012, respectively.
In January 2011, we issued 60.0 thousand shares of our stock to management. These shares were granted pursuant to performance
based stock plans authorized on April 1, 2010, at a grant date fair value of $11.93 per share. We also issued non-performance
based stock awards of 0.6 thousand shares to consultants at $12.28 per share in January 2011.
On April 9, 2012, we issued 3.8 thousand shares of our stock to a previous executive. Stock compensation charged to operations
relating to these stock awards was $59.9 thousand for the year ended December 31, 2012. These shares were granted pursuant
to a performance based stock plan authorized on August 13, 2010, at a grant date fair value of $15.98 per share.
See also Note 13 – “Long Term Incentive Plan” in these Notes to Consolidated Financial Statements for additional information
regarding the Long Term Incentive Plan.
Subsequent Events: We have evaluated the period from December 31, 2013 through the date the financial statements herein
were issued, for subsequent events requiring recognition or disclosure in the financial statements and the following events were
identified:
Options granted to Director:
On January 16, 2014, we awarded options to purchase 30.0 thousand shares of our stock to our new independent director at a
per share exercise price of $3.47, the fair value as of grant date. See also Note 13 – “Long Term Incentive Plan” in these Notes
to Consolidated Financial Statements for additional information regarding the Long Term Incentive Plan and options granted
under the plan.
Seventh Amendment to Credit Agreement with Fifth Third Bank:
On February 21, 2014, the Company entered into a Seventh Amendment to Credit Agreement (the “Seventh Amendment”) with
Fifth Third Bank (the “Bank”) which amended the July 30, 2010 Credit Agreement (the “Credit Agreement”), including the First
Amendment to Credit Agreement dated as of April 14, 2011, the Second Amendment to Credit Agreement dated as of November
16, 2011, the Third Amendment to Credit Agreement dated as of March 2, 2012, the Fourth Amendment to Credit Agreement
dated as of August 13, 2012, the Fifth Amendment to Credit Agreement dated as of November 14, 2012 and the Sixth Amendment
to Credit Agreement dated as of April 1, 2013 (collectively, the "Previous Amendments") as follows. The Seventh Amendment
extended the maturity date of both the revolving credit facility and the term loan from April 30, 2014 to July 31, 2015. The
Seventh Amendment decreased the interest rate on both the revolving credit facility and term loan by 1.00% to equal the one
month LIBOR plus four hundred basis points (4.00%) through June 30, 2014. The interest rate will increase effective July 1,
2014 by 2.00% to equal the one month LIBOR plus six hundred basis points (6.00%) through September 30, 2014. The interest
rate will increase effective October 1, 2014 by an additional 2.00% to equal the one month LIBOR plus eight hundred basis
points (8.00%) and continuing thereafter. The Seventh Amendment decreased the maximum revolving commitment by $10.0
million to $15.0 million until September 30, 2014. On October 1, 2014, the maximum revolving commitment will decrease by
$2.5 million to $12.5 million through the termination date. The Seventh Amendment increased the eligible inventory available
for calculating the borrowing base effective February 21, 2014 to 60.0% of up to $12.5 million in eligible inventory. The
Seventh Amendment decreased the principal payment on the term loan by $80.0 thousand to $25.0 thousand per month on March
1, and April 1, 2014. Principal payments then increase by $25.0 thousand to $50.0 thousand, payable on the first day of each
F - 17
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
month until the sale of certain real estate owned by ISA, at which time a new payment will be calculated based on net proceeds
from the sale. The Seventh Amendment reduced the ratio of adjusted EBITDA for the preceding twelve months to aggregate
cash payments of interest expense and scheduled payment of principal in the preceding twelve months (the "Fixed Charge
Coverage Ratio") to no less than 1.0 to 1.0 for the period ending September 30, 2014. The Seventh Amendment also provided
a waiver of the Fixed Charge Coverage Ratio covenant default for the quarters ended June 30, September 30 and December 31,
2013. The Seventh Amendment requires that unfunded capital expenditures should not exceed $500.0 thousand. The Seventh
Amendment also added a minimum liquidity requirement of $200.0 thousand for any month end beginning February 28 and
ending on June 30, 2014; of $500.0 thousand for any month end beginning on July 31 and ending on December 31, 2014; and
of $1.0 million for any month end beginning on or after January 31, 2015. The Seventh Amendment added a minimum
consolidated adjusted EBITDA ("Minimum EBITDA") requirement stating that the Minimum EBITDA shall not fall below (i)
$250.0 thousand for the calendar year to date period ending on March 31, 2014, (ii) $500.0 thousand for the calendar year to
date period ending on June 30, 2014 (iii) $750.0 thousand for the calendar year to date period ending on September 30, 2014,
and (iv) $1.0 million for each calendar year to date ending on or after December 31, 2014. The Seventh Amendment requires
ISA to periodically provide the Bank with a business plan and its strategy for obtaining certain growth metrics. In addition, the
Companies also agreed to perform other customary commitments and pay a fee totaling $200.0 thousand to the Bank by the end
of the year. All other terms of the Credit Agreement and Previous Amendments remain in effect. In connection with the Seventh
Amendment, the Company amended and restated both the term loan note (the "Amended and Restated Term Loan Note") and
the revolving loan note (the "Amended and Restated Revolving Loan Note"), issued to the Bank under the Credit Agreement.
See Note 4 - "Notes Payable to Bank" for additional debt information.
Impact of Recently Issued Accounting Standards: As of December 31, 2013, there are no recently issued accounting standards
not yet adopted that would have a material effect on the Company’s financial statements.
In February 2013, the FASB issued ASU 2013-2, Comprehensive Income: Reporting of Amounts Reclassified Out of Accumulated
Other Comprehensive Income. This update requires that the effect of significant reclassifications out of accumulated other
comprehensive income be reported on the respective line items in net income if the amount being reclassified is required under
GAAP to be reclassified in its entirety in the same reporting period to net income. For reclassifications involving other amounts,
cross references would be required to other disclosures provided under generally accepted accounting principles on such items.
This update is effective prospectively for annual reporting periods beginning after December 15, 2012 and interim periods within
those years. No reclassification events occurred during the year ended December 31, 2013. The effect on the Company would
be immaterial due to insignificant amounts involved.
In July 2013, the FASB issued ASU 2013-11, Presentation of Unrecognized Tax Benefit When a Net Operating Loss Carry
forward, a Similar Tax Loss, or a Tax Credit Carry forward Exists, an amendment to FASB ASC Topic 740, Income Taxes. This
update clarifies that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial
statements as a reduction to a deferred tax asset for a net operating loss carry forward, a similar tax loss, or a tax credit carry
forward if such settlement is required or expected in the event the uncertain tax position is disallowed. In situations where a net
operating loss carry forward, a similar tax loss, or a tax credit carry forward is not available at the reporting date under the tax
law of the applicable jurisdiction or the tax law of the jurisdiction does not require, and the entity does not intend to use, the
deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability
and should not be combined with deferred tax assets. This ASU is effective prospectively for fiscal years, and interim periods
within those years, beginning after December 15, 2013. Retrospective application is permitted. The Company will comply with
the presentation requirements of this ASU for the quarter ending March 31, 2014. The Company does not expect the impact of
adopting this ASU to be material to the Company's financial position, results of operations or cash flows as we do not currently
have any uncertain tax positions that were unrecognized.
NOTE 2 - MANAGEMENT SERVICES AGREEMENT WITH ALGAR, INC.
On December 2, 2013, the Company and Algar, Inc. (“Algar”) entered into a Management Services Agreement (the “Management
Agreement”). Under the Management Agreement, Algar provides the Company with day-to-day senior executive level operating
management supervisory services. Algar also provides business, financial, and organizational strategy and consulting services,
as the Company’s board of directors may reasonably request from time to time.
The Management Agreement gives Algar the right to appoint the Company’s President and one additional executive officer of
the Company. The Company is required to reimburse Algar on a monthly basis for its pre-approved expenses, as defined in the
Management Agreement, including expenses associated with the salaries of its executive appointees and employees. The
F - 18
NOTE 2 - MANAGEMENT SERVICES AGREEMENT WITH ALGAR, INC. (Continued)
Management Agreement also provides that the Company’s board of directors will increase to up to seven members. The Company
and Algar have also agreed that Algar, subject to certain limitations and Nasdaq listing requirements, may cause the appointment
of up to two members, one of whom will serve as Vice Chairman. Under the Management Agreement, Algar will be paid a bonus
in an amount equal to 10.0% of any year-over-year increase in the Company’s pre-tax income during the term. The term of the
Management Agreement is effective December 1, 2013 and extends through December 31, 2016, subject to earlier termination
upon mutual agreement or upon circumstances set forth in the agreement.
Subject to shareholder approval and restrictions on exercisability set forth in a Stock Option Agreement entered into on December
2, 2013 between the Company and Algar (the “Stock Option Agreement”), the Company granted Algar an option to purchase a
total of 1.5 million shares of Company common stock at an exercise price per share of $5.00. The first 375.0 thousand share
options vested and became exercisable on December 1, 2013. The second 375.0 thousand share options vest and become
exercisable only if and after the market price of our Common Stock reaches $6.00 per share or Company revenue following an
acquisition increases by $30.0 million. The third 375.0 thousand share options vest and become exercisable only if and after
the market price of our Common Stock reaches $8.00 per share or Company revenue following an acquisition increases by $90.0
million. The fourth 375.0 thousand share options vest and become exercisable only if and after the market price of our Common
Stock reaches $9.00 per share or Company revenue following an acquisition increases by $120.0 million.
Subject to the terms and conditions set forth in the Stock Option Agreement, including ratification of the issuance of the options
by the Company’s shareholders at a special meeting, the options became exercisable on December 1, 2013; provided, however,
the options shall become immediately exercisable for all 1.5 million option shares upon the first to occur of any of the following:
(i) the termination of Algar's services under the Management Agreement by the Company without cause; (ii) the termination of
Algar's services under the Management Agreement by Algar for good reason; or (iii) upon the occurrence of a change in control
(with such vesting and expiration timed to give Algar the right to exercise the options immediately before the expiration triggered
by the change in control). All rights of Algar will terminate with respect to the options and Algar will have no further rights
under the Stock Option Agreement if (A) the Company's shareholders fail to ratify the issuance of the options to Algar at the
Company's special meeting, (B) Algar's Services under the Management Agreement are terminated by the Company for cause,
by Algar without Good Reason, or the Management Agreement is terminated automatically for legal and regulatory reasons.
The options shall expire and be of no further force or effect on the earlier of (i) the closing of a change of control transaction,
(ii) immediately upon termination of Algar's services under the Management Services Agreement by the Company for cause or
by Algar without good reason, (iii) immediately if the issuance of the options is not ratified by the Company's shareholders at
a special meeting, (iv) upon the expiration of the term of the Management Agreement, or (v) three years after the date of the
Stock Option Agreement. See also Note 13 - "Long Term Incentive Plan" for additional information about the accounting for
these and other options outstanding.
Sean Garber, Algar’s Chairman and Chief Executive Officer, formerly served as the Company’s President from 1997 to 2000.
Mr. Garber is also Algar’s largest shareholder. Algar is located in Louisville, Kentucky and specializes in the procurement and
sale of new and used auto parts as well as automotive and metal recycling.
In connection with the Management Agreement, Mr. Garber and Orson Oliver, the Company’s interim Chief Executive Officer
and Chairman of the board of directors, have received an Irrevocable Proxy from each of Harry Kletter, K & R, LLC and the
Harry Kletter Family Limited Partnership (collectively, “Kletter”), which provides Mr. Oliver and Mr. Garber joint voting
authority over the shares owned by Kletter, approximately 25.7% of the Company’s issued and outstanding common stock. As
of December 31, 2013, Kletter was the Company’s largest shareholder. Messrs. Oliver and Garber have entered into a separate
agreement in which, among other things, they agree to vote their proxies in favor of matters approved by the Company’s board
of directors.
Under the Management Agreement, the Company and Algar have agreed to use their best efforts to effect a business combination
between them as soon as is reasonably practicable.
On December 2, 2013, in connection with the Management Agreement, the Company’s board of directors appointed Sean Garber
as President. Mr. Garber replaced Orson Oliver who had been serving as interim President. Mr. Oliver will continue to serve
as the Company’s Chairman and interim Chief Executive Officer.
F - 19
NOTE 2 - MANAGEMENT SERVICES AGREEMENT WITH ALGAR, INC. (Continued)
Under the Management Agreement, the Company will reimburse Algar for the portion of Mr. Garber’s salary that is attributable
to Algar’s services under the Management Agreement in an amount not to exceed $20.8 thousand per month, or $250.0 thousand
per year. The Company expects Algar to appoint Mr. Garber to the Company’s board of directors prior to June 30, 2014. Mr.
Garber is expected to be appointed Vice Chairman at that time.
NOTE 3 - GOODWILL AND INTANGIBLES
In previous years, the Company acquired businesses relating to the stainless steel blends market and recorded total goodwill of
$6.8 million. An independent valuation consultant assessed the fair value of purchased intangibles for each acquisition.
Identifiable intangibles totaling $6.2 million were originally recorded. In 2012, the Company recorded an impairment loss for
the carrying value of goodwill of $6.8 million based on an outside valuation as described below (see also Note 1 - "Summary
of Significant Accounting Policies - Goodwill and Other Intangibles"). In the fourth quarter of 2013, management discontinued
the production of stainless steel blends, which is a subset of the stainless steel market, and recorded an impairment loss for the
intangibles remaining carrying value, net of amortization, of approximately $3.5 million (see also Note 1 - "Summary of
Significant Accounting Policies - Intangibles").
The Company tests for goodwill impairment using a two-step process and at the level of the recycling reporting units to which
all the goodwill is related in accordance with ASC Topic 350 - Intangibles-Goodwill and Other. In the first step, the Company
determines whether to impair goodwill by comparing the fair value of the recycling reporting unit as a whole (the present value
of expected cash flows) to its carrying value including goodwill or by obtaining a valuation from an outside source. A reporting
unit is an operating segment or one level below an operating segment (referred to as a "component"). A component is considered
a reporting unit for purposes of goodwill testing if the component constitutes a business for which discrete financial information
is available and segment management regularly reviews the operating results of that component.
For 2013 and 2012, the Company identified two reporting units. In 2012, the Company obtained a valuation from an outside
source to value goodwill and intangible balances as of December 31, 2012. Of the valuation methodologies considered for the
valuation of the goodwill, the income approach valuation method was used. In this approach, discounted cash flow analysis
measures the value of a company by the present value of its estimated future economic benefits. These benefits can include
earnings, cost savings, tax deductions, and proceeds from disposition. Value indications are developed by discounting expected
cash flows to their present value at a rate of return that incorporates the risk-free rate for the use of funds, the expected rate of
inflation and risks associated with the particular investment. The material assumptions used in the valuation include a discount
rate range, a long-term growth rate, a working capital rate, and a terminal growth rate range. The valuation also includes income
projections and capital expenditure forecasts as provided by management. These assumptions and estimates were based on
information available at the time the valuation was performed. These assumptions and estimates bear the risk of change as future
performance, future economic conditions, and continued major customer relationships cannot be predicted or guaranteed. See
also Note 1 - "Summary of Significant Accounting Policies" for additional information about these assets.
If necessary, the second step of the goodwill impairment test compares the implied fair value of the reporting unit's goodwill
with the carrying amount of that goodwill. The implied fair value of goodwill is determined in the same manner as the amount
of goodwill recognized in a business combination. Since the recycling reporting unit’s fair value exceeded its carrying value
in 2011, no further computations were required in that year. In 2012, as a result of changes in our long-term projections for
stainless steel sales due to decreasing demand for stainless steel and other nickel-based metals, the recycling reporting unit's
fair value did not exceed its carrying value. Accordingly, we performed the second step of the impairment test and recorded an
impairment loss of $6.8 million. We had no accumulated impairment losses to goodwill prior to this loss.
The change in carrying value, in thousands, of goodwill during the years ended December 31, 2013 and 2012 is shown below:
Balance, January 1, 2012
$ 6,840
Additions to goodwill
Impairment loss, goodwill
Balance, December 31, 2012
Additions to goodwill
Impairment loss, goodwill
Balance, December 31, 2013
$
—
(6,840)
—
—
—
—
F - 20
NOTE 4 - LONG TERM DEBT AND NOTES PAYABLE TO BANK
On February 21, 2014, the Company entered into a Seventh Amendment to Credit Agreement (the “Seventh Amendment”) with
Fifth Third Bank (the “Bank”) which amended the July 30, 2010 Credit Agreement (the “Credit Agreement”), including the First
Amendment to Credit Agreement dated as of April 14, 2011, the Second Amendment to Credit Agreement dated as of November
16, 2011, the Third Amendment to Credit Agreement dated as of March 2, 2012, the Fourth Amendment to Credit Agreement
dated as of August 13, 2012, the Fifth Amendment to Credit Agreement dated as of November 14, 2012 and the Sixth Amendment
to Credit Agreement dated as of April 1, 2013 (collectively, the "Previous Amendments") as follows. Pursuant to the Credit
Agreement, as amended, the Bank has provided the Companies a revolving credit facility and a term loan described below. The
Seventh Amendment extended the maturity date of both the revolving credit facility and the term loan from April 30, 2014 to
July 31, 2015. The Seventh Amendment decreased the interest rate on both the revolving credit facility and term loan by 1.00%
to equal the one month LIBOR plus four hundred basis points (4.00%) through June 30, 2014. The interest rate will increase
effective July 1, 2014 by 2.00% to equal the one month LIBOR plus six hundred basis points (6.00%) through September 30,
2014. The interest rate will increase effective October 1, 2014 by an additional 2.00% to equal the one month LIBOR plus eight
hundred basis points (8.00%) and continuing thereafter. The Seventh Amendment decreased the maximum revolving commitment
by $10.0 million to $15.0 million until September 30, 2014. On October 1, 2014, the maximum revolving commitment will
decrease by $2.5 million to $12.5 million through the termination date. The Seventh Amendment increased the eligible inventory
available for calculating the borrowing base effective February 21, 2014 to 60.0% of up to $12.5 million in eligible inventory.
The Seventh Amendment decreased the principal payment on the term loan by $80.0 thousand to $25.0 thousand per month on
March 1, and April 1, 2014. Principal payments then increase by $25.0 thousand to $50.0 thousand, payable on the first day of
each month until the sale of certain real estate owned by ISA, at which time a new payment will be calculated based on net
proceeds from the sale. The Seventh Amendment reduced the ratio of adjusted EBITDA for the preceding twelve months to
aggregate cash payments of interest expense and scheduled payment of principal in the preceding twelve months (the "Fixed
Charge Coverage Ratio") to no less than 1.0 to 1.0 for the period ending September 30, 2014. The Seventh Amendment also
provided a waiver of the Fixed Charge Coverage Ratio covenant default for the quarters ended June 30, September 30 and
December 31, 2013. The Seventh Amendment requires that unfunded capital expenditures should not exceed $500.0 thousand.
The Seventh Amendment also requires that the sum of the Company's cash balances plus the amount of unused revolving line
of credit availability under the borrowing base equal or exceed a specified amount in the aggregate for certain time periods
("Minimum Liquidity Covenant") as follows: $200.0 thousand for any month end beginning February 28 and ending on June
30, 2014; $500.0 thousand for any month end beginning on July 31 and ending on December 31, 2014; and $1.0 million for any
month end beginning on or after January 31, 2015. The Seventh Amendment added a minimum consolidated adjusted EBITDA
("Minimum EBITDA") requirement stating that the Minimum EBITDA shall not fall below (i) $250.0 thousand for the calendar
year to date period ending on March 31, 2014, (ii) $500.0 thousand for the calendar year to date period ending on June 30, 2014
(iii) $750.0 thousand for the calendar year to date period ending on September 30, 2014, and (iv) $1.0 million for each calendar
year to date ending on or after December 31, 2014. The Seventh Amendment requires ISA to periodically provide the Bank
with a business plan and its strategy for obtaining certain growth metrics. In addition, the Company also agreed to perform
other customary commitments and pay a fee totaling $200.0 thousand to the Bank by the end of the year. All other terms of the
Credit Agreement and Previous Amendments remain in effect. In connection with the Seventh Amendment, the Company
amended and restated both the term loan not (the "Amended and Restated Term Loan Note") and the revolving loan note (the
"Amended and Restated Revolving Loan Note"), issued to the Bank under the Credit Agreement.
On October 15, 2013, WESSCO, LLC ("WESSCO"), a wholly-owned subsidiary of the Company, signed two promissory notes
(collectively, the "KY Bank Notes") in favor of The Bank of Kentucky, Inc. ("KY Bank"), one in the amount of $3.0 million
(the "Term Note") and one in the amount of $1.0 million (the "Line of Credit Note"). The Company used the proceeds from the
Term Note to pay the Bank $3.0 million against the Company’s loan from that bank (the “Fifth Third Loan”). WESSCO expects
to use the Line of Credit Note to purchase additional equipment. The Company is a guarantor of the KY Bank Notes. The
Company has also signed a $3.0 million demand promissory note (the “Company Note”) in favor of WESSCO in exchange for
the proceeds of WESSCO’s Term Note.
In connection with these transactions, WESSCO executed a Reaffirmation of Guaranty and Security (the “Fifth Third Security
Document”), through which it guarantees the Fifth Third Loan and grants Fifth Third Bank a security interest in its assets.
F - 21
NOTE 4 - NOTES PAYABLE TO BANK (Continued)
As security for the KY Bank Notes, WESSCO provided KY Bank a first priority security interest in all of its assets, including
the Company Note, pursuant to a Security Agreement (the “Security Agreement”). The KY Bank Notes impose a Fixed Charge
Coverage Ratio Covenant on WESSCO under which: (i) the sum of (a) WESSCO’s earnings before interest, taxes, depreciation,
rent, and interest expense, less distributions and (b) unfunded capital expenditures, divided by (ii) the sum of (x) the current
portion of long term debt due for the period, (y) interest expense and (z) rent expense is required to be at least 1.15 to 1 at all
times. KY Bank will test this ratio annually measured for periods starting January 1 and ending December 31. The Security
Agreement also contains other customary covenants.
The interest rate on the KY Bank Notes and the Company Note is equal to the one month LIBOR plus three and one-half percent
(3.50%) adjusted automatically on the first day of each month during the term of the KY Bank Notes, which have a final maturity
date of October 14, 2019. As of December 31, 2013, the interest rate was 3.67%. In the event of a default, the interest rate
under the KY Bank Notes (but not the Company Note) will increase by five percent (5.00%). Events of default under the KY
Bank Notes include (a) the failure to pay (i) any installment of principal or interest payable pursuant to the Term Note or the
Line of Credit Note on the date when due, or (ii) any other amount payable to KY Bank under the KY Bank Notes, the Security
Agreement or any of the other Loan Documents within five (5) days after the date when any such payment is due in accordance
with the terms thereof; (b) the occurrence of any default under the Fifth Third Security Document; (c) the occurrence of any
default under any of the documents evidencing or securing any other loan made to WESSCO or the Company (except that if
there is an event of default under the documents evidencing the Fifth Third Loan, it will not constitute an event of default under
the KY Bank Notes if Fifth Third Bank and the Company enter into a forbearance agreement within sixty (60) days of that event
of default); and (d) the occurrence of any other “Event of Default” under the Security Agreement or any of the other Loan
Documents. The only event of default under the Company Note is the failure of the Company to pay all funds due to WESSCO
on demand.
The principal under the Term Note is payable in sixty (60) monthly installments as follows: $45.3 thousand for the first year,
$47.5 thousand for the second year, $49.9 thousand for the third year, $52.4 thousand for the fourth year, and $54.4 thousand
for the eleven months of the final year. Interest will be calculated as noted above and paid each month. The first payment
commenced November 1, 2013, and the final unpaid principal amount of $60.0 thousand, together with all accrued and unpaid
interest, charges, fees, or other advances, if any, is to be paid on November 1, 2018. As of December 31, 2013, the outstanding
balance on the Term Note was $2.9 million. With respect to the Line of Credit Note, WESSCO may request advances up to
$1.0 million for twelve (12) months after the effective date of the Line of Credit Note (the "Draw Period"). Advances are limited
to eighty percent (80%) of the purchase price for equipment. Advances made to WESSCO that have been repaid may be re-
borrowed during the Draw Period. During the Draw Period, interest-only payments in the amount of all accrued and unpaid
interest on the principal balance of the Line of Credit Note must be made monthly. The total of all advances, less any repayments,
through the end of the Draw Period, will equal the principal balance of the Line of Credit Note, and no further advances may
be made after the Draw Period. At the conclusion of the Draw Period, the principal and interest is payable in sixty (60) monthly
installments commencing on the first day of the month immediately following the end of the Draw Period. Any unpaid principal
amount due, together with all accrued and unpaid interest, charges, fees, or other advances, if any, must be paid by October 14,
2019. As of December 31, 2013, the outstanding balance on the Line of Credit Note was $307.7 thousand.
WESSCO cannot make demand for payment of the Company Note before December 31, 2016. In connection with these
transactions, WESSCO paid loan fees totaling $20.0 thousand and other customary fees.
The Sixth Amendment extended the maturity date of both the revolving credit facility and the term loan from October 31, 2013
to April 30, 2014. The Sixth Amendment also provided a waiver of the ratio of debt to adjusted EBITDA for the preceding
twelve months (the "Senior Leverage Ratio") and the ratio of adjusted EBITDA for the preceding twelve months to aggregate
cash payments of interest expense and scheduled payment of principal in the preceding twelve months (the "Fixed Charge
Coverage Ratio") covenant defaults for the quarter ended December 31, 2012. The Sixth Amendment eliminated the Senior
Leverage Ratio for the remaining term of the loan. The Sixth Amendment reduced our covenant to maintain the Fixed Charge
Coverage Ratio to 0.6 to 1.0 for the quarter ended March 31, 2013. This ratio was calculated using a trailing 3-month basis for
that quarter. Beginning with the quarter ended June 30, 2013, the Fixed Charge Coverage Ratio requirement returned to 1.20
to 1.0 and was tested on a trailing 12-month basis as of each quarter end date. The Sixth Amendment increased our interest rate
on both the revolving credit facility and term loan by 1.75% and 1.50%, respectively, to equal the one month LIBOR plus five
hundred basis points (5.00%) per annum, adjusted monthly on the first day of each month. For the quarter ended March 31,
2013, the Sixth Amendment required a Minimum Liquidity Covenant of at least $3.0 million. The Sixth Amendment decreased
the eligible inventory available for calculating the borrowing base effective April 1, 2013 to 57.5% of eligible inventory up to
F - 22
NOTE 4 - NOTES PAYABLE TO BANK (Continued)
$12.5 million, and then to 55.0% of eligible inventory up to $12.5 million effective June 18, 2013 upon the delivery of the May
31, 2013 borrowing base certificate.
The Fifth Amendment decreased our maximum revolving commitment by $5.0 million to $25.0 million and provided a waiver
of the Senior Leverage Ratio and the Fixed Charge Coverage Ratio covenant defaults for the quarter ended September 30, 2012.
The Fourth Amendment decreased our maximum revolving commitment by $10.0 million to $30.0 million and extended the
maturity date of both the revolving credit facility and the term loan from July 31, 2013 to October 31, 2013. The Fourth
Amendment also provided a waiver of the Senior Leverage Ratio and Fixed Charge Coverage Ratio covenant defaults for the
quarter ended June 30, 2012. The Fourth Amendment also changed our covenant to maintain the Fixed Charge Coverage Ratio
from not less than 1.20 to 1 to not less than 1.0 to 1 for the third quarter of 2012, and to not less than 1.50 to 1 for the fourth
quarter of 2012. The Fourth Amendment also increased the interest rate for both the revolving credit facility and the term loan
by fifty basis points (0.50%) to 3.50% and 3.75%, respectively.
The Third Amendment redefined the calculation period for the purpose of measuring compliance with our Senior Leverage Ratio
and Fixed Charge Coverage Ratio such that each ratio would be calculated quarterly for the period beginning January 1, 2012
through the end of each quarter of 2012. Prior to the Third Amendment, the ratios were calculated on a rolling 12-month basis.
The Third Amendment also changed the Senior Leverage Ratio. The Third Amendment also increased the unused line fee by
0.25% to 0.75% and provided a waiver of the Senior Leverage Ratio and Fixed Charge Coverage Ratio covenant defaults for
the quarter ended December 31, 2011.
The First Amendment (i) increased the maximum revolving commitment and the maximum amount of eligible inventory advances
in the calculation of the borrowing base, (ii) changed the due date of the first excess cash flow payment to April 30, 2012, and
(iii) amended certain other provisions of the Credit Agreement and certain of the other loan documents. Under the April
Amendment, the Company was permitted to borrow the lesser of $45.0 million (the "Maximum Revolving Commitment") or
the borrowing base, consisting of the sum of 85% of eligible accounts plus 60% of eligible inventory up to $18.0 million. The
Second Amendment decreased our Maximum Revolving Commitment to $40.0 million.
Under the original Credit Agreement, we were permitted to borrow via a revolving credit facility the lesser of $40.0 million or
the borrowing base, consisting of the sum of 85% of eligible accounts plus 60% of eligible inventory up to $17.0 million. Eligible
accounts are generally those receivables that are less than ninety days from the invoice date. As security for the revolving credit
facility, we provided the Bank a first priority security interest in the accounts receivable from most of our customers and in our
inventory. We also cross collateralized the revolving line of credit with an $8.8 million term loan, entered into to replace several
notes payable with another bank. Proceeds of the original revolving credit facility in the amount of $33.4 million were used to
repay the outstanding principal balance of the prior obligations with another bank. We used additional proceeds of the revolving
credit facility to pay closing costs and for funding temporary fluctuations in accounts receivable of most of our customers and
inventory.
With respect to the revolving credit facility, the interest rate at December 31, 2013 was one month LIBOR plus five hundred
basis points (5.00%) per annum, adjusted monthly on the first day of each month. As of December 31, 2013, the interest rate
was 5.25%. We also paid a fee of 0.75% on the unused portion. Under the Seventh Amendment the revolving credit facility
expires on July 31, 2015. As of December 31, 2013, the outstanding balance on the revolving line of credit was $13.3 million.
Beginning with the Sixth Amendment, the original $8.8 million term loan provides for an interest rate that is equal to the interest
rate for the revolving credit facility and was 5.25% as of December 31, 2013. Principal and interest is payable monthly, originally
in 36 consecutive installments of approximately $125.0 thousand. The first such payment commenced September 1, 2010 and
continued through February 2014. The Seventh Amendment then changed the payment schedule as described above. In addition,
the term loan agreement provides that we are to make an annual payment equal to 25% of (i) our adjusted EBITDA, minus (ii)
our aggregate cash payments of interest expense and scheduled payments of principal (including any prepayments of the term
loan), minus (iii) any non-financed capital expenditures, in each case for the Company’s prior fiscal year. Based on 2013
operating results, no annual payment will be required in 2014 for the 2013 fiscal year. The next annual payment will be due on
April 30, 2015 (or earlier, upon completion of the Companies' financial statements for the fiscal year ending December 31,
2014). Any such payments will be applied to remaining installments of principal under the term loan in the inverse order of
maturity and to accrued but unpaid interest thereon. As security for the term loan, we provided the Bank a first priority security
interest in all equipment other than the rental fleet that we own. As of December 31, 2013, the outstanding balance on the term
loan was $1.5 million.
F - 23
NOTE 4 - NOTES PAYABLE TO BANK (Continued)
In addition, we provided a first mortgage on the property at the following locations: 3409 Campground Road, 6709, 7023, 7025,
7101, 7103, 7110, 7124, 7200 and 7210 Grade Lane, Louisville Kentucky, 1565 East Fourth Street, Seymour, Indiana and 1617
State Road 111, New Albany, Indiana. The Company also cross collateralized the term loan with the revolving credit facility
and all other existing debt the Company owes to the Bank.
In our original Credit Agreement with the Bank, we agreed to certain covenants, including (i) maintenance of the Senior Leverage
Ratio of not more than 3.50 to 1 (or, if measured as of December 31 of any fiscal year, 4.0 to 1), (ii) maintenance of the Fixed
Charge Coverage Ratio of not less than 1.20 to 1, and (iii) a limitation on capital expenditures of $4.0 million in any fiscal year.
Pursuant to the Third Amendment, the Senior Leverage Ratio increased to 4.25 to 1 for the period ended March 31, 2012. The
Senior Leverage Ratio decreased to 3.50 to 1 for the period ended June 30, 2012. Pursuant to the Fourth Amendment, the Senior
Leverage Ratio increased to 4.75 to 1 for the period ended September 30, 2012 and decreased to 3.25 to 1 for the period ended
December 31, 2012. The Senior Leverage Ratio was eliminated after December 31, 2013 by the Sixth Amendment. In 2012,
the Senior Leverage Ratio was, in each quarter, calculated using a measurement period beginning January 1, 2012 and ending
at the end of the quarterly measurement period. The Sixth Amendment reduced the Fixed Charge Coverage Ratio requirements
and added a Minimum Liquidity Covenant requirement, as noted above. The Seventh Amendment decreased our Fixed Charge
Coverage Ratio, decreased the limitation on capital expenditures, added Minimum Liquidity Covenant requirements and added
Minimum EBITDA requirements, as noted above.
As of December 31, 2013, we were not in compliance with the Fixed Charge Coverage ratio for the quarter due to insufficient
earnings. As of December 31, 2013, our ratio of adjusted EBITDA to aggregate cash payments of interest expense and scheduled
principal payments was (0.58) and our capital expenditures totaled $1.1 million. As of December 31, 2013, we have $1.1 million
under our existing credit facilities that we can use based on the bank waiver received.
On April 12, 2011, we entered into a Loan and Security Agreement with the Bank pursuant to which the Bank agreed to provide
the Company with a Promissory Note (the “April Note”) in the amount of $226.9 thousand for the purpose of purchasing operating
equipment. The interest rate is 5.68% per annum. Principal and interest is payable in 48 equal monthly installments of $5.3
thousand, each due on the 20th day of each calendar month. Payment commenced on the 20th day of May, 2011, and the entire
unpaid principal amount, together with all accrued and unpaid interest, charges, fees or other advances, if any, comes due on or
before April 20, 2015. As security for the April Note, we granted the Bank a first priority security interest in the equipment
purchased with the proceeds of the April Note. As of December 31, 2013, the outstanding balance of the April Note was $75.3
thousand.
On August 9, 2011, we entered into a Loan and Security Agreement (the “August Agreement”) with the Bank pursuant to which
the Bank agreed to loan the Company funds pursuant to a Promissory Note (the “August Note”) in the amount of $115.0 thousand
for the purpose of purchasing operating equipment. The interest rate is 5.95% per annum. Principal and interest is payable in
48 equal monthly installments of $2.7 thousand. The first such payment commenced on September 12, 2011, and the entire
unpaid principal amount, together with all accrued and unpaid interest, charges, fees or other advances, if any, becomes due no
later than August 12, 2015. As security for the August Note, we granted the Bank a first priority security interest in the equipment
purchased with the proceeds of the Note. As of December 31, 2013, the outstanding balance of the August Note was $51.3
thousand.
On October 19, 2010, we entered into a Promissory Note (the “October Note”) with the Bank in the amount of $1.3 million for
the purpose of purchasing equipment. The interest rate is 5.20% per annum. Principal and interest is payable in 48 equal monthly
installments of $30.5 thousand with the first such payment commencing November 15, 2010, and the final unpaid principal
amount due, together with all accrued and unpaid interest, charges, fees, or other advances, if any, to be paid on October 15,
2014. As security for the October Note, we provided the Bank a first priority security interest in the equipment purchased with
the proceeds. As of December 31, 2013, the outstanding balance on the October Note was $297.9 thousand.
In previous years, we entered into three interest rate swap agreements with BB&T swapping variable rates based on LIBOR for
fixed rates. The first swap agreement covers approximately $3.6 million in debt and commenced April 7, 2009 and matures on
April 7, 2014. The second swap agreement commenced October 15, 2008 and no longer covers any debt as it matured on May
7, 2013. The third swap agreement commenced October 22, 2008 and no longer covers any debt as it matured on October 22,
2013. The one remaining swap agreement with BB&T fixes our interest rate at 5.89%. At December 31, 2013, we recorded the
estimated fair value of the liability related to the remaining swap at approximately $49.1 thousand. We maintain a cash account
on deposit with BB&T which serves as collateral for the swap agreement. As of December 31, 2013, the balance in this account
was $75.6 thousand.
F - 24
NOTE 4 - NOTES PAYABLE TO BANK (Continued)
In October 2013, we entered into an interest rate swap agreement with KY Bank swapping a variable rate based on LIBOR for
a fixed rate. This swap agreement covers approximately $2.9 million in debt, commenced October 17, 2013 and matures on
October 1, 2018. The swap agreement fixes our interest rate at 4.74%. At December 31, 2013, we recorded the estimated fair
value of the liability related to this swap at approximately $22.2 thousand.
We entered into the swap agreements for the purpose of hedging the interest rate market risk for the respective notional amounts
and forecasted amounts. See Note 1 – “Summary of Significant Accounting Policies – Derivative and Hedging Activities” for
additional information about these derivative instruments.
The following table outlines the notional amounts, in thousands, related to the interest rate swaps as of December 31, 2013:
Notional Amount
Swap with BB&T
Swap with KY Bank
$3,637
$2,909
Rate
5.89%
4.74%
Our long term debt as of December 31, 2013 and 2012 consisted of the following:
2013
2012
(in thousands)
Revolving credit facility of $25.0 million in 2013 and 2012 with Fifth Third Bank. See
above description for additional details.
$
13,349
$
18,450
Note payable to Fifth Third Bank in the original amount of $8.8 million secured by our
rental fleet equipment, our shredder system assets, and a crane. See above description for
additional details.
Note payable to Fifth Third Bank in the original amount of $1.3 million secured by
equipment purchased with the proceeds. See above description for additional details.
Loan and Security Agreement payable to Fifth Third Bank in the original amount of
$226.9 thousand secured by the equipment purchased with the proceeds. See above
description for additional details.
Note payable to Fifth Third Bank in the original amount of $115.0 thousand secured by the
equipment purchased with the proceeds. See above description for additional details.
Note payable to the Bank of Kentucky, Inc. in the original amount of $3.0 million secured
by all WESSCO assets. See above description for additional details.
Revolving credit facility convertible to term loan of up to $1.0 million in 2013 with the
Bank of Kentucky, Inc. See above description for additional details.
Less current maturities
1,495
298
75
51
2,910
308
18,486
1,597
16,889
$
5,755
638
133
80
—
—
25,056
1,687
23,369
$
The annual maturities of long term debt, in thousands, for the next five years and thereafter as of December 31, 2013 are as
follows:
2014
2015
2016
2017
2018
$
1,597
15,103
603
633
550
Total long-term debt
$ 18,486
F - 25
NOTE 5 - LEASE COMMITMENTS
Operating Leases:
We lease our Louisville, Kentucky facility from a related party (see Note 11 - "Related Party Transactions") under an operating
lease that, as of December 31, 2012, automatically renewed for a five-year option period under terms of the lease agreement.
The rent was adjusted in January 2008 per the agreement to monthly payments of $48.5 thousand through December 2012.
Effective January 1, 2013, the lease amount increased to $53.8 thousand per month based on the CPI index as stated in the lease
agreement. In addition, the Company is also responsible for real estate taxes, insurance, utilities and maintenance expense.
We lease equipment from a related party (see Note 11 - "Related Party Transactions") under operating leases expiring November
2015 and May 2016 for a monthly payment totaling $10.5 thousand.
We lease office space in Dallas, Texas. The lease was renewed effective October 1, 2013 for a period of one year with monthly
payments of $1.0 thousand.
We lease a lot in Louisville, KY for a term that commenced in March 2012 and ends in February 2016. The monthly payment
amount from March 2012 through February 2014 was $3.5 thousand. The monthly payment amount then increased to $3.8
thousand for the remaining term.
We leased a facility in Lexington, Kentucky for $4.5 thousand per month; the lease terminated February 10, 2012. We subleased
this property for a term that commenced March 1, 2007 and ended January 31, 2012 for $4.5 thousand per month.
Future minimum lease payments for operating leases, in thousands, as of December 31, 2013 are as follows:
2014
2015
2016
2017
2018
$
823
806
673
646
—
Future minimum lease payments
$
2,948
Total rent expense for the years ended December 31, 2013, 2012 and 2011 was $994.6 thousand, $925.6 thousand, and $1.0
million, respectively.
NOTE 6 - PROVISION FOR EMPLOYEE TERMINATIONS AND SEVERANCES
For the years ended December 31, 2013 and 2012, the Company expensed $70.0 thousand and $228.4 thousand, respectively,
for costs related to employee terminations and severances. For the year ended December 31, 2011, the Company did not have
any expenses related to employee terminations and severances.
NOTE 7 - EMPLOYEE RETIREMENT PLAN
We maintain a defined contribution retirement plan under Section 401(k) of the Internal Revenue Code which covers substantially
all employees. Prior to January 1, 2013, eligible employees could contribute a maximum of 15.0% of their annual salary.
Beginning January 1, 2013, eligible employees may contribute up to 100.0% of their annual salary to meet the IRS limit of $17.5
thousand. Under the plan, we match 25.0% of each eligible employee’s voluntary contribution up to 6.0% of their gross salary.
We also offer an additional discretionary match for eligible employees who contribute 7.0% - 10.0% of their weekly wages. In
an effort to decrease expenses, we suspended the employee match under the plan for an undetermined period of time effective
March 1, 2014. The expense under the plan for the years ended December 31, 2013, 2012 and 2011 was $49.0 thousand, $53.7
thousand and $59.6 thousand, respectively.
F - 26
NOTE 8 - INCOME TAXES
The income tax provision (benefit), in thousands, consists of the following for the years ended December 31, 2013, 2012 and
2011:
Federal
Current
Deferred
IRS audit adjustment
State
Current
Deferred
2013
2012
2011
$
$
(25) $
(357)
—
(382)
364
1,406
1,770
1,388
$
(770) $
(2,692)
—
(3,462)
(159)
(533)
(692)
(4,154) $
(3,373)
436
622
(2,315)
(818)
92
(726)
(3,041)
A reconciliation of income taxes at the statutory rate to the reported provision (benefit), in thousands, is as follows:
Federal income tax at statutory rate
State and local income taxes, net of federal income tax effect
Permanent differences
Increase (decrease) in deferred tax asset valuation allowance
Other differences
2013
2012
2011
(4,225) $
(371)
1,140
4,752
92
1,388
$
(3,665) $
(457)
9
(497)
456
(4,154) $
(2,354)
(395)
13
—
(305)
(3,041)
$
$
F - 27
NOTE 8 - INCOME TAXES (Continued)
Significant components of the Company’s deferred tax liabilities and assets, in thousands, as of December 31, 2013 and 2012
are as follows:
Deferred tax liabilities
Property and equipment
Gross deferred tax liabilities
Deferred tax assets
2013
2012
$
(2,735) $
(2,735)
(3,137)
(3,137)
Intangibles and goodwill
Accrued property taxes
Allowance for doubtful accounts
Inventory capitalization
Stock options
Federal net operating loss carry forward
State net operating loss carry forward
State recycling equipment tax credit carry forward
Interest rate swap
Accrued expenses
Other
Gross deferred tax assets
Valuation allowance
Net deferred tax assets
$
2,919
10
43
120
62
2,413
1,521
4,617
30
—
11
11,746
(8,914)
97
$
2,776
12
43
210
—
—
599
4,659
100
11
35
8,445
(4,162)
1,146
The Internal Revenue Service has conducted an examination of the Company’s 2009 income tax return and, per the final report,
proposed changes amounting to approximately $735.0 thousand of additional taxes due for which we received an invoice early
in 2012. This increase arose from the Company’s use of bonus depreciation rules for certain additions to shredding equipment
which were determined to be disqualified for bonus depreciation. This additional income tax was accrued as of December 31,
2011 and netted against the refund received in 2012 due to the net loss in 2011.
This resulting adjustment to 2009 depreciation deductions allowed the Company to file an amended U.S. tax return for 2010,
pursuant to which we claimed additional depreciation deductions and resulted in a claim for refund of income taxes paid amounting
to approximately $113.0 thousand which was also accrued at December 31, 2011 and received in 2012.
At December 31, 2013, we have deferred recycling equipment state tax credit carry forwards of $4.6 million relating to our
shredder purchase which do not expire. This tax credit is limited to 25 percent of our Kentucky state income tax liability which
includes the Limited Liability Entity Tax, which is based on gross receipts or gross profits. We used the available state tax credits
of $18.4 thousand, $23.9 thousand and $12.7 thousand in 2013, 2012, and 2011, respectively.
At December 31, 2013, we have a Federal net operating loss ("NOL") carry forward of $7.1 million which expires in 2033. We
also have state NOL carry forwards of $20.2 million as of December 31, 2013. The majority of the state NOL carry forwards
relate to losses in Kentucky which expire beginning in 2031.
A deferred tax asset valuation allowance is established if it is “more likely than not” that the related tax benefits will not be
realized. In determining the appropriate valuation allowance, we consider the projected realization of tax benefits based on
expected levels of future taxable income, considering recent operating losses, available tax planning strategies, reversals of
existing taxable temporary differences and taxable income in the state in carry back years. As of December 31, 2013, management
determined that only the state recycling equipment tax credit carry forwards would be realized to the extent of $97.0 thousand
and reserved all other net deferred tax assets by increasing the related valuation allowance. The state tax credit carry forwards
have been reduced to their net realizable value based upon estimates of future gross profits and utilization of the credit in the
foreseeable future.
F - 28
NOTE 8 - INCOME TAXES (Continued)
The recorded valuation allowance, in thousands, consisted of the following at December 31, 2013 and 2012:
Year Ended December 31,
2013
2012
Valuation allowance, beginning of year
Increase (decrease) in deferred tax asset valuation allowance
Valuation allowance, end of year
$
$
4,162
4,752
8,914
$
$
4,659
(497)
4,162
NOTE 9 - CASH AND STOCK DIVIDENDS
Under our loan agreement with Fifth Third Bank, ISA may make restricted payments constituting dividends if, and to the extent,
that each of the following conditions have been met (i) our Board of Directors has approved them; (ii) such restricted payments
made in any fiscal year do not exceed $750.0 thousand; (iii) if, after giving effect to such restricted payments, revolving loan
availability is equal to or greater than an aggregate amount equal to $1.0 million; (iv) after giving effect to the proposed restricted
payments, no default or event of default has occurred and is continuing as of the date such restricted payment occurs, and (v)
ISA is in compliance with the financial covenants on a pro forma basis, after giving effect to such restricted payment.
In 2013 and 2012, the Board of Directors did not declare a cash or stock dividend.
NOTE 10 – PER SHARE DATA
The computation for basic and diluted loss per share is as follows:
Basic loss per share
Net loss
Weighted average shares outstanding
Basic loss per share
Diluted loss per share
Net loss
Weighted average shares outstanding
Add dilutive effect of assumed exercising of stock options
Diluted weighted average shares outstanding
Diluted loss per share
NOTE 11 - RELATED PARTY TRANSACTIONS
2013
2012
2011
(in thousands, except per share information)
$
$
$
$
(13,816) $
7,038
(1.96) $
(13,816) $
7,038
—
7,038
(1.96) $
(6,620) $
6,943
(0.95) $
(6,620) $
6,943
—
6,943
(0.95) $
(3,881)
6,927
(0.56)
(3,881)
6,927
—
6,927
(0.56)
In 2013, the Company entered into various transactions with related parties including the Company’s founder and principal
shareholder as of December 31, 2013 and former Chief Executive Officer ("former CEO"), Harry Kletter and an affiliated
company, K&R, LCC ("K&R"), which is wholly-owned by Kletter Holding, LLC, the sole member of which was Mr. Kletter
as of that date.
On November 1, 2013, Mr. Kletter purchased 125.0 thousand shares of the Company's Common Stock from an affiliate of Blue
Equity, LLC ("Blue Equity") in lieu of the Company's redemption of the shares, as contemplated in a Management Services
Agreement by and between the Company and Blue Equity entered into on April 1, 2013 (the "Blue Equity Management
Agreement"). The purchase price was equal to $4.00 per share, or $500.0 thousand in the aggregate, which were equal to the
proceeds received by the Company from the original sale of these securities to Blue Equity. The closing price per share of the
Company's Common Stock on the NASDAQ Capital Market on October 31, 2013 was $2.31. The Blue Equity Management
Agreement was terminated effective July 31, 2013. As of December 31, 2013, Mr. Kletter beneficially owned approximately
1.8 million shares, or 25.9%, of the Company's issued and outstanding common stock.
F - 29
NOTE 11 - RELATED PARTY TRANSACTIONS (Continued)
In January 2014, the Company announced Mr. Kletter's passing. In addition to serving as the Company's Chairman of the Board
and interim CEO, Orson Oliver is also the executor of Mr. Kletter's trust and had previously received an Irrevocable Proxy from
each of Mr. Kletter, K & R and the Harry Kletter Family Limited Partnership (collectively, “Kletter”), which provided Mr. Oliver
and Sean Garber joint voting authority over the shares owned by Kletter (see Note 2 - "Management Services Agreement with
Algar, Inc."). Mr. Oliver is in an advisory position in connection to K&R transactions with the Company.
Except as noted below, all agreements between the Company and K&R are expected to remain in effect according to the terms
of each agreement.
A summary of the K&R transactions, in thousands, as of December 31, 2013 is as follows:
Balance sheet accounts:
Accounts receivable
Notes receivable
Deposits (included in other long-term assets)
Accrued rent
Income statement activity:
Rent expense (property)
Lease expense (equipment)
Consulting fees
2013
2012
2011
$
$
$
$
$
$
$
13.4
$
— $
42.1
30.0
646.0
126.0
140.0
$
$
$
$
$
— $
— $
62.1
$
— $
582.0
126.0
240.0
$
$
$
—
45.4
62.1
—
582.0
101.0
480.0
In 2012, the Company leased its corporate offices, processing property and buildings in Louisville, Kentucky for $48.5 thousand
per month from K&R pursuant to the K&R lease. Deposits include one month of the original lease agreement’s rent in advance
in the amount of $42.1 thousand. Effective January 1, 2013, the lease amount increased to $53.8 thousand per month based on
the CPI index as stated in the lease agreement. As of December 31, 2013, we recorded an accrual of $30.0 thousand for rent
expense owed to K&R.
In 2004, we paid for repairs totaling $302.2 thousand that we made to the buildings and property that we lease from K&R,
located at 7100 Grade Lane, Louisville, Kentucky. K&R executed an unsecured promissory note, dated March 25, 2005, but
effective December 31, 2004, to us for the principal sum of $302.2 thousand. The term of the note was ninety-six (96) months
with an interest rate of 5.5%. After paying principal only payments of $3.1 thousand for twelve (12) months in 2005, the monthly
installments increased to principal and interest payments of $3.9 thousand with the final installment paid in December of 2012.
In an addendum to the K&R lease as of January 1, 2006, the rent was increased $4.0 thousand as a result of the improvements
made to the property in 2004. For the years 2012 and 2011, the payments to K&R by the Company of $4.0 thousand for additional
rent and the payment from K&R to the Company of $3.9 thousand for the promissory note were offset. As of December 31,
2012, this note was paid in full.
Effective January 1, 2012, the Company and K&R entered into an agreement (the “Second Amendment”) which amends an
April 1, 2010 amendment (the “Amendment") to a consulting agreement which the parties had entered into effective January 2,
1998 (the “Prior Agreement”). Under the Prior Agreement, the Company engaged K&R as a consultant and retained the services
of K&R management personnel to perform planning and consulting services with respect to the Company’s businesses, including
the preparation of business plans, pro forma budgets, and assistance with general operational issues. The Prior Agreement
provided for a term of ten years, with an automatic renewal for additional terms of one year on January 1 of each successive
calendar year unless either party provides the other party with written notice of its intent not to renew at least six months prior
to the expiration of the then existing term. The Amendment increased the consulting fees from $240.0 thousand per annum to
$480.0 thousand per annum. The Second Amendment reduced the consulting fees from $480.0 thousand per annum to $240.0
thousand per annum. The annual fee was payable in equal monthly installments of $20.0 thousand. The Second Amendment
otherwise ratified the Prior Agreement in all respects. Deposits previously included one month of the original agreement’s
consulting services in advance in the amount of $20.0 thousand. This deposit was used to offset a portion of the rent expense
owed to K&R in December. Mr. Kletter was compensated through these consulting fees. As of December 31, 2012, we extended
this consulting agreement for one year according to the terms of the contract. In connection with Mr. Kletter's retirement from
F - 30
NOTE 11 - RELATED PARTY TRANSACTIONS (Continued)
his positions of CEO and Director and the termination of the Blue Equity Management Agreement, the Prior Agreement and
amendments thereof were terminated effective July 31, 2013.
Effective December 1, 2010, the Company and K&R entered into a lease agreement under which the Company leases equipment
from K&R for a monthly payment of $5.5 thousand for five years.
Effective June 1, 2011, the Company and K&R entered into a lease agreement under which the Company leases equipment from
K&R for a monthly payment of $5.0 thousand for five years.
See also Note 5 - "Lease Commitment."
On September 13, 2013, K & R made a $500.0 thousand refundable, non-interest bearing deposit with the Company related to
K & R's potential purchase of a piece of the Company's real property located at 1565 East 4th Street in Seymour, Indiana. The
parties continue to negotiate the terms of the potential transaction. The Company was permitted and has used the deposited funds
for general corporate purposes. If the parties are unable to agree to the terms of a transaction, the Company is obligated to refund
the deposit to K & R. For the period ended December 31, 2013, this deposit is recorded as a current liability entitled "Deposit
from related party" for $500.0 thousand.
Other related-party transactions are as follows:
Board of Directors' fees and consulting fees:
As of December 31, 2013, we had outstanding Board of Directors' fees of $71.0 thousand. We paid financial consulting fees of
$95.0 thousand and $70.0 thousand during 2013 and 2012, respectively, to two of our directors.
Termination and Consulting Agreement with Brian Donaghy:
On June 11, 2013, Brian G. Donaghy notified the Company that, effective immediately, he was resigning from his position as
the Company's President and Chief Operating Officer and all other positions he held with the Company, including principal
executive officer.
On June 17, 2013, the Company and Mr. Donaghy entered into a Termination and Consulting Agreement (the “Consulting
Agreement”) pursuant to which Mr. Donaghy provided consulting services to the Company with respect to the scrap metals
industry with compensation at a monthly rate of $12.5 thousand. The Consulting Agreement terminated Mr. Donaghy's Amended
and Restated Employment Agreement with the Company dated as of April 1, 2010. During the consulting period, the Company
paid premiums for Mr. Donaghy's COBRA coverage to the extent of the amount of coverage premiums paid by the Company
immediately before Mr. Donaghy's termination of employment. The Consulting Agreement was terminated effective December
16, 2013.
In connection with the Consulting Agreement, Mr. Donaghy granted the Company a full release of its obligations under his
Amended and Restated Employment Agreement. The Company granted Mr. Donaghy a release of his non-competition obligations
under that agreement, but the Consulting Agreement provides that Mr. Donaghy may not solicit Company employees to leave
the Company during the consulting period and for two years thereafter and may not be employed by certain industry competitors
during the consulting period.
Retirement of and Consulting Agreement with James K. Wiseman:
On October 29, 2013, James K. Wiseman notified the Company of his intent to retire as the Company’s Vice President and
General Manager of Recycling and resign from all other positions he holds with the Company and its subsidiaries. Mr. Oliver,
interim Chief Executive Officer and interim President, became responsible for the day-to-day operations of the Company.
Because of Mr. Wiseman’s experience with the Company and in the scrap metal industry, on November 1, 2013, the Company
and Mr. Wiseman entered into a Consulting Agreement (the “Wiseman Consulting Agreement”) pursuant to which Mr. Wiseman
provides consulting services to the Company with respect to that industry with compensation at a monthly rate of $10.0 thousand.
The Wiseman Consulting Agreement provides for the termination of Mr. Wiseman’s employment with the Company as the Vice
President and General Manager of Recycling, a position he had initially held in accordance with an Executive Employment
Agreement with the Company dated as of April 4, 2007.
F - 31
NOTE 11 - RELATED PARTY TRANSACTIONS (Continued)
The Wiseman Consulting Agreement may not be terminated by either party until after October 31, 2014 after which time either
party may terminate the Wiseman Consulting Agreement by giving 30 days prior written notice of termination to the other party.
During the consulting period, the Company will pay premiums for Mr. Wiseman’s COBRA coverage to the extent of the amount
of coverage premiums paid by the Company immediately before Mr. Wiseman’s termination of employment.
In connection with the Wiseman Consulting Agreement, Mr. Wiseman granted the Company a release of its obligations to pay
any salary and welfare plan benefits under his Executive Employment Agreement. The Company granted Mr. Wiseman a release
of his non-competition obligations under that agreement, but the Wiseman Consulting Agreement provides that Mr. Wiseman
may not solicit Company employees to leave the Company during the consulting period and for two years thereafter. As of
December 31, 2013, we accrued $70.0 thousand of the consulting fees as employee severances relating to the Wiseman Consulting
Agreement.
Management Services Agreement with Algar, Inc.:
On December 2, 2013, the Company and Algar entered into the Management Agreement. Under the Management Agreement,
Algar provides the Company with day-to-day senior executive level services. Algar will also provide business, financial, and
organizational strategy and consulting services, as the Company’s board of directors may reasonably request from time to time.
Under the Management Agreement, Algar will be paid a bonus in an amount equal to 10.0% of any year-over-year increase in
the Company’s pre-tax income during the term. Subject to shareholder approval and restrictions on exercisability set forth in
the Stock Option Agreement, the Company granted Algar an option to purchase a total of 1.5 million shares of Company common
stock at an exercise price per share of $5.00.
On December 2, 2013, in connection with the Management Agreement, the Company’s board of directors appointed Sean Garber
as President. Under the Management Agreement, the Company will reimburse Algar for the portion of Mr. Garber’s salary that
is attributable to Algar’s services under the Management Agreement in an amount not to exceed $20.8 thousand per month, or
$250.0 thousand per year. As of December 31, 2013, we accrued management fees to Algar of $25.9 thousand. We also recorded
$70.4 thousand in accounts payable to Algar as of this date.
See Note 2 - "Management Services Agreement with Algar, Inc." for additional details relating to the Management Agreement,
the Stock Option Agreement and Mr. Garber's appointment as President.
NOTE 12 - SEGMENT INFORMATION
The Company’s operations include two primary segments: Recycling and Waste Services. The Recycling segment ("Recycling")
provides products and services to meet the needs of its customers related to ferrous, non-ferrous and fiber recycling in two
locations in the Midwest. The Waste Services segment ("Waste Services") provides waste disposal services including contract
negotiations with service providers, centralized billing, invoice auditing, and centralized dispatching. Waste Services also sells,
leases, and services waste handling and recycling equipment, such as trash compactors and balers to end user customers.
The Company’s two reportable segments are determined by the products and services that each offers. Recycling generates its
revenues based on buying and selling of ferrous and non-ferrous, including stainless steel, scrap metals, automobile parts and
fiber scrap. On July 2, 2012, the Company opened the ISA Pick.Pull.Save used automobile yard, which is considered a product
line within Recycling. The Company purchases automobiles for the yard through auctions, automobile purchase programs with
various suppliers, and general scrap purchases. Retail customers locate and remove used parts for purchase from automobiles
within the yard. Fuel, Freon, tires and certain core automobile parts are also sold to various vendors for additional revenue. All
automobiles are shredded and sold as scrap metal after a specified time period in the yard.
Waste Services’ revenues consist of charges to customers for waste disposal services and equipment sales and lease income.
The components of the column labeled “other” are selling, general and administrative expenses that are not directly related to
the two primary segments.
The accounting policies of the two segments are the same as those described in the summary of significant accounting policies
(Note 1). We evaluate 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.
F - 32
NOTE 12 - SEGMENT INFORMATION (Continued)
The majority of the assets listed under the column labeled "other" include land, buildings and deferred taxes that are used by
multiple segments, which makes them not appropriate to allocate. We consider such assets corporate assets. Expenses related
to land and buildings, including property taxes, insurance and utilities, are allocated to each segment based on a formula.
Depreciation expense for Recycling totaled $2.3 million, $2.6 million and $2.7 million for the years ended December 31, 2013,
2012 and 2011, respectively. Depreciation expense for Waste Services totaled $397.2 thousand, $404.7 thousand and $485.0
thousand for the years ended December 31, 2013, 2012 and 2011, respectively. Depreciation expense for Other totaled $624.5
thousand, $642.0 thousand and $625.4 thousand for the years ended December 31, 2013, 2012 and 2011, respectively.
Amortization expense for Recycling totaled $641.0 thousand for the year ended December 31, 2013 and $750.0 thousand for
the years ended December 31, 2012 and 2011. We did not have any amortization expense in Waste Services or Other in any
year.
2013
RECYCLING
WASTE
SERVICES
OTHER
SEGMENT
TOTALS
Recycling revenues
Equipment sales, service and leasing revenues
Management fees
Cost of sales
Inventory adjustment for lower of cost or market
Selling, general, and administrative expenses
Impairment loss, intangibles
Segment (loss) profit
$
$
$
129,373
—
—
(129,154)
(2,225)
(2,692)
(3,489)
(8,187) $
(in thousands)
— $
2,311
5,069
(5,403)
—
(883)
—
1,094
$
— $
—
—
—
—
(4,157)
—
(4,157) $
129,373
2,311
5,069
(134,557)
(2,225)
(7,732)
(3,489)
(11,250)
2013
Cash
Income tax receivable
Accounts receivable, net
Inventories
Net property and equipment
Deferred income taxes
Other assets
Segment assets
RECYCLING
WASTE
SERVICES
OTHER
SEGMENT
TOTALS
(in thousands)
835
—
10,496
8,728
14,773
—
67
34,899
$
$
132
—
960
54
1,320
—
180
2,646
$
$
622
7
—
—
5,733
97
28
6,487
$
$
1,589
7
11,456
8,782
21,826
97
275
44,032
$
$
2012
RECYCLING
WASTE
SERVICES
OTHER
SEGMENT
TOTALS
Recycling revenues
Equipment sales, service and leasing revenues
Management fees
Cost of sales
Selling, general, and administrative expenses
Impairment loss, goodwill
Segment (loss) profit
$
$
$
187,034
—
—
(182,984)
(3,164)
(6,840)
(5,954) $
(in thousands)
— $
2,110
5,088
(5,292)
(768)
—
1,138
$
— $
—
—
—
(4,038)
—
(4,038) $
187,034
2,110
5,088
(188,276)
(7,970)
(6,840)
(8,854)
F - 33
NOTE 12 - SEGMENT INFORMATION (Continued)
2012
Cash
Income tax receivable
Accounts receivable, net
Inventories
Net property and equipment
Net intangibles
Deferred income taxes
Other assets
Segment assets
RECYCLING
WASTE
SERVICES
OTHER
SEGMENT
TOTALS
1,083
—
12,453
16,465
16,870
4,275
—
158
51,304
$
$
(in thousands)
— $
—
890
64
983
—
—
12
1,949
$
843
1,437
1
—
6,357
—
1,146
286
10,070
$
$
1,926
1,437
13,344
16,529
24,210
4,275
1,146
456
63,323
$
$
2011
RECYCLING
WASTE
SERVICES
OTHER
SEGMENT
TOTALS
Recycling revenues
Equipment sales, service and leasing revenues
Management fees
Cost of sales
Inventory adjustment for lower of cost or market
Selling, general, and administrative expenses
Segment (loss) profit
$
$
$
269,802
—
—
(263,563)
(3,441)
(4,717)
(1,919) $
(in thousands)
— $
2,132
5,279
(5,474)
—
(808)
1,129
$
— $
—
—
—
—
(3,200)
(3,200) $
269,802
2,132
5,279
(269,037)
(3,441)
(8,725)
(3,990)
2011
Cash
Income tax receivable
Accounts receivable, net
Inventories
Net property and equipment
Goodwill
Net intangibles
Other assets
Segment assets
RECYCLING
WASTE
SERVICES
OTHER
SEGMENT
TOTALS
1,116
—
16,342
18,500
18,909
6,840
5,025
363
67,095
$
$
(in thousands)
— $
—
940
44
1,024
—
—
12
2,020
$
1,151
3,967
(91)
—
6,266
—
—
562
11,855
$
$
2,267
3,967
17,191
18,544
26,199
6,840
5,025
937
80,970
$
$
NOTE 13 - LONG TERM INCENTIVE PLAN
In previous years, shareholders approved ratification of a long term incentive plan and approved the issuance and reservation
of additional common shares of our Common Stock under the plan. The plan makes available up to 2.4 million shares of our
Common Stock for performance-based awards under the plan. We may grant any of these types of awards: non-qualified and
incentive stock options; stock appreciation rights; and other stock awards including stock units, restricted stock units, performance
shares, performance units, and restricted stock. The performance goals that we may use for such awards will be based on any
one or more of the following performance measures: cash flow; earnings; earnings per share; market value added or economic
value added; profits; return on assets; return on equity; return on investment; revenues; or total shareholder return.
F - 34
NOTE 13 - LONG TERM INCENTIVE PLAN (Continued)
The plan is administered by a committee selected by the Board, initially our Compensation Committee, and consisting of two
or more outside members of the Board. The Committee may grant one or more awards to our employees, including our officers,
our directors and consultants, and will determine the specific employees who will receive awards under the plan and the type
and amount of any such awards. A participant who receives shares of stock awarded under the plan must hold those shares for
six months before the participant may dispose of such shares. The Committee may settle an award under the plan in cash rather
than stock.
For performance-based stock awards granted under this plan, we have assumed that the performance targets for awards granted
in a specific year will be achieved. We have assumed that performance targets for future years will not be achieved. Based on
these assumptions, we use the closing per share stock price on the date the contract is signed to calculate award values for
recording purposes. These calculated amounts reflect the aggregate grant date fair value of the stock awards computed in
accordance with ASC Topic 718.
In January 2011, we issued 60.0 thousand shares of our stock to management. These shares were granted pursuant to performance
based stock plans authorized on April 1, 2010, at a grant date fair value of $11.93 per share. We also issued non-performance
based stock awards of 0.6 thousand shares to consultants at $12.28 per share in January 2011.
On April 9, 2012, we issued 3.8 thousand shares of our stock to a previous executive. Stock compensation charged to operations
relating to these stock awards was $59.9 thousand for the year ended December 31, 2012. These shares were granted pursuant
to a performance based stock plan authorized on August 13, 2010, at a grant date fair value of $15.98 per share.
The Company uses the Modified Black-Scholes-Merton option-pricing model to value the Company's stock options for each
stock option award. Using this option-pricing model, the fair value of each stock option award is estimated on the date of grant.
The fair value of the Company's stock option awards, which are generally subject to pro-rata vesting annually over one year, is
expensed on a straight-line basis over the vesting period of the stock options. The expected volatility assumption is based on
traded options volatility of the Company's stock over a term equal to the expected term of the option granted. The expected term
of stock option awards granted is derived from historical exercise experience under the Company's stock option plans and
represents the period of time that stock option awards granted are expected to be outstanding. The expected term assumption
incorporates the contractual term of an option grant, which is five years, as well as the vesting period of an award, which is
generally pro-rata vesting annually over one year. The risk-free interest rate is based on the implied yield on a U.S. Treasury
constant maturity with a remaining term equal to the expected term of the option granted.
The Company recognizes stock-based compensation costs, net of estimated forfeitures, for only those shares expected to vest
on a straight-line basis over the requisite service period of the award. The Company estimates the forfeiture rates based on its
historical experience. Treasury shares or new shares are issued for exercised options. The Company does not expect to repurchase
any additional shares within the following annual period to accommodate the exercise of outstanding stock options.
As of May 15, 2012, we awarded options to purchase 30.0 thousand shares of our stock each to our three new directors for a
total of 90.0 thousand shares at a per share exercise price of $4.94, the fair value as of the grant date. These options vested as
of May 14, 2013 and are outstanding as of December 31, 2013. These options expire in May 2017.
As of December 1, 2013, subject to shareholder approval and vesting provisions, we granted options to purchase a total of 1.5
million shares of our Common Stock to Algar at per share exercise price of $5.00 pursuant to the Management Agreement. The
closing price per share of the Company's Common Stock on the NASDAQ Capital Market on December 2, 2013 was $2.54 per
share. Per ASC Topic 718: Compensation - Stock Compensation, these options are not deemed to be granted for accounting
purposes until shareholder approval is obtained. See Note 2 - "Management Services Agreement with Algar, Inc." for additional
information relating to the Management Agreement and Stock Option Agreement.
As of December 31, 2013, we did not have any unrecognized stock-based compensation cost related to non-vested option awards
as all outstanding options granted have vested. Stock compensation charged to operations relating to stock options and grants
was $48.0 thousand and $96.0 thousand for the years ended December 31, 2013 and 2012, respectively. We did not charge any
stock compensation to operations relating to stock options for the year ended December 31, 2011.
F - 35
NOTE 13 - LONG TERM INCENTIVE PLAN (Continued)
The weighted average assumptions relating to the valuation of the Company's stock options awarded in May, 2012 are shown
below. No stock options other than the options to Algar were granted during 2013 or 2011.
Weighted average grant-date fair value of grants per option
Volatility
Risk-free interest rate
Expected life
Expected dividend yield
2012
$1.71
52.8%
2.5%
2.5 years
0.0%
As of July 1, 2009, we awarded options to purchase 30.0 thousand shares of our stock each to our three independent directors
for a total of 90.0 thousand shares at a per share exercise price of $4.23, the fair value as of the grant date. These options are
outstanding as of December 31, 2013. These options expire in June 2014.
On January 16, 2014, we awarded options to purchase 30.0 thousand shares of our stock to our new independent director at a
per share exercise price of $3.47, the fair value as of grant date.
See Note 1 – “Summary of Significant Accounting Policies - Stock Option Plans” of these Notes to Consolidated Financial
Statements for additional information on this stock option plan.
NOTE 14 - LEGAL PROCEEDINGS AND ENVIRONMENTAL MATTERS
We have litigation from time to time, including employment-related claims, none of which we currently believe to be material.
Our operations are subject to various environmental statutes and regulations, including laws and regulations addressing materials
used in the processing of our products. In addition, certain of our operations are subject to federal, state and local environmental
laws and regulations that impose limitations on the discharge of pollutants into the air and water and establish standards for the
treatment, storage and disposal of solid and hazardous wastes. Failure to maintain or achieve compliance with these laws and
regulations or with the permits required for our operations could result in substantial operating costs and capital expenditures,
in addition to fines and civil or criminal sanctions, third party claims for property damage or personal injury, cleanup costs or
temporary or permanent discontinuance of operations. Certain of our facilities have been in operation for many years and, over
time, we and other predecessor operators of these facilities have generated, used, handled and disposed of hazardous and other
regulated wastes. Environmental liabilities in material amounts could exist, including cleanup obligations at these facilities or
at off-site locations where we disposed of materials from our operations, which could result in future expenditures that we cannot
currently estimate and which could reduce our profits. ISA records liabilities for remediation and restoration costs related to
past activities when our obligation is probable and the costs can be reasonably estimated. Costs of future expenditures for
environmental remediation are not discounted to their present value. Recoveries of environmental remediation costs from other
parties are recorded as assets when their receipt is deemed probable. Costs of ongoing compliance activities related to current
operations are expensed as incurred. Such compliance has not historically constituted a material expense to us.
F - 36
NOTE 15 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
2013
Revenue
Gross profit (loss)
Inventory write-down
Impairment loss, intangibles
Loss before other income (expense)
Net loss
Basic loss per share
Diluted loss per share
1st
2nd
3rd
(in thousands, except per share information)
4th
$
34,758
$
40,123
$
1,424
—
—
(435)
(115)
(0.02)
(0.02)
707
—
—
(1,369)
(1,238)
(0.18)
(0.18)
$
33,311
(1,267)
(1,900)
—
(2,987)
(2,191)
(0.31)
(0.31)
$
28,561
(893)
(325)
(3,489)
(6,459)
(10,272)
(1.45)
(1.45)
Year
136,753
(29)
(2,225)
(3,489)
(11,250)
(13,816)
(1.96)
(1.96)
We have reclassified certain income statement items within these Condensed Consolidated Financial Statements and Notes to
Condensed Consolidated Financial Statements for the prior years and prior quarters in order to be comparable with the current
presentation. These reclassifications had no effect on previously reported income (loss), although gross profit was affected.
In the third quarter of 2013, a continuing reduction in market demand and prices for stainless steel occurred, which led to a
reduction in stainless steel sales volumes and average stainless steel selling prices, resulting in ISA recording a net realizable
value (“NRV”) inventory write-down of $1.9 million at September 30, 2013. Based on the final sale price of the remaining
inventory in the fourth quarter of 2013 and the first quarter of 2014, we recorded an additional NRV inventory write-down of
$325.0 thousand at December 31, 2013. See Note 3 - "Goodwill and Intangibles." In the fourth quarter of 2013, management
determined to discontinue the production of stainless steel blends. With this change in strategy, management determined the
value of the intangible assets related to the stainless steel blend business was impaired. We recorded an impairment loss of
approximately $3.5 million for the remaining value of these intangible assets in that quarter.
An inventory write-down was not necessary in 2012; however, based on an outside valuation, we recorded an impairment loss
for the carrying value of goodwill of $6.8 million. See Note 3 - "Goodwill and Intangible Assets" for additional information
regarding our decision to discontinue the production of stainless steel blends and the impairment losses recorded in 2013 and
2012.
2012
Revenue
Gross profit
Impairment loss, goodwill
Income (loss) before other income
(expense)
Net income (loss)
Basic earnings (loss) per share
Diluted earnings (loss) per share
1st
2nd
3rd
(in thousands, except per share information)
4th
Year
$
61,678
$
49,852
$
45,729
$
36,973
$
194,232
2,760
—
513
9
—
—
625
—
(1,358)
(1,239)
(0.18)
(0.18)
1,324
—
(573)
(886)
(0.13)
(0.13)
1,247
(6,840)
(7,436)
(4,504)
(0.65)
(0.65)
5,956
(6,840)
(8,854)
(6,620)
(0.95)
(0.95)
F - 37
NOTE 15 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) (Continued)
2011
Revenue
Gross profit (loss)
Inventory write-down
Income (loss) before other income
(expense)
Net income (loss)
Basic earnings (loss) per share
Diluted earnings (loss) per share
1st
2nd
3rd
(in thousands, except per share information)
4th
$
106,401
$
65,062
$
7,214
—
4,299
2,167
0.31
0.31
3,458
—
1,739
313
0.05
0.05
$
55,766
(5,250)
(3,441)
(7,136)
(4,536)
(0.67)
(0.67)
49,984
(687)
—
(2,892)
(1,825)
(0.26)
(0.26)
Year
$
277,213
4,735
(3,441)
(3,990)
(3,881)
(0.56)
(0.56)
Reduced metal prices caused us to reduce our inventory balance approximately $3.4 million due to a lower of cost or market
adjustment at the end of the third quarter 2011.
F - 38
SUPPLEMENTARY INFORMATION
INDUSTRIAL SERVICES OF AMERICA, INC.
AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Years ended December 31, 2013, 2012 and 2011
Description
Balance at
Beginning
of Period
Additions
Charged to
Costs and
Expenses
Deductions *
Balance at
End of
Period
(in thousands)
Allowance for doubtful accounts 2013 (deducted
from accounts receivable)
Allowance for doubtful accounts 2012 (deducted
from accounts receivable)
Allowance for doubtful accounts 2011 (deducted
from accounts receivable)
$
$
$
* Uncollected amounts written off, net of recoveries
100
100
100
$
$
$
— $
— $
— $
— $
— $
— $
100
100
100
F - 39
EXHIBIT 3.1
INDUSTRIAL SERVICES OF AMERICA, INC.
AMENDED AND RESTATED ARTICLES OF INCORPORATION
Pursuant to the provisions of the Florida Business Corporation Act, the undersigned corporation adopts the
following Amended and Restated Articles of Incorporation, which Amended and Restated Articles of
Incorporation shall supersede and take the place of the existing Articles of Incorporation and all amendments
thereof:
ARTICLE I
That the name of this Corporation is: Industrial Services of America, Inc.
ARTICLE II
That the general nature of the business to be transacted by this Corporation shall be as follows:
A. To design, manufacture, fabricate, acquire, buy, sell, and in any manner dispose of, lease, repair,
erect, connect, install and generally deal and trade in and with lighting fixtures, electrical fixtures,
electrical lighting fixtures, electric machinery, electric devices and general electric equipment,
appliances, specialties, merchandise, parts, supplies and materials of every nature and description,
and to design, manufacture, fabricate, acquire, buy, sell and dispose of in any manner, and generally
deal in any and all machinery, equipment, apparatus, articles, goods, wares and merchandise suitable
in connection with the foregoing objects.
B. To acquire, by purchase or otherwise, for investment or resale, and to own, operate, subdivide, map or
plat, lease, let, mortgage and sell, or otherwise dispose of, for cash or on credit, by conveyance,
agreement for deed, or other appropriate instrument, and generally, to deal and traffic as the owner, or
as agent or broker, in real, personal and mixed property, and any interest or estate therein, including
subdivisions, hotels, apartment houses or business houses, factories and warehouses, residences,
estates and manufacturing sites and any lot or parcel of land upon which they are located; and to
create, own, lease, sell, operate and deal in freehold and leasehold estates of any and all character
whatsoever, and in connection therewith, to own, lease and operate auto-bus lines or other means of
conveyance; and to manufacture, buy, sell, exchange, and generally, for cash or on credit, to deal at
wholesale or at retail, as agent, broker or owner, in goods, wares, and merchandise, and other
personal property of all description whatsoever.
C. To engage in the business of a contractor and builder, and to erect, plan, outline and conceive of all
manner of structures, and to do all and every act necessary and consistent with the work of a
contractor and builder.
D. To carry on business in the United States or elsewhere, as factors, agents, commission merchants or
merchants to buy, sell, manipulate and deal in, at wholesale or at retail, any merchandise, goods,
wares, products and commodities of every sort, kind or description, and to carry on any other
business, whether manufacturing or otherwise, which can be conveniently carried on with any of the
Corporation's objects; to open stores, offices or agencies throughout the United States or elsewhere,
or to allow or cause the legal estate and interest in any properties or business required, acquired,
established or carried on by the corporation to re-main in or to be vested in the name of, or carried on
by any other corporation formed or to be formed, and either upon trust for, or as agents or nominees
1
of this Corporation, and to manage the affairs or take over and carryon the business of any such other
corporation formed or to be formed, and to exercise all or any of the powers of any such corporation,
or of holders of shares of stock or securities thereof, and to receive and to distribute as profits the
dividends and interest on such shares of stock and securities; to purchase or otherwise acquire and
undertake, all or any part of the business, property and liabilities of any persons or corporations, to
carry on any kind of business which this Corporation is authorized to carry on; to enter into
partnership or take or make any arrangement for sharing profits, union of interests, reciprocal
concessions, or cooperate with any person or corporation carrying on or about to carry on any
business which this Corporation is authorized to carry on, or any business or transaction capable of
being conducted so as, directly or indirectly, to benefit this Corporation.
E. To guarantee, to acquire by purchase, subscription, or otherwise, hold for investment, or otherwise,
sell, assign, transfer, mortgage, pledge or otherwise dispose of the shares of the capital stock of, or
any bonds, securities or evidences of indebtedness created by any other corporation or corporations of
the State of Florida, or any other state or government, domestic or foreign; and while the owner of
any such stocks, bonds, securities and evidences of indebtedness, to exercise all the rights, powers
and privileges of ownership, including the right to vote stocks, bonds, securities or other obligations
are or may be in any manner and at any time owned, held or guaranteed, and to do any and all other
acts or things for the preservation, protection, improvement or enhancement in value of any such
stocks, bonds, securities or other obligations; and to do all and any such act or things designed to
accomplish any such purpose.
F. To acquire in any manner, enjoy, utilize, hold, sell, assign, lease, mortgage or otherwise dispose of,
letters patent of the United States or of any foreign country, patents, patent rights, licenses and
privileges, inventions, improvements and processes, copyrights, trademarks and trade names or
pending applications therefore, relating to or useful in connection with any business of the
Corporation or any other corporation in which the Corporation has or may have an interest as a
stockholder or otherwise.
G. To borrow money and contract debts when necessary for the transaction of its business or for the
exercise of its corporate rights, privileges or franchises, or for any other lawful purpose of its
incorporation; to issue bonds, promissory notes, bills of exchange, debentures and other obligations
and evidences of indebtedness payable at a specified time or times, or payable upon the happening of
a specified event or events, secured or unsecured, from time to time, for moneys borrowed, or in
payment for property acquired, or for any of the other objects or purposes of the corporation or for
any of the objects of its business; to secure the same by mortgage or mortgages, or deed or deeds of
trust, or pledge or other lien upon any or all of the property, rights, privileges or franchises of the
corporation, wheresoever situated, acquired or to be acquired; and to confer upon the holders of any
debentures, bonds or other evidences of indebtedness of the Corporation, secured or unsecured, the
right to convert the principal thereof into any preferred or common stock of the Corporation now or
hereafter authorized, upon such terms and conditions as shall be fixed by the Board of Directors; to
sell, pledge or otherwise dispose of any or all debentures or other bonds, notes and other obligations
in such manner and upon such terms as the Board of Directors may deem judicious, subject, however,
to the provisions of the By Laws of the Corporation.
H. To engage in the business of consulting with large corporations for their waste management
problems; to manufacture, purchase, and resell various types of waste management equipment; the
leasing, servicing, manufacturing, and purchase and reselling of parts for said equipment; to buy and
sell land and buildings; to erect buildings thereon, to acquire leases, and otherwise acquire, own, use,
and dispose of property of all kinds, real, personal, or mixed; to borrow money and give security for
2
same, to give mortgages upon the assets of this Corporation when deemed by the Board of Directors
expedient so to do for the performance of such other things as the Board of Directors may deem
necessary or proper for the furtherance of the interests of this Corporation in the exercise of the
powers enumerated; and to engage in any and all other business activities authorized by law.
ARTICLE III
The maximum number of shares of Common Voting Stock that this Corporation is authorized to have
outstanding at any one time is twenty million (20,000,000) shares of the par value of one-third cent ($0.0033)
per share.
The Corporation is also authorized to issue two hundred thousand (200,000) shares of Non-Voting Preferred
Stock having a par value of Ten Dollars ($10.00) per share.
The Preferred shares may be issued from time to time in one or more series.
The Board of Directors is hereby authorized to fix or alter the designations, preferences, and relative,
participating, optional, or other special rights and qualifications, limitations, or restrictions of such preferred
shares, including, without limitation of the generality of the foregoing, dividend rights, dividend rates,
conversion rights, voting rights, rights and terms of redemption (including sinking fund provisions), the
redemption price or prices and liquidation preferences of any wholly unissued series of preferred shares, and
the number of shares constituting any such series and the designation thereof, or any of them; and to increase
or decrease the number of shares of that series, but not below the number of shares of such series then
outstanding. In case the number of shares of any series shall be so decreased, the shares constituting such
decrease shall resume the status which they had prior to the adoption of the resolution originally fixing the
number of shares of such series.
ARTICLE IV
The amount of capital with which this Corporation shall begin business will be FIVE HUNDRED ($500.00)
DOLLARS.
ARTICLE V
This Corporation shall have perpetual existence.
ARTICLE VI
The principal place of business of this Corporation shall be in the City of Miami, Dade County, Florida, or
any other City, County or State which the Board of Directors may authorize.
ARTICLE VII
That the business of the Corporation shall be conducted by a Board of Directors which shall consist of not
fewer than three (3) or more than nine (9) members, as the same may be provided by the By Laws of the
Corporation.
Intentionally left blank.
ARTICLE VIII
3
Intentionally left blank.
ARTICLE IX
ARTICLE X
The management and control of the business of the Corporation shall be conducted under the direction of the
Board of Directors of the following officers, who shall be elected by the Board of Directors, to wit, a
President, one or more Vice- Presidents, a Treasurer and a Secretary, provided that any one or more of said
offices may be held by the same person, except that the office of President shall not be held by the Secretary,
or Assistant Secretary of the corporation.
ARTICLE XI
No stockholder shall be entitled as a matter of right to subscribe for or receive additional shares of any class
of stock of the Corporation, whether now or hereafter authorized, or any bonds, debentures or other securities
convertible into stock, but such additional shares of stock or other securities convertible into stock may be
issued or disposed of by the Board of Directors to such persons and on such terms as in its discretion it shall
deem advisable.
ARTICLE XII
The Corporation shall indemnify any and all of its directors or officers or former directors or officers or any
person who may have served at its request as a director or officer of another corporation in which it owns
shares of capital stock or of which it is a creditor against expenses actually and necessarily incurred by them
in connection with the defense of any action, suit or proceeding in which they, or any of them, are made
parties, or a party by reason of being or having been directors or officers or a director or officer of the
corporation, or of such other corporation, except in relation to matters as to which any such director or officer
or former director or officer of person shall be adjudged in such action, suit or proceeding to be liable for
negligence or misconduct in the performance of duty. Such indemnification shall not be deemed exclusive of
any other rights to which those indemnified may be entitled, under any by-laws, agreement, vote of
stockholders, or other-wise. The right of indemnification hereinabove stated shall under no circumstances
extend to or include indemnification for liabilities arising under the Securities Act of 1933, as amended.
ARTICLE XIII
No contract or other transaction between the Corporation and any other corporation, firm or individual shall
be affected or invalidated by the fact that any one or more of the directors or officers of this Corporation is or
are interested in or is a director or officer, or are directors or officers of such other corporation, or a member
of such firm, and any director or directors, or officer or officers, individually or jointly, may be a party or
parties to or may be interested in any contract, or transaction, of this Corporation or in which this
Corporation is interested, and no contract, act or transaction of this Corporation with any person or persons,
firms or corporations, shall be affected or in-validated by the fact that any director or directors, or officer or
officers, of this Corporation is a party, or are parties, to or interested in such contract, act or transaction, or in
any way connected with such person or persons, firm or corporation, and each and every person who may be-
come a director or officer of this Corporation is hereby relieved from any liability that might otherwise exist
from contracting with the Corporation for the benefit of himself or any firm or corporation in which he may
be in anywise interested.
4
I, the undersigned hereby certify that these Amended and Restated Articles of Incorporation were duly
adopted by the Corporation’s Board of Directors on the 13th day of March, 2014.
INDUSTRIAL SERVICES OF AMERICA, INC.
By: /s/ Orson Oliver
Orson Oliver
Chairman of the Board and Interim CEO
5
EXHIBIT 10.68
THE BANK OF KENTUCKY, INC.
CONFIRMATION
To:
Wessco, LLC
7100 Grade Loan
Louisville, KY 40213
Attn:
Alan Schoering
Email:
aschroering@isa-inc.com
From:
Date:
The Bank of Kentucky, Inc.
17th October, 2013
Our Ref:
37571
The purpose of this letter agreement is to set forth the terms and conditions of the Swap Transaction entered into
between The Bank of Kentucky, Inc. and Wessco, LLC (the “Counterparty”) on the Trade Date specified below (the
“Swap Transaction”). This letter agreement constitutes a “Confirmation” as referred to in the Master Agreement
specified below.
1. The definitions and provisions contained in the 2006 ISDA Definitions (as published by the International Swaps and
Derivatives Association, Inc.) (the “Definitions”) are incorporated into this Confirmation.
This Confirmation supplements, forms a part of, and is subject to, a certain ISDA Master Agreement (the “Master
Agreement”) which has been, or will be executed between Counterparty and The Bank of Kentucky, Inc.. All
provisions contained or incorporated by reference in such Master Agreement shall govern this Confirmation except as
expressly modified below. In the event of any inconsistency between this Confirmation and the Definitions or the
Master Agreement, this Confirmation will govern.
This Confirmation will be governed by and construed in accordance with the laws of the State of New York, without
reference to choice of law doctrine, provided that this provision will be superseded by any choice of law provision on
the Master Agreement.
2. This Confirmation constitutes a Swap Transaction under the Master Agreement and the terms of the Swap
Transaction to which this Confirmation relates are as follows:
Wessco, LLC
Our ref: 37571
____________________________________________________________________________________________________
Notional Amount:
For each Calculation Period, the amount listed under the heading “Notional Amount”
in Schedule A, attached.
Trade Date:
17th October, 2013
Effective Date:
17th October, 2013
Termination Date:
1st October, 2018
Fixed Amounts:
Fixed Rate Payer:
Wessco, LLC
Fixed Rate Payer
Payment Dates:
Commencing the 1st day of November, 2013 and monthly thereafter on the 1st
calendar day of each month up to and including the Termination Date, subject to
adjustment in accordance with Following Business Day Convention.
Period End Dates:
The 1st calendar day of each month commencing November, 2013 and ending on the
Termination Date. No Adjustment.
Fixed Rate:
Fixed Rate Day
Count Fraction:
Floating Amounts:
4.74000%
Act/360
Floating Rate Payer:
The Bank of Kentucky, Inc.
Floating Rate Payer
Payment Dates:
Commencing the 1st day of November, 2013 and monthly thereafter on the 1st
calendar day of each month up to and including the Termination Date, subject to
adjustment in accordance with Following Business Day Convention.
Period End Dates:
The 1st calendar day of each month commencing November, 2013 and ending on the
Termination Date. No Adjustment.
Floating Rate for Initial
3.67375% inclusive of Spread
Calculation Period:
Floating Rate Option:
USD-LIBOR-BBA
Wessco, LLC
Our ref: 37571
____________________________________________________________________________________________________
Designated Maturity:
1 Month
Spread:
Floating Rate Day
Count Fraction:
3.50000%
Act/360
Reset Dates:
The first day of each Floating Rate Payer Calculation Period
Calculation Agent:
The Bank of Kentucky, Inc.
Business Days:
New York, London
Other Terms
and Conditions:
Counterparty is electing under section 2(h)(7)(B) of the Commodity Exchange Act
(7 U.S.C. §(h)(7)(B)) not to present this Swap Transaction to a Derivatives
Clearing Organization for clearing.
Payment method:
Account ending in 1040
Please confirm the foregoing correctly sets forth the terms of our Agreement by executing the copy of this
Confirmation and returning it to us.
Regards,
The Bank of Kentucky, Inc.
By: /s/ Martin J. Gerrety______________________
Name: Martin J. Gerrety_______________________
EVP and CFO
Accepted and confirmed as
of the Trade Date
Wessco, LLC a Delaware limited liability company
By: Industrial Services of America, Inc, a Florida Corporation, its Manager
By: /s/ Alan Schroering__________________
Name: Alan Schroering
Title: VP Finance and interim CFO
Date: 10/18/13
Wessco, LLC
Our ref: 37571
____________________________________________________________________________________________________
Schedule A
Period Start
17-Oct-13
01-Nov-13
01-Dec-13
01-Jan-14
01-Feb-14
01-Mar-14
01-Apr-14
01-May-14
01-Jun-14
01-Jul-14
01-Aug-14
01-Sep-14
01-Oct-14
01-Nov-14
01-Dec-14
01-Jan-15
01-Feb-15
01-Mar-15
01-Apr-15
01-May-15
01-Jun-15
01-Jul-15
01-Aug-15
01-Sep-15
01-Oct-15
01-Nov-15
01-Dec-15
01-Jan-16
01-Feb-16
01-Mar-16
01-Apr-16
01-May-16
01-Jun-16
Period End
01-Nov-13
01-Dec-13
01-Jan-14
01-Feb-14
01-Mar-14
01-Apr-14
01-May-14
01-Jun-14
01-Jul-14
01-Aug-14
01-Sep-14
01-Oct-14
01-Nov-14
01-Dec-14
01-Jan-15
01-Feb-15
01-Mar-15
01-Apr-15
01-May-15
01-Jun-15
01-Jul-15
01-Aug-15
01-Sep-15
01-Oct-15
01-Nov-15
01-Dec-15
01-Jan-16
01-Feb-16
01-Mar-16
01-Apr-16
01-May-16
01-Jun-16
01-Jul-16
Notional Amount (USD) Notional Amortization
3,000,000.00
2,954,714.00
2,909,428.00
2,864,142.00
2,818,856.00
2,773,570.00
2,728,284.00
2,682,998.00
2,637,712.00
2,592,426.00
2,547,140.00
2,501,854.00
2,456,568.00
2,409,026.00
2,361,484.00
2,313,942.00
2,266,400.00
2,218,858.00
2,171,316.00
2,123,774.00
2,076,232.00
2,028,690.00
1,981,148.00
1,933,606.00
1,886,064.00
1,836,175.00
1,786,286.00
1,736,397.00
1,686,508.00
1,636,619.00
1,586,730.00
1,536,841.00
1,486,952.00
45,286.00
45,286.00
45,286.00
45,286.00
45,286.00
45,286.00
45,286.00
45,286.00
45,286.00
45,286.00
45,286.00
45,286.00
47,542.00
47,542.00
47,542.00
47,542.00
47,542.00
47,542.00
47,542.00
47,542.00
47,542.00
47,542.00
47,542.00
47,542.00
49,889.00
49,889.00
49,889.00
49,889.00
49,889.00
49,889.00
49,889.00
49,889.00
49,889.00
Wessco, LLC
Our ref: 37571
____________________________________________________________________________________________________
Period Start
01-Jul-16
01-Aug-16
01-Sep-16
01-Oct-16
01-Nov-16
01-Dec-16
01-Jan-17
01-Feb-17
01-Mar-17
01-Apr-17
01-May-17
01-Jun-17
01-Jul-17
01-Aug-17
01-Sep-17
01-Oct-17
01-Nov-17
01-Dec-17
01-Jan-18
01-Feb-18
01-Mar-18
01-Apr-18
01-May-18
01-Jun-18
01-Jul-18
01-Aug-18
01-Sep-18
Period End
01-Aug-16
01-Sep-16
01-Oct-16
01-Nov-16
01-Dec-16
01-Jan-17
01-Feb-17
01-Mar-17
01-Apr-17
01-May-17
01-Jun-17
01-Jul-17
01-Aug-17
01-Sep-17
01-Oct-17
01-Nov-17
01-Dec-17
01-Jan-18
01-Feb-18
01-Mar-18
01-Apr-18
01-May-18
01-Jun-18
01-Jul-18
01-Aug-18
01-Sep-18
01-Oct-18
Notional Amount (USD) Notional Amortization
1,437,063.00
1,387,174.00
1,337,285.00
1,287,396.00
1,235,005.00
1,182,614.00
1,130,223.00
1,077,832.00
1,025,441.00
973,050.00
920,659.00
868,268.00
815,877.00
763,486.00
711,095.00
658,704.00
604,279.00
549,854.00
495,429.00
441,004.00
386,579.00
332,154.00
277,729.00
223,304.00
168,879.00
114,454.00
60,029.00
49,889.00
49,889.00
49,889.00
52,391.00
52,391.00
52,391.00
52,391.00
52,391.00
52,391.00
52,391.00
52,391.00
52,391.00
52,391.00
52,391.00
52,391.00
54,425.00
54,425.00
54,425.00
54,425.00
54,425.00
54,425.00
54,425.00
54,425.00
54,425.00
54,425.00
54,425.00
60,029.00
INDUSTRIAL SERVICES OF AMERICA, INC.
LIST OF SUBSIDIARIES AS OF DECEMBER 31, 2013
NAME OF ENTITY
STATE OF INCORPORATION
EXHIBIT 21
ISA Indiana, LLC
ISA Indiana Real Estate, LLC
ISA Recycling, LLC
ISA Logistics LLC
ISA Real Estate, LLC
7021 Grade Lane LLC
7124 Grade Lane LLC
7200 Grade Lane LLC
Computerized Waste Systems, LLC*
WESSCO, LLC**
Indiana
Indiana
Kentucky
Kentucky
Kentucky
Kentucky
Kentucky
Kentucky
Kentucky
Kentucky
* Operating under the name Computerized Waste Systems or CWS.
** Operating under the name Waste Equipment Sales and Service Company or WESSCO.
I, Orson Oliver, certify that:
CERTIFICATIONS
Exhibit 31.1
1.
I have reviewed this Form 10-K for the year ended December 31, 2013 of Industrial Services of America, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period
in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
(d) Disclosed in the report any change in the registrant's internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter (the registrants' fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control
over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or
persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant's internal control over financial reporting.
March 31, 2014
Date
/s/ Orson Oliver
Orson Oliver, Chairman of the Board and Interim Chief Executive Officer
(principal executive officer)
CERTIFICATIONS
Exhibit 31.2
I, Alan Schroering, certify that:
1.
I have reviewed this Form 10-K for the year ended December 31, 2013 of Industrial Services of America, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period
in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
(d) Disclosed in the report any change in the registrant's internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter (the registrants' fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control
over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or
persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant's internal control over financial reporting.
March 31, 2014
Date
/s/ Alan Schroering
Alan Schroering, Vice-President of Finance and Interim Chief Financial Officer
(principal financial officer)
CERTIFICATIONS
Orson Oliver and Alan Schroering, being the Chairman of the Board and Interim Chief Executive Officer and Vice-President of
Finance and Interim Chief Financial Officer, respectively, of Industrial Services of America, Inc., hereby certify as of this 31st
day of March, 2014, that the Form 10-K for the year ended December 31, 2013, fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in the Form 10-K fairly
presents, in all material respects, the financial condition and results of operations of Industrial Services of America, Inc.
Exhibit 32.1
/s/ Orson Oliver
Orson Oliver, Chairman of the Board and Interim Chief Executive Officer
/s/ Alan Schroering
Alan Schroering, Vice-President of Finance and Interim Chief Financial Officer