FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 29, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-19621
APPLIANCE RECYCLING CENTERS OF AMERICA, INC.
MINNESOTA
(State or other jurisdiction of
incorporation or organization)
7400 Excelsior Blvd.
Minneapolis, Minnesota 55426-4517
(Address of principal executive
offices)
41-1454591
(I.R.S. Employer
Identification No.)
(612) 930-9000
(Registrant's telephone number, including area code)
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, and (2) has been subject to such filing requirements
for the past 90 days.
YES __X__ NO _____
As of August 5, 1996, the number of shares outstanding of the registrant's no
par value common stock was 4,547,077 shares.
APPLIANCE RECYCLING CENTERS OF AMERICA, INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1: Financial Statements:
Consolidated Balance Sheets as of
June 29, 1996 and December 30, 1995
Consolidated Statements of Operations for the Three and Six
Months Ended June 29, 1996 and July 1, 1995
Consolidated Statements of Cash Flows for the
Six Months Ended June 29, 1996 and July 1, 1995
Notes to Consolidated Financial Statements
Item 2: Management's Discussion and Analysis
of Financial Condition and Results of Operations
PART II. OTHER INFORMATION
<TABLE>
<CAPTION>
Appliance Recycling Centers of America, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 29, December 30,
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 254,000 $ 4,605,000
Accounts receivable 1,386,000 1,382,000
Inventories 986,000 426,000
Other current assets 323,000 325,000
Income taxes receivable 70,000 106,000
Deferred tax assets 277,000 277,000
------------ ------------
Total current assets $ 3,296,000 $ 7,121,000
------------ ------------
Property and Equipment, at cost
Land $ 2,103,000 $ 2,101,000
Buildings and improvements 4,510,000 3,677,000
Equipment 6,295,000 6,483,000
------------ ------------
$ 12,908,000 $ 12,261,000
Less accumulated depreciation 4,221,000 3,973,000
------------ ------------
Net property and equipment $ 8,687,000 $ 8,288,000
Other Assets 576,000 108,000
Deferred Tax Assets 373,000 373,000
------------ ------------
Total assets $ 12,932,000 $ 15,890,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Note payable to bank $ 250,000 $ --
Current maturities of long-term obligations 496,000 1,041,000
Accounts payable 1,675,000 1,536,000
Accrued expenses 836,000 1,041,000
------------ ------------
Total current liabilities $ 3,257,000 $ 3,618,000
Long-Term Obligations, less current maturities 1,813,000 2,084,000
------------ ------------
Total liabilities $ 5,070,000 $ 5,702,000
------------ ------------
Shareholders' Equity
Common Stock, no par value; authorized 20,000,000 shares; issued and
outstanding 4,547,000 as of June 29, 1996
and 4,227,000 as of December 30, 1995 $ 10,350,000 $ 9,177,000
Retained earnings (deficit) (2,466,000) 1,032,000
Foreign currency translation adjustment (22,000) (21,000)
------------ ------------
Total shareholders' equity $ 7,862,000 $ 10,188,000
------------ ------------
Total liabilities and shareholders' equity $ 12,932,000 $ 15,890,000
============ ============
See Notes to Consolidated Financial Statements
</TABLE>
<TABLE>
<CAPTION>
Appliance Recycling Centers of America, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
June 29, July 1, June 29, July 1,
--------------------------- ---------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues
Recycling revenues $ 1,399,000 $ 3,073,000 $ 3,166,000 $ 5,797,000
Appliance sales 1,351,000 435,000 2,185,000 778,000
Byproduct revenues 523,000 504,000 982,000 1,105,000
----------- ----------- ----------- -----------
Net revenues $ 3,273,000 $ 4,012,000 $ 6,333,000 $ 7,680,000
Cost of Revenues 2,692,000 2,476,000 5,542,000 4,885,000
----------- ----------- ----------- -----------
Gross profit $ 581,000 $ 1,536,000 $ 791,000 $ 2,795,000
Selling, General and Administrative Expenses 2,209,000 1,417,000 4,256,000 2,754,000
----------- ----------- ----------- -----------
Operating income (loss) $(1,628,000) $ 119,000 $(3,465,000) $ 40,000
Other Income (Expense):
Other income 84,000 6,000 70,000 37,000
Interest income 4,000 56,000 32,000 108,000
Interest expense (66,000) (67,000) (135,000) (139,000)
----------- ----------- ----------- -----------
Income (loss) before provision for income taxes $(1,606,000) $ 114,000 $(3,498,000) $ 47,000
Provision for (Benefit of) Income Taxes -- 53,000 -- 25,000
----------- ----------- ----------- -----------
Net income (loss) $(1,606,000) $ 61,000 $(3,498,000) $ 22,000
=========== =========== =========== ===========
Net Earnings (Loss) per Common and
Common Equivalent Share $ (0.36) $ 0.01 $ (0.80) $ 0.01
=========== =========== =========== ===========
Weighted Average Number of Common and
Common Equivalent Shares 4,404,000 4,247,000 4,365,000 4,245,000
=========== =========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
Appliance Recycling Centers of America, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 29, July 1,
---------------------------
1996 1995
----------- -----------
<S> <C> <C>
Cash Flows from Operating Activities
Net income (loss) $(3,498,000) $ 22,000
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 764,000 742,000
Common Stock issued for services 30,000 --
(Gain) loss on sale of equipment (48,000) (31,000)
Deferred income taxes -- (28,000)
Change in assets and liabilities, net of effects from
acquisition of Universal Appliance Company, Inc.
and Universal Appliance Recycling, Inc.:
(Increase) decrease in:
Receivables 251,000 2,224,000
Inventories (505,000) (10,000)
Other current assets 11,000 60,000
Income taxes receivable 40,000 (48,000)
(Increase) decrease in:
Accounts payable (37,000) (212,000)
Accrued expenses (237,000) (282,000)
Income taxes payable (23,000) (427,000)
----------- -----------
Net cash provided by (used in) operating activities $(3,252,000) $ 2,010,000
----------- -----------
Cash Flows from Investing Activities
Purchase of equipment $(1,147,000) $ (249,000)
Cash acquired for acquisition of Universal Appliance
Company, Inc. and Universal Appliance Recycling, Inc. 26,000 --
Payments for noncompete agreements (110,000) --
Proceeds from disposal of equipment 153,000 76,000
----------- -----------
Net cash provided by (used in) investing activities $(1,078,000) $ (173,000)
----------- -----------
Cash Flows from Financing Activities
Increase (decrease) in note payable to bank $ 250,000 --
Payments on long-term obligations (1,024,000) (393,000)
Proceeds from placement of Common Stock 700,000 --
Proceeds and tax benefit from stock options 54,000 88,000
----------- -----------
Net cash provided by (used in) financing activities $ (20,000) $ (305,000)
----------- -----------
Effect of foreign currency exchange rate changes
on cash and cash equivalents $ (1,000) $ 12,000
----------- -----------
Increase (decrease) in cash and cash equivalents $(4,351,000) $ 1,544,000
Cash and Cash Equivalents
Beginning 4,605,000 2,860,000
----------- -----------
Ending $ 254,000 $ 4,404,000
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
Appliance Recycling Centers of America, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS - continued
(Unaudited)
Six Months Ended
June 29, July 1,
---------------------------
1996 1995
----------- -----------
<S> <C> <C>
Supplemental Disclosures of Cash Flow Information
Cash payments (receipts) for:
Interest $ 136,000 $ 138,000
Income taxes net of refunds $ (9,000) $ 422,000
========= =========
Supplemental Schedule of Noncash Investing and
Financing Activities
Acquisition of Universal Appliance Company, Inc. and
Universal Appliance Recycling, Inc.
Working capital acquired, including cash
and cash equivalents of $26,000 118,000 --
Fair value of other assets acquired,
principally property and equipment
and a noncompete agreement 176,000 --
Value assigned to Goodwill 302,000 --
Long-term debt assumed (207,000) --
--------- ---------
Total consideration, 84,000
shares of Common Stock $ 389,000 --
========= =========
</TABLE>
See Notes to Consolidated Financial Statements
Appliance Recycling Centers of America, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Financial Statements - In the opinion of management of the Company, the
accompanying unaudited consolidated financial statements contain all
adjustments (consisting of only normal, recurring accruals) necessary
to present fairly the financial position of the Company and its
subsidiaries as of June 29, 1996, and the results of operations for the
three-month and six-month periods and its cash flows for the six-month
periods ended June 29, 1996 and July 1, 1995. The results of operations
for any interim period are not necessarily indicative of the results
for the year. These interim consolidated financial statements should be
read in conjunction with the Company's annual financial statements and
related notes in the Company's Annual Report on Form 10-K for the year
ended December 30, 1995.
2. Accrued Expenses
Accrued expenses were as follows:
June 29, December 30,
1996 1995
---------- ----------
Vacation $ 183,000 $ 171,000
Payroll 312,000 307,000
Customer Deposit 90,000 140,000
Other 251,000 423,000
---------- ----------
$ 836,000 $1,041,000
========== ==========
PART I: ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis provides information that management
believes is relevant to an assessment and understanding of the Company's level
of operation and financial condition. This discussion should be read with the
consolidated financial statements appearing in Item 1.
RESULTS OF OPERATIONS
Net revenues for the three and six months ended June 29, 1996 were
$3,273,000 and $6,333,000, respectively, compared to $4,012,000 and
$7,680,000 for the same periods in the prior year. Recycling revenues
for the three and six months ended June 29, 1996 decreased by $1,674,000
and $2,631,000, respectively, from the same periods in the prior year.
The decreases were primarily due to decreased revenues from contracts
with electric utility programs. The Company expects recycling revenues
for the last six months of 1996 to decrease when compared to the same
period in the prior year but to increase when compared to the first six
months of 1996.
Appliance sales for the three and six months ended June 29, 1996
increased by $916,000 and $1,407,000, respectively, over the same
periods in the prior year. The increases were primarily due to the
Company's expansion of its retail business through a new chain of stores
under the name "Encore Recycled Appliances." As of June 29, 1996 the
Company had 30 retail locations compared to three as of July 1, 1995 and
ten as of January 1, 1996. The Company expects a significant increase in
revenues generated from appliance sales compared to the prior year as
sales volumes continue to increase at the retail locations. The Company
expects to open an additional two to three retail stores during the
remaining six months of 1996.
Byproduct revenues for the three months ended June 29, 1996 increased by
$19,000 over the same period in the prior year, but decreased by
$123,000 for the six months ended June 29, 1996 from the same period in
the prior year. The decrease was primarily due to reduced sales of
reclaimed chlorofluorocarbons ("CFCs") partially offset by higher sales
of scrap metals. The Company expects a small increase in byproduct
revenues in the remaining six months of 1996 compared to the first six
months of 1996.
Gross profit as a percentage of net revenues decreased to 17.7% for the
three months and 12.5% for the six months ended June 29, 1996 from 38.3%
for the three months and 36.4% for the six months ended July 1, 1995.
The decrease between the three and six months ended June 29, 1996
compared to the same periods in the prior year was primarily due to
inefficiencies in the conversion to add appliance reconditioning
capabilities to 6 of the Company's 11 recycling centers. Gross profit as
a percentage of net revenues increased from 7.3% for the first quarter
of 1996 to 17.7% for the second quarter of 1996. The Company expects
gross profit as a percentage of revenues to increase in the third and
fourth quarters of 1996 when compared to the first and second quarters
of 1996 due to improved efficiencies in appliance reconditioning. Due to
the expiration of utility contracts and the implementation of
cost-cutting programs, four recycling centers were closed in the second
quarter of 1996 leaving seven centers open as of June 29, 1996. The
Company believes the gross margin rate will continue to improve
throughout the remainder of the year. Gross profit margin for any single
period, however, will be affected favorably or unfavorably by numerous
factors, including volume of appliances recycled, training of personnel,
speed at which appliance sales increase, costs incurred in opening new
retail stores and the price and volume of byproduct revenues.
Selling, general and administrative expenses for the three and six
months ended June 29, 1996 increased to $2,209,000 and $4,256,000,
respectively, from $1,417,000 and $2,754,000 in the same periods of
1995. The increases in the three and six months ended June 29, 1996 were
primarily due to costs associated with 30 retail stores compared to
three retail stores in the same period in the prior year and by a small
increase in general and administrative expenses. The Company expects
total selling, general and administrative expenses for the last six
months of 1996 to be slightly less than the total for the first six
months of 1996. The Company expects an increase in selling expenses to
be offset by reductions in general and administrative expenses.
Interest income decreased to $4,000 from $56,000 for the three months
and to $32,000 from $108,000 for the six months ended June 29, 1996
compared to the same periods in 1995. The decrease in interest income
for the three and six months ended June 29, 1996 resulted from lower
cash balances when compared to the same periods in the prior year.
Interest expense was $66,000 for the three months and $135,000 for the
six months ended June 29, 1996 compared to $67,000 and $139,000 for the
same periods in 1995.
During the first six months of 1996, the Company recorded a valuation
allowance of approximately $1,390,000, and accordingly, no tax benefit
was recorded for the first six months of 1996. $400,000 of the deferred
tax assets as of June 29, 1996 will be realized by carrybacks to prior
taxable years and the realization of the remaining deferred tax assets
is dependent upon future taxable income.
The Company recorded a net loss of $1,606,000 for the three months and
$3,498,000 for the six months ended June 29, 1996 compared to a net
income of $61,000 and $22,000 in the same periods of 1995. The increase
in loss was primarily due to the increased operational expenses and
increased selling, general and administrative expenses associated with
the development of the Company's retail business. The Company expects
losses for the remaining six months of 1996 to continue but to be
reduced substantially as utility revenue, appliance sales and byproduct
revenue are expected to increase during the last six months of 1996
compared to the first six months of 1996.
LIQUIDITY AND CAPITAL RESOURCES
At June 29, 1996, the Company's working capital was $39,000 compared to
$3,503,000 at December 30, 1995. Cash and cash equivalents decreased to
$254,000 at June 29, 1996 from $4,605,000 at December 30, 1995. Net cash
used in operating activities was $3,252,000 for the six months ended
June 29, 1996 compared to net cash provided by operating activities of
$2,010,000 in the same period of 1995. The decrease in cash provided by
operating activities was primarily due to the net loss from operations
and an increase in inventory offset by depreciation and a decrease in
accounts receivable. The Company anticipates its net cash used in
operating activities will decrease significantly for the remaining six
months of 1996 compared to the first six months of 1996 due to
anticipated increases in sales and corresponding margins.
The Company's capital expenditures were approximately $1,147,000 and
$249,000 for the six months ended June 29, 1996 and July 1, 1995,
respectively. The 1996 capital expenditures were primarily related to
leasehold improvements to the Company's recycling centers and additional
retail stores. The Company had no material purchase commitments for
assets as of June 29, 1996.
On January 2, 1996, the Company acquired Universal Appliance Company,
Inc. and Universal Appliance Recycling, Inc., Washington, D.C.-based
companies, by exchanging a total of 84,000 shares of its Common Stock
for 100% ownership of the respective companies. The acquisitions were
accounted for as an asset purchase. In addition, selling shareholders
can earn up to a total of 100,000 shares of Company stock in contingent
consideration over the next four years. Also, the selling shareholders
received a total of $110,000 under noncompete agreements.
The Company had a bank line of credit of $2,500,000 which expired in
April 1996. The Company had no borrowings under the line. The Company
has negotiated a revised bank line of credit in the amount of $400,000
which expires October 1, 1996. Advances under the line are secured by
all receivables, are subject to borrowing base requirements, require the
Company to meet certain financial covenants, are due on demand and bear
interest at three percentage points above the bank's base rate. As of
June 29, 1996 the Company was not in compliance with the required
financial covenants. The bank's base rate as of June 29, 1996 was 8.25%.
As of June 29, 1996 the Company has borrowed $250,000 from the line of
credit.
In May 1996, $700,000 was raised in a private placement of Common Stock
to an institutional investor that currently holds approximately 15% of
the outstanding shares. These proceeds were used to pay off an equipment
loan of $480,000 and for additional working capital. The proceeds were
raised from selling 200,000 shares at $3.50 each.
The Company anticipates that its current cash balance, existing and
anticipated financing, and bank line of credit will be sufficient to
finance its operations and capital expenditures during the remainder of
1996. The Company's total capital requirements will depend on the
number, size and timing of recycling centers and retail stores added
during the year. If the Company does not achieve its planned revenue
levels or expenses are higher than anticipated, the Company may require
additional capital to finance operations. Sources of additional
financing, if needed in the future, may include further debt financing
or the sale of equity or other securities.
Statements regarding the Company's operations, performance and results
for 1996, including the increase in revenues from utility revenue,
appliance sales and byproduct revenue and the improvement of the gross
margin rate, discussed herein are forward-looking and therefore are
subject to certain risks and uncertainties. Certain events that could
significantly affect the 1996 results include the speed at which Encore
stores reach profitability, whether new stores are able to attain
planned revenue levels, higher than expected costs and expenses
(including costs of new store openings and increased equipment costs
associated with opening retail stores), recycling programs reaching
planned revenue levels, and the availability of sufficient capital to
cover start-up and other costs until revenues from operations are
available.
PART II. OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS - None
ITEM 2 - CHANGES IN SECURITIES - None
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES - None
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 2, 1996 the Annual Meeting of the Shareholders of Appliance
Recycling Centers of America, Inc. was held to obtain the approval
of shareholders of record as of March 15, 1996 in connection with
the two matters indicated below. Following is a brief description of
each matter voted on at the meeting and the number of votes cast
for, against or withheld, as well as the number of abstentions and
broker nonvotes, as to each matter:
Vote
-------------------------------------------------------------
Matter For Withhold Authority
------ --- ------------------
1. Election of Directors:
Edward R. Cameron 3,721,024 19,330
George B. Bonniwell 3,721,424 18,930
Duane S. Carlson 3,720,524 19,830
Harry W. Spell 3,720,444 19,910
2. Ratification of McGladrey & Pullen, LLP as independent
public accountants for 1996.
Vote
------------------------------------------------------
For Against Abstain Not Voted
3,710,969 11,060 18,325 0
ITEM 5 - OTHER INFORMATION - None
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit No. 27 - Financial Data Schedule
(b) The Company did not file any reports on Form 8-K during the
three months ended June 29, 1996.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Appliance Recycling Centers of America, Inc.
Registrant
Date: August 9, 1996 /s/Edward R. Cameron
-----------------------------------
Edward R. Cameron
President
Date: August 9, 1996 /s/Kent S. McCoy
-------------------------------
Kent S. McCoy
Vice President of Finance, Treasurer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-28-1996
<PERIOD-END> JUN-29-1996
<CASH> 254,000
<SECURITIES> 0
<RECEIVABLES> 1,456,000
<ALLOWANCES> 0
<INVENTORY> 986,000
<CURRENT-ASSETS> 3,296,000
<PP&E> 12,908,000
<DEPRECIATION> 4,221,000
<TOTAL-ASSETS> 12,932,000
<CURRENT-LIABILITIES> 3,257,000
<BONDS> 0
0
0
<COMMON> 10,350,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 12,932,000
<SALES> 6,333,000
<TOTAL-REVENUES> 6,333,000
<CGS> 5,542,000
<TOTAL-COSTS> 5,542,000
<OTHER-EXPENSES> (70,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 135,000
<INCOME-PRETAX> (3,498,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> 00
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,498,000)
<EPS-PRIMARY> (.80)
<EPS-DILUTED> (.80)
</TABLE>
