SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 28, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-19621
APPLIANCE RECYCLING CENTERS OF AMERICA, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1454591
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7400 EXCELSIOR BOULEVARD, MINNEAPOLIS, MINNESOTA 55426-4517
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 612-930-9000
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK,
WITHOUT PAR VALUE
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of March 24, 1997, the aggregate market value of the voting stock held by
nonaffiliates of the registrant, computed by reference to the average of the
high and low prices on such date as reported by the Nasdaq SmallCap Market, was
$2,841,860.
As of March 24, 1997, there were outstanding 1,136,744 shares of the
registrant's Common Stock, without par value.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement dated March 24, 1997,
are incorporated by reference into Part III hereof.
TABLE OF CONTENTS
PART I
Item 1. Business
General
Industry Background
Company Background
Customers and Source of Supply
Company Operations
Principal Product and Services
Sales and Marketing
Seasonality
Competition
Government Regulation
Employees
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for the Company's Common Equity and Related Shareholder
Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Company
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
SIGNATURES
INDEX TO EXHIBITS
PART I
ITEM 1. BUSINESS
GENERAL
Appliance Recycling Centers of America, Inc., together with its
operating subsidiaries ("ARCA" or the "Company") provides a comprehensive range
of services for large-scale collection, reuse and recycling of major household
appliances in an environmentally sound manner. The Company provides its
customers with integrated processes and programs addressing the solid waste
management, environmental and energy conservation issues involved with appliance
disposal and recycling. The Company generates revenues from fees charged for the
disposal of appliances, the sale of materials generated from processed
appliances (byproduct revenues) and the sale of reconditioned appliances through
a chain of Company-owned retail stores called Encore(R) Recycled Appliances
("Encore").
The Company was incorporated in Minnesota in 1983, although through its
predecessors, it commenced the appliance recycling business in 1976. The
Company's principal office is located at 7400 Excelsior Boulevard, Minneapolis,
Minnesota 55426-4517. References herein to the Company include its operating
subsidiaries. (See Exhibit 21.1.)
INDUSTRY BACKGROUND
There are more than 500 million major household appliances, such as
refrigerators, freezers, ranges, dishwashers, microwaves, washers, dryers, room
air conditioners, water heaters and dehumidifiers, currently in use in the
United States. It is estimated by the Steel Recycling Institute that in 1995, 42
million major household appliances were taken out of use in the United States.
Industry sources estimate that 50 to 55 million major household appliances will
be disposed of each year between 1997 and the year 2000. The disposal of these
appliances has become a serious problem as a result of a number of factors
including: (i) decreasing landfill capacity in many parts of the country; (ii)
the inability of incinerators, composting facilities and other landfill
alternatives to process appliances; and (iii) the presence in appliances of
certain hazardous and other environmentally harmful materials that require
special processing.
Legislation has been adopted in 34 states affecting appliance disposal.
This legislation may include landfill restrictions, disposal bans, advance
disposal fees and other types of restrictions. As a result, appliances must be
dealt with outside the ordinary municipal solid waste stream.
Landfill restrictions arise in part because some appliance components
contain certain hazardous and other environmentally harmful materials, including
polychlorinated biphenyls (PCBs), mercury, refrigerants such as
chlorofluorocarbons (CFCs) and sulfur dioxide, and oils. PCBs are suspected as
carcinogens, are resistant to degradation when deposited in landfills and can
cause groundwater contamination. The production of PCBs was banned by the EPA in
1979, although businesses were allowed to continue using remaining inventories
of components that contained PCBs. Mercury is toxic to humans and can enter the
body through inhalation, skin absorption or ingestion, and it vaporizes at high
temperatures forming extremely toxic fumes. CFCs are believed to cause long-term
damage to the earth's stratospheric ozone layer and may contribute to global
warming when released into the atmosphere. The 1990 Amendments to the Clean Air
Act prohibit the venting of CFCs and, since July 1, 1992 have required the
recovery of CFC refrigerants during the service, repair and disposal of
appliances. See Business - Government Regulation.
In addition to these solid waste management and environmental issues,
utility companies, motivated by economic and environmental factors to control
energy consumption, sponsor various programs to encourage and assist residential
consumers to conserve energy, including programs for turning in surplus,
energy-inefficient appliances. Many residential consumers own and operate room
air conditioners, freezers or more than one refrigerator, contributing
significantly to residential energy use and peak energy demand. In addition,
many of the refrigerators manufactured in the 1960s and early 1970s consume up
to 1,750 kilowatt-hours of electricity each year. The National Appliance Energy
Conservation Act requires that a typical 18-cubic-foot refrigerator manufactured
after 1992 have an energy consumption rate not exceeding 700 kilowatt-hours per
year. As new, more efficient appliances become available, utility companies have
begun to encourage the use of newer models and the disposal of older, less
efficient models.
The Federal Energy Policy Act of 1992 gives individual states the
option of deregulating their electric utility industry. The potential of
deregulation has caused uncertainty about the future and form of energy
conservation programs sponsored by electric utilities. Some electric utility
companies are delaying new energy conservation programs, including the Company's
refrigerator recycling program. The Company believes, however, that energy
conservation and efficiency programs will remain a long-term component of the
nation's electric utility industry. See Business - Government Regulation.
COMPANY BACKGROUND
The Company began business in 1976 as a retailer of reconditioned
appliances. Initially, the Company contracted with national and regional
retailers of appliances such as Sears, Roebuck & Company, Inc. ("Sears") and
Montgomery Ward & Co. ("Montgomery Ward") to collect major appliances in
Minneapolis/Saint Paul and two other metropolitan areas. As part of their new
appliance sales efforts, these customers arrange for the removal of old
appliances from consumers' residences. The Company collects old appliances on
behalf of its customers, reconditions and sells suitable used appliances through
its own retail stores and sells the remaining appliances to scrap metal
processors.
In the late 1980s, in response to stricter environmental protection
laws, the Company developed and marketed programs to process and dispose of
appliances in an environmentally sound manner. These programs are offered to new
appliance retailers, waste management companies and the general public. See
Business - Customers and Source of Supply.
In 1989, the Company expanded its appliance recycling concept to the
utility industry when it established an appliance processing center in
Milwaukee, Wisconsin, pursuant to a contract with a utility company. From 1989
to 1994 the Company focused its resources on the expansion of its business with
electric utility companies. During this time period the Company opened nine
centers throughout the U.S. and Canada, primarily serving seventeen electric
utility customers. The Company's electric utility business has been negatively
impacted by the potential of electric utility industry deregulation. The
potential of deregulation has caused electric utilities to decrease their
sponsorship of energy conservation programs like the one the Company offers. The
Company currently has only one major contract with an electric utility customer.
During fiscal year 1996, one customer, Southern California Edison
Company ("Edison"), accounted for approximately 22.1% of the Company's net
revenues. In September 1996, Edison entered into a contract with the Company to
extend the refrigerator recycling program through 1997. The Company has
participated in that program through its Los Angeles recycling center since
1993. Under the terms of the contract, Edison will provide for a minimum number
of refrigerators to be recycled during each year of the contract. The contract
generated revenues of $3.1 million in 1996 and will generate at least $3.5
million in revenues in 1997. The program is subject to cancellation by the
California Public Utilities Commission if certain cost effectiveness ratios are
not met by the Edison program.
In response to the decrease in demand for services from electric
utilities, the Company has increased its marketing of services to appliance
retailers, waste management companies and property management companies. The
Company also has increased its focus on the sale of reconditioned appliances. In
1995, under the name Encore(R) Recycled Appliances, the Company began operating
a chain of Company-owned retail stores. These stores offer reconditioned
appliances to value-conscious individuals and property managers.
During 1996 the Company continued to expand its focus on its Encore
retail stores and had more than 30 retail stores open at one point during the
year. Due to substantial losses in certain markets, the Company closed centers
and stores in three markets in the fourth quarter of 1996. Write-offs and other
significant expenses related to these closings caused the Company to report a
significantly larger than anticipated loss for the year. The Company currently
has four recycling centers, located in Columbus, Ohio; Minneapolis, Minnesota;
St. Louis, Missouri; and Los Angeles, California. The Company currently has 14
retail stores, located in the Minneapolis, St. Louis and Columbus markets.
CUSTOMERS AND SOURCE OF SUPPLY
The Company offers its services to entities that as part of their
operations become responsible for disposing of large quantities of used
appliances. These entities include new appliance retailers, waste management
companies, property management companies and utility companies.
NEW APPLIANCE RETAILERS. The Company began its business by offering
appliance recycling programs to Sears, Montgomery Ward and other new appliance
retailers to collect appliances from either the retailers' facilities or from
their consumers. Recently the Company expanded its existing marketing efforts to
new appliance retailers, a primary source of product which can be reconditioned
and sold in the Company's stores.
WASTE MANAGEMENT COMPANIES. The Company provides services to waste
management companies and the general public for the collection and recycling of
appliances for specified fees.
PROPERTY MANAGEMENT COMPANIES. The Company provides comprehensive
appliance exchange and recycling services to property managers of apartment
complexes as well as local housing authorities.
UTILITY COMPANIES. The Company contracts with utility companies to
provide comprehensive appliance recycling services tailored to the needs of the
particular utility. The contracts historically have had terms of one to four
years, with provisions for renewal at the option of the utility company. Under
some contracts, the utility retains the Company to manage all aspects of its
appliance recycling program, while under other contracts, the Company provides
only specified services. Pricing for the Company's services is on a
per-appliance basis and depends upon several factors, including the total number
of appliances processed, the length of the contract term and the specific
services selected by the utility. Contracts with electric utility customers
require that the Company does not recondition for resale appliances received
from utility company energy conservation programs. The Company currently has
only one major contract with an electric utility customer.
The Company believes its sources are adequate to supply the current
number of retail stores.
COMPANY OPERATIONS
The Company provides an integrated range of collection, reuse and
recycling services. Appliances are collected from a variety of sources,
including new appliance retailers and manufacturers, solid waste management
companies, property managers, local government and electric utilities. Some
appliances are reconditioned and sold through the Company's retail network of
Encore stores. The remaining appliances are disposed of in an environmentally
responsible manner at a Company recycling center. Environmentally harmful
substances---including CFCs, PCBs and mercury---are removed and properly
managed. After all appliance processing is completed, scrap materials are sold
for recycling.
The Company seeks to establish its centers in metropolitan areas where
it can be assured a sufficient volume of appliances to enable the Company to
operate at profitable levels. The Company's ability to expand successfully into
other markets depends on its ability to obtain contracts and be cost competitive
in the operation of new centers. Factors considered by the Company in evaluating
such markets include: (i) the projected volume of appliances; (ii) local real
estate conditions; (iii) equipment costs; (iv) labor costs; (v) transportation
and collection costs; (vi) scrap metal demand and prices; (vii) insurance and
performance bond requirements; and (viii) existing environmental laws.
When a potential market is identified, the Company attempts to
negotiate contracts to provide appliance recycling services. The Company enters
the market only after securing a satisfactory supply of appliances. When a
sufficient supply of appliances is obtained, the Company proceeds to secure
necessary permits and licenses, obtain appropriate facilities to house the
recycling center and retail stores, install processing equipment, acquire
collection vehicles, and employ and train suitable collection, reconditioning
and processing personnel. If a large geographic area is being serviced, the
Company may also obtain one or more sites to serve as transfer locations.
Once the Company's facility is opened, appliances are collected from
its customers and brought to the Company's recycling facility, where they are
inspected to determine whether they will be either reconditioned for resale or
processed for recycling in an environmentally sound manner.
The Company believes 15 to 20% of all appliances collected can be
reconditioned. Appliances identified for resale are thoroughly inspected for
wear-and-tear and broken or damaged parts. Worn parts are replaced and
appliances are tested to ensure they are fully operational and function safely
under proper conditions. Appliances are professionally cleaned and touched-up or
repainted. Reconditioned appliances are then sold in the Company's chain of
Encore retail stores. Each appliance has a 90-day warranty, with an additional
extended warranty available for purchase. The Company offers a money-back
guarantee and provides delivery and repair services on products that it sells.
Appliances that don't meet the Company's standards are processed and
recycled in an environmentally sound manner. Appliances identified to be
recycled are processed per federal, state and local environmental regulations.
They are inspected and categorized according to the types of hazardous materials
they may contain. At the Company's centers, appliances are moved through the
processing area on a conveyor system, which eases the handling of heavy and
bulky items and promotes employee safety. After the appliances are moved to the
processing area, the Company's processing technicians remove electrical
capacitors and fluorescent light ballasts that may contain PCB dielectric fluid,
and components that may contain mercury. This procedure is conducted at a
specially constructed and controlled component removal area. The Company's
processing technicians are trained to locate and remove such components from all
makes and models of appliances. The technicians place the components in
separate, clearly marked containers in the component removal area. Throughout
the day, the containers are regularly emptied into United States Department of
Transportation approved drums for storage and subsequent shipment to qualified
hazardous waste disposal or recycling facilities.
The next step is to recover refrigerants from the appliances. Several
different types of refrigerant fluids and gases are commonly used in household
appliances and are recovered and reclaimed at the Company's processing centers.
Older refrigerators typically contain R-12 (dichlorodifluoromethane) or R-114
(dichlorotetrafluoroethane) chlorofluorocarbon (CFC) refrigerants. These
refrigerants are commonly referred to by their Dupont trade name of Freon. Newer
refrigerators, those manufactured after 1994, contain R-134a (tetrafluoroethane)
a hydrofluorocarbon (HFC) refrigerant. Freezers and room air conditioners most
frequently contain R-12 or R-22 (chlorodifluoromethane), a
hydrochlorofluorocarbon (HCFC) refrigerant. Dehumidifiers and water coolers
usually contain R-12 or R-500 (an azeotrope blend of R-12 and R-152a) as the
refrigerant fluid/gas. Each type of refrigerant must be kept separate during the
processing operation to ensure the recyclability of the refrigerants. The
Company's technicians are trained to identify each type of refrigerant and to
separate appliances according to the specific type of refrigerant used in a
particular appliance.
When processing at the Company's centers has been completed and the
appliances are free of environmentally hazardous components and materials, they
are delivered to qualified metals processing facilities for shredding. Shredded
materials from the processed appliances are sold to steel mini-mills or other
metal recovery facilities for appropriate reuse.
PLANNED EXPANSION. The Company has no plans to expand or open
additional recycling centers or retail stores in 1997. Management believes that
the uncertainties in the electric utility industry regarding deregulation will
persist at least through 1998. The reaction to deregulation among states and
utilities has been varied. The Company believes, however, that energy
conservation and efficiency programs will remain a long-term component of the
nation's electric utility industry.
The Company believes that the growth and expansion of the business in
the near future will likely occur primarily through the expansion of revenues
from the Company's current retail stores, the development of contracts with
solid waste management companies and appliance retailers, and the generation of
revenues from the contract with Edison.
PRINCIPAL PRODUCT AND SERVICES
The Company generates revenues from three sources: recycling fees,
appliance sales and byproduct revenues. The following table reflects the
percentage of total revenues from each source.
1996 1995 1994
---- ---- ----
Recycling fees 48.4% 75.7% 85.9%
Appliance sales 36.7% 11.0% 6.6%
Byproduct revenues 14.9% 13.3% 7.5%
----- ----- ----
100.0% 100.0% 100.0%
========= ====== ======
SALES AND MARKETING
The Company uses various means to promote awareness of its services and
the need for environmentally sound recycling of appliances and believes it is
recognized as a leader in the appliance recycling industry.
The Company's strategy for its retail stores is to present an upscale
image in convenient, high-traffic locations. Store interiors are modern, bright
and clean. In every Encore market, the Company actively promotes its stores
through various forms of print advertising, including daily classified ads in
major newspapers, telephone yellow pages ads and direct mail. In addition, the
Company uses radio and television advertisements in some markets, in addition to
other types of promotions.
SEASONALITY
The Company experiences seasonal fluctuations in operating results,
with revenues generally higher during the second and third calendar quarters
than in the first and fourth calendar quarters. The lower levels in the first
and fourth quarters reflect consumer purchasing cycles, which result in lower
sales of major household appliances during such quarters and corresponding
reductions in the demand for appliance recycling services. Furthermore, utility
companies that sponsor appliance turn-in programs generally reduce their
promotional efforts for such programs during the first and fourth calendar
quarters. The Company expects that it will continue to experience lower revenues
in the first and fourth quarters of future years as compared to the second and
third quarters of such years.
COMPETITION
Many factors, including existing and proposed governmental regulation,
may affect competition in the waste management and environmental services
industry. Recycling of appliances in conformity with recent legislative and
regulatory requirements is a relatively new industry. The Company generally
competes with two or three other companies which are based in the geographic
area to be served under the contract and which generally offer only some of the
services provided by the Company.
The Company expects its primary competition for contracts with existing
or new customers to come from entrepreneurs entering the appliance recycling
business, energy management consultants, current recycling companies, major
waste hauling companies, scrap metal processors and used appliance dealers. In
addition, customers such as utility companies and local governments may operate
appliance recycling programs internally rather than contracting with the Company
or other third parties. There can be no assurance that the Company will be able
to compete profitably in any of its chosen markets.
Competition for the Company's retail stores comes from new appliance
retailers and other reconditioned and used appliance retailers. Each Encore
location will compete not only with local and national chains of new appliance
retailers, many of whom have been in business longer than the Company and who
may have significantly greater assets than the Company, but will also be
required to compete with numerous independently owned retailers of used and
reconditioned appliances.
GOVERNMENT REGULATION
The business of recycling major appliances is subject to certain
governmental laws and regulations and is becoming increasingly regulated. These
laws and regulations include landfill disposal restrictions, hazardous waste
management requirements and air quality standards, as well as special permit and
license conditions for the recycling of appliances. In some instances, there are
bonding, insurance and other conditions for bidding on appliance recycling
contracts.
The Company's appliance recycling centers are subject to various
federal, state and local laws, regulations and licensing requirements relating
to the collection, processing and recycling of household appliances.
Requirements for registrations, permits and licenses vary among the Company's
market areas. The Company's centers are registered with the EPA as hazardous
waste generators and are licensed, where required, by appropriate state and
local authorities. The Company has agreements with approved and licensed
hazardous waste companies for transportation and disposal of PCBs from its
centers.
The 1990 Amendments to the Clean Air Act provide for the phaseout of
the production of CFCs over a period of years. Effective July 1, 1992, the Act
prohibits the venting of CFCs in the course of maintaining, servicing, repairing
or disposing of an appliance. The Act also requires the recovery of CFC
refrigerants from appliances prior to their disposal or delivery for recycling.
In 1995, the venting of CFC substitute refrigerants was also prohibited.
In 1992, Congress adopted the Energy Policy Act of 1992 to encourage
energy efficiency. Requirements under this act establish, among other things,
mandatory energy performance standards that affect the manufacture and sale of
major household appliances. Another component of this act allows for
deregulation of the nation's energy providers, including the electric utility
industry. The ultimate impact of deregulation on the electric utility industry
is yet unknown; therefore, there can be no assurance that the Company will be
able to continue certain of its current operations in a deregulated environment.
Company management believes that further government regulation of the
appliance recycling industry could have a positive effect on the Company's
business; however, there can be no assurance what course future regulation could
have. Under some circumstances, further regulation could materially increase the
costs of the Company's operations and have an adverse effect on the Company's
business. In addition, as is the case with all companies handling hazardous
materials, under some circumstances, the Company may be subject to contingent
liability.
EMPLOYEES
At March 1, 1997, the Company had 157 full-time employees, of whom
approximately 87 percent were involved in the collection, transportation and
processing of appliances at the Company's centers and approximately 13 percent
were in sales, administration and management. The Company has not experienced
any work stoppages and believes its employee relations are good.
ITEM 2. PROPERTIES
The Company's executive offices are located in Minneapolis, Minnesota,
in a Company owned facility which includes approximately 11 acres of land. The
building contains approximately 122,000 square feet, including 27,000 square
feet of office space and 95,000 square feet of operations and processing space.
The Southern California center building, which also is owned by the Company, is
located in Compton, California, and consists of 44,000 square feet: 6,000 square
feet of office space and 38,000 square feet of warehouse space. In addition, the
Company owns a 14,000-square-foot facility in Saint Paul, Minnesota, which
contains a retail store at which it sells reconditioned appliances.
The Company generally leases the other facilities it operates; however,
in some locations, the Company may purchase rather than lease a facility for a
center. Numerous factors will be considered by the Company in determining
whether to purchase a facility, including: (i) the length of the contract or
contracts to be serviced at the facility; (ii) the need for structural
modifications to the facility to accommodate the Company's processing equipment;
(iii) local real estate conditions; and (iv) license or permit requirements
applicable to the Company's operations. The Company generally attempts to
negotiate lease terms that correspond to the term of the principal contract or
contracts in connection with which the center is to be operated. The Company's
centers typically range in size from 12,000 to 40,000 square feet. The Company's
retail stores are typically 1,500 to 3,000 square feet. Currently, the Company
is negotiating the settlement of 11 leases for the locations closed in 1996.
The Company believes that the facilities and equipment at each of its
centers are adequate to meet its anticipated needs for the near term and
believes that alternate facilities will readily be available to the Company to
meet its future needs.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are involved in various legal
proceedings arising in the normal course of business, none of which is expected
to result in any material loss to the Company or any of its subsidiaries.
In addition, the Company is involved in certain legal proceedings
arising from the cancellation of leases in connection with the closing of
certain facilities. The Company has established a reserve for lease settlements
and closing costs. See Note 6 in the "Notes to Consolidated Financial
Statements" in "Item 8. Financial Statements and Supplementary Data."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to a vote of security holders
during the last quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's Common Stock trades on the Nasdaq SmallCap Market under
the symbol ARCI. The following table sets forth the range of low and high prices
for the Company's Common Stock for each of the four quarters of 1996 and 1995 as
reported on the Nasdaq system(1):
1996 1995
---- ----
Low High Low High
--- ---- --- ----
First Quarter $12 $19 1/2 $13 1/2 $26 1/2
Second Quarter 14 1/2 20 15 26
Third Quarter 8 1/2 17 1/2 21 1/2 28 1/2
Fourth Quarter 2 1/3 11 1/2 15 27 1/2
(1)Effective at the close of business on February 21, 1997, the Company
adopted a 1-for-4 reverse stock split. The prices have been retroactively
restated to reflect the 1-for-4 reverse stock split. The last sales price on
March 24, 1997 was $2.50.
The Company's Common Stock is currently traded on the Nasdaq SmallCap
Market under the symbol ARCI. The Common Stock was traded on the Nasdaq National
Market from January 8, 1993 to February 25, 1997.
The Company had 2,390 shareholders of record as of March 7, 1997.
The Company has never paid or declared any cash dividends and the line
of credit agreement entered into in 1996 prohibits the payment of cash
dividends. The Company does not intend to pay dividends on its Common Stock in
the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial information set forth below should be read in
conjunction with "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Item 8. Financial Statements and
Supplementary Data."
<TABLE>
<CAPTION>
Fiscal Years Ended 1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------
(In thousands, except
per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
Net revenues $ 14,030 $ 16,241 $ 20,327 $ 14,943 $ 15,304
- ----------------------------------------------------------------------------------------------------------------
Gross profit $ 2,744 $ 5,630 $ 8,360 $ 4,996 $ 7,213
- ----------------------------------------------------------------------------------------------------------------
Operating income (loss) $ (6,899) $ (1,538) $ 1,753 $ (645) $ 2,174
- ----------------------------------------------------------------------------------------------------------------
Net income (loss) $ (7,269) $ (943) $ 877 $ (455) $ 1,228
- ----------------------------------------------------------------------------------------------------------------
Earnings (loss) per share $ (6.53) $ (0.90) $ 0.82 $ (0.47) $ 1.29
- ----------------------------------------------------------------------------------------------------------------
Weighted average number
of shares outstanding 1,114 1,052 1,071 975 954
- ----------------------------------------------------------------------------------------------------------------
BALANCE SHEET
Working capital $ (1,671) $ 3,503 $ 4,700 $ 2,046 $ 2,087
- ----------------------------------------------------------------------------------------------------------------
Total assets $ 9,992 $ 15,890 $ 16,912 $ 14,481 $ 9,998
- ----------------------------------------------------------------------------------------------------------------
Long-term liabilities $ 1,711 $ 2,084 $ 2,741 $ 2,474 $ 2,938
- ----------------------------------------------------------------------------------------------------------------
Shareholders' equity $ 4,113 $ 10,188 $ 10,932 $ 9,840 $ 4,821
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The Company generates revenues from three major areas: recycling fees,
sales of reconditioned appliances and sales of byproducts. In 1996 the Company
experienced a significant decrease in recycling fees received from electric
utility companies because of the uncertainties of energy conservation programs
due to proposed electric utility industry deregulation. This decrease was
partially offset by an increase in sales of reconditioned appliances as the
Company added appliance reconditioning capabilities to six of its recycling
centers and opened 22 additional retail stores. Due to poor performance related
to this expansion and slower than planned sales growth, the Company incurred
substantial losses. In response to these losses, the Company closed three
centers and 12 retail stores in the fourth quarter and incurred charges of
approximately $2.0 million related to the closing of these locations.
The Company experiences seasonal fluctuations in operating results,
with revenues generally higher during the second and third calendar quarters
than in the first and fourth quarters. The lower levels in the first and fourth
quarters reflect consumer purchasing cycles, which result in lower demand for
appliances and recycling services.
REVENUES
The Company's net revenues for 1996 were $14,030,000 compared to
$16,241,000 in 1995. Recycling revenues decreased to $6,785,000 in 1996 from
$12,300,000 in 1995. The decrease was primarily due to continued decreased
revenues from contracts with electric utility programs. In September 1996,
Southern California Edison Company ("Edison") entered into a contract with the
Company to extend the refrigerator recycling program through 1997. Under the
terms of the contract, Edison has specified minimum refrigerator recycling
volumes which generated $3.1 million in revenues in 1996. The contract is
expected to generate a minimum of $3.5 million in revenues in 1997. The program
is subject to cancellation by the California Public Utilities Commission if
certain cost effectiveness ratios are not met by the Edison program. The Company
believes 1997 recycling revenue levels will be highly dependent on the volume of
appliances processed from the Edison program.
Appliance sales increased to $5,148,000 in 1996 from $1,793,000 in
1995. The increase was primarily due to the Company's expansion of its retail
business through a new chain of stores under the name Encore(R) Recycled
Appliances. During 1996, the Company opened a total of 22 retail locations in
the following markets: Baltimore, Maryland-Washington, D.C.; Columbus, Ohio; Los
Angeles, California; St. Louis, Missouri; Minneapolis, Minnesota; and Oakland,
California.
Due to substantial losses in some of the markets, the Company withdrew
from three markets during the fourth quarter of 1996, closing 12 retail
locations and three recycling centers. The Company closed all of its retail
locations and centers in Washington, D.C./Baltimore, Maryland; Hartford,
Connecticut; and Oakland, California. In addition, the Company closed its retail
outlets in Southern California. Total revenues associated with the closed
markets were $3,268,000 in 1996. As of December 28, 1996 the Company operated 14
retail locations and four recycling centers compared to 10 retail locations and
10 recycling centers as of December 30, 1995. No new stores are currently
expected to be opened until after 1997. The Company expects 1997 retail revenue
to be lower than 1996 retail revenue due to the decreased number of stores, but
expects a growth in sales per store.
Byproduct revenues decreased slightly to $2,097,000 in 1996 from
$2,148,000 in 1995. The decrease was due to lower sales of reclaimed CFCs offset
by a small increase in scrap income.
The Company's net revenues for 1995 were $16,241,000 compared to
$20,327,000 in 1994. Recycling revenues decreased to $12,300,000 in 1995 from
$17,452,000 in 1994 primarily due to decreased appliance volumes from electric
utility customers.
Byproduct revenues increased to $2,148,000 in 1995 from $1,534,000 in
1994. The increase was primarily due to higher demand for and corresponding
sales of reclaimed CFCs and increased scrap metal prices.
Appliance sales increased to $1,793,000 in 1995 from $1,341,000 in
1994. In 1995, the Company began a significant initiative to expand appliance
sales.
GROSS PROFIT
The overall gross profit rate decreased to 19.6% for 1996 from 34.7%
for 1995. The decrease was primarily due to costs related to a decrease in units
recycled from utility customers, start-up inefficiencies related to the
expansion of the reconditioned appliance business, lower than planned retail
sales and write-offs and other significant expenses related to the closing of
retail stores and recycling centers. The gross profit rate in the closed markets
was (12.7%) in 1996.
The Company believes the gross profit rate will improve due to the
closing of under-performing markets and the improved operating efficiencies in
the remaining markets. Also, the Company believes gross profit will be highly
dependent on the volume of appliances processed from the Edison program.
The overall gross profit rate decreased to 34.7% in 1995 from 41.1% in
1994 primarily due to reduced numbers of appliances recycled from utility
customers. In 1995 the Company also incurred personnel and related costs in
shifting from electric utility customers to the reconditioning and sale of
appliances.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to $9,643,000 in
1996 from $5,852,000 in 1995, a 64.8% increase. Selling, general and
administrative expenses were 68.7% of sales in 1996 compared to 36.0% and 32.5%
in 1995 and 1994, respectively. Selling expenses increased to $3,275,000 in 1996
from $1,452,000 in 1995. The increase in selling expenses was primarily due to
costs associated with opening and operating additional retail stores in 1996
compared to 1995. General and administrative expenses increased to $6,368,000 in
1996 from $4,400,000 in 1995. The increase in general and administrative
expenses was due to operating more locations in 1996 than 1995 and closing costs
associated with the closed markets slightly offset by a decrease in personnel
costs.
The increase of 3.5% in selling, general and administrative expenses as
a percentage of net revenues in 1995 compared to 1994 was primarily due to
decreased revenues without a proportionate decrease in selling, general and
administrative expenses.
In 1995, the Company took a one-time charge of $1.3 million related to
a loss on impaired assets and non-recurring charges associated with the
Company's utility business.
INTEREST EXPENSE
Interest expense increased in 1996 compared to 1995 due to a higher
average borrowed amount in 1996 than 1995. Interest expense decreased in 1995
compared to 1994, primarily due to an average lower borrowed amount in 1995 than
1994.
INCOME TAXES
During 1996, the Company recorded a valuation allowance of $2,560,000
on its net deferred tax assets generated during 1996 due to the uncertainty of
their realization. In addition, in conjunction with the fourth quarter business
restructuring, the Company wrote off $235,000 of deferred tax assets recorded in
prior years due to the uncertainty of their realization. The realization of
deferred tax assets is dependent upon sufficient future taxable income during
the period that deductible temporary differences and carryforwards are expected
to be available to reduce taxable income. At December 28, 1996, the Company had
net operating loss carryforwards of $4,515,000 that expire in 2011.
The Company's tax rate decreased to 38.5% in 1995 from 43.1% in 1994
primarily due to a change in the effective state rate.
LIQUIDITY AND CAPITAL RESOURCES
At December 28, 1996, the Company had a working capital deficit of
$1,671,000 compared to a working capital surplus of $3,503,000 at December 30,
1995. Cash and cash equivalents decreased to $280,000 at December 28, 1996 from
$4,605,000 at December 30, 1995. Net cash used in operating activities was
$4,142,000 in 1996 compared to net cash provided by operating activities of
$3,706,000 in 1995. The decrease in cash provided by operating activities was
primarily due to the net loss from operations offset by depreciation and
amortization expenses and a decrease in accounts receivable attributable to the
revenue decrease.
Net cash used in investing activities was $954,000 in 1996 compared to
$1,372,000 in 1995. The decrease in net cash used in investing activities in
1996 from 1995 was due to a decrease in capital expenditures and proceeds
received from the selling of excess equipment.
Net cash provided by financing activities was $750,000 in 1996 compared
to net cash used in financing activities of $607,000 in 1995. The increase in
cash provided by financing activities was primarily due to the issuance of
Common Stock in a May 1996 private placement.
The Company's capital expenditures were approximately $1,285,000 in
1996 and $2,261,000 in 1995. The 1996 capital expenditures were primarily
related to leasehold improvements to the Company's recycling centers and
additional retail stores. The 1995 expenditures were primarily related to
building improvements and acquisition of equipment to add appliance shredding
capabilities to the Minnesota facility and were financed with working capital
and an equipment loan of $700,000. The Company had no material purchase
commitments for assets as of December 28, 1996. The closing of certain retail
stores resulted in the loss of the capital investments in these leasehold
improvements totaling $480,000. The Company generated $415,000 in proceeds in
1996 from the sales of excess equipment, primarily transportation equipment,
from the closing of the centers and stores. In 1997, the Company does not expect
to generate a material amount of cash from the sale of excess equipment since
the majority of it was sold in 1996.
As of December 28, 1996, the Company had a $2.0 million line of credit
with a lender. The line of credit provides for a stated maturity date of August
30, 1999, and provides that the lender may demand payment in full of the entire
outstanding balance of the loan at any time. The loan provides for a rate of
interest equal to 5 percentage points over the prime lending rate per annum, but
never less than 10% per annum (the loan rate as of December 28, 1996 was
13-1/4%), and minimum monthly interest payments of $10,000 regardless of the
outstanding principal balance. Upon an event of default, the interest may
increase by 5 percentage points per annum. The line of credit is secured by
receivables, inventory, equipment, real estate and other assets of the Company
and a portion is guaranteed by the President of the Company. The loan also
requires that the Company meet certain financial covenants, provides payment
penalties for noncompliance, limits the amount of other debt the Company can
incur, limits the amount of spending on fixed assets and limits payments of
dividends. At December 28, 1996, the Company's borrowing availability under the
line of credit was $1,640,000, of which $1,390,000 was borrowed.
In May 1996, $700,000 was raised in a private placement of Common Stock
to an institutional investor that currently holds approximately 16% 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 50,000 shares at $14.00 per share after giving effect to the Company's
reverse stock split.
The Company believes, based on the closing of unprofitable markets, the
anticipated revenues from the Edison contract, the anticipated growth in sales
per retail store and the anticipated improvement in gross profit, that its
current cash balance, funds generated from operations and current line of credit
will be sufficient to finance its operations and capital expenditures through
December 1997. The Company's total capital requirements will depend, among other
things as discussed below, on the number of recycling centers operating and the
number and size of retail stores operating during the fiscal year. Currently,
the Company has four centers and 14 stores in operation. If revenues are lower
than anticipated or expenses are higher than anticipated or the line of credit
cannot be maintained, 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. There
can be no assurance that such additional sources of financing will be available
or available on terms satisfactory to the Company or permitted by the Company's
current lender.
FORWARD-LOOKING STATEMENTS
Statements contained in this annual report regarding the Company's
future operations, performance and results, and anticipated liquidity discussed
herein are forward-looking and therefore are subject to certain risks and
uncertainties, including those discussed herein. In addition, any
forward-looking information regarding the operations of the Company will be
affected by the ability of individual stores to meet planned revenue levels, the
speed at which individual Encore stores reach profitability, costs and expenses
being realized at higher than expected levels, the Company's ability to secure
an adequate supply of used appliances for resale, the continued availability of
the Company's current line of credit, and the ability of Edison to deliver units
under its contract with the Company and the timing of such delivery.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Description
-----------
Independent Auditor's Report
Consolidated Balance Sheets as of December 28, 1996
and December 30, 1995
Consolidated Statements of Operations for the three years
ended December 28, 1996
Consolidated Statements of Shareholders' Equity for the three years
ended December 28, 1996
Consolidated Statements of Cash Flows for the three years
ended December 28, 1996
Notes to Consolidated Financial Statements
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders
Appliance Recycling Centers of America, Inc.
Minneapolis, Minnesota
We have audited the accompanying consolidated balance sheets of Appliance
Recycling Centers of America, Inc. and subsidiaries as of December 28, 1996 and
December 30, 1995, and the related consolidated statements of operations,
shareholders' equity, and cash flows for each of the years in the three year
period ended December 28, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Appliance Recycling
Centers of America, Inc. and subsidiaries as of December 28, 1996 and December
30, 1995, and the results of their operations and their cash flows for each of
the years in the three year period ended December 28, 1996, in conformity with
generally accepted accounting principles.
MCGLADREY & PULLEN, LLP
Minneapolis, Minnesota
February 18, 1997
APPLIANCE RECYCLING CENTERS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 28, December 30,
1996 1995
------------ ------------
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 280,000 $ 4,605,000
Accounts receivable, net of allowance of
$84,000 in 1996 (Notes 4 and 10) 1,127,000 1,382,000
Inventories (Note 4) 444,000 426,000
Income taxes receivable 400,000 106,000
Other current assets 246,000 325,000
Deferred tax assets (Note 8) -- 277,000
------------ ------------
Total current assets $ 2,497,000 $ 7,121,000
------------ ------------
PROPERTY AND EQUIPMENT, AT COST (Notes 4, 5 and 11)
Land $ 2,103,000 $ 2,101,000
Buildings and improvements 3,798,000 3,677,000
Equipment 5,604,000 6,483,000
------------ ------------
$ 11,505,000 $ 12,261,000
Less accumulated depreciation 4,086,000 3,973,000
------------ ------------
Net property and equipment $ 7,419,000 $ 8,288,000
------------ ------------
OTHER ASSETS $ 76,000 $ 108,000
DEFERRED TAX ASSETS (Note 8) -- 373,000
------------ ------------
Total assets $ 9,992,000 $ 15,890,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Line of credit (Note 4) $ 1,390,000 $ --
Current maturities of long-term obligations (Note 5) 227,000 1,041,000
Accounts payable 1,391,000 1,536,000
Accrued expenses (Note 6) 1,160,000 1,041,000
------------ ------------
Total current liabilities $ 4,168,000 $ 3,618,000
LONG-TERM OBLIGATIONS, LESS CURRENT MATURITIES (Note 5) 1,711,000 2,084,000
------------ ------------
Total liabilities $ 5,879,000 $ 5,702,000
------------ ------------
COMMITMENTS (Note 7)
SHAREHOLDERS' EQUITY (Notes 3, 4, 8 and 9)
Common Stock, no par value; authorized 5,000,000 shares;
issued and outstanding 1,137,000 shares in 1996
and 1,057,000 shares in 1995 $ 10,350,000 $ 9,177,000
Retained earnings (accumulated deficit) (6,237,000) 1,032,000
Foreign currency translation adjustment -- (21,000)
------------ ------------
Total shareholders' equity $ 4,113,000 $ 10,188,000
------------ ------------
Total liabilities and shareholders' equity $ 9,992,000 $ 15,890,000
============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
APPLIANCE RECYCLING CENTERS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the fiscal year ended
-------------------------
DECEMBER 28, December 30, December 31,
1996 1995 1994
----------------------------------------
<S> <C> <C> <C>
REVENUES (Notes 3 and 10)
Recycling revenues $ 6,785,000 $ 12,300,000 $ 17,452,000
Appliance sales 5,148,000 1,793,000 1,341,000
Byproduct revenues 2,097,000 2,148,000 1,534,000
------------ ------------ ------------
Total revenues $ 14,030,000 $ 16,241,000 $ 20,327,000
COST OF REVENUES 11,286,000 10,611,000 11,967,000
------------ ------------ ------------
Gross profit $ 2,744,000 $ 5,630,000 $ 8,360,000
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 9,643,000 5,852,000 6,607,000
LOSS ON IMPAIRED ASSETS AND NON-RECURRING
CHARGES (Note 11) - 1,316,000 -
------------ ------------ ------------
Operating income (loss) $ (6,899,000) $ (1,538,000) $ 1,753,000
OTHER INCOME (EXPENSE)
Other income 122,000 65,000 66,000
Interest income 37,000 230,000 43,000
Interest expense (294,000) (290,000) (320,000)
------------ ------------ ------------
Income (loss) before provision for income taxes $ (7,034,000) $ (1,533,000) $ 1,542,000
PROVISION FOR (BENEFIT OF)
INCOME TAXES (Note 8) 235,000 (590,000) 665,000
------------ ------------ ------------
Net income (loss) $ (7,269,000) $ (943,000) $ 877,000
============ ============ ============
NET EARNINGS (LOSS) PER COMMON AND
COMMON EQUIVALENT SHARE $ (6.53) $ (0.90) $ 0.82
============ ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES 1,114,000 1,052,000 1,071,000
============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
APPLIANCE RECYCLING CENTERS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Retained Earnings Foreign Currency
Common Stock (Accumulated Deficit) Translation Adjustment Total
------------------ --------------------- ---------------------- -----
Shares Amount
------ ------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1993 1,010,000 $ 8,764,000 $ 1,098,000 $(22,000) $ 9,840,000
Exercise of Common Stock
options and warrants and related
tax benefits (Notes 8 and 9) 35,000 232,000 - - 232,000
Foreign currency translation
adjustment - - - (17,000) (17,000)
Net income (loss) - - 877,000 - 877,000
BALANCE, DECEMBER 31, 1994 1,045,000 $ 8,996,000 $ 1,975,000 $(39,000) $10,932,000
Exercise of Common Stock
options and warrants and related
tax benefits (Notes 8 and 9) 12,000 181,000 - - 181,000
Foreign currency translation
adjustment - - - 18,000 18,000
Net income (loss) - - (943,000) - (943,000)
BALANCE, DECEMBER 30, 1995 1,057,000 $ 9,177,000 $ 1,032,000 $(21,000) $10,188,000
Issuance of Common Stock
(Notes 3 and 9) 73,000 1,118,000 - - 1,118,000
Exercise of Common Stock options
and warrants (Note 9) 7,000 55,000 - - 55,000
Foreign currency translation
adjustment - - - 21,000 21,000
Net income (loss) - - (7,269,000) - (7,269,000)
BALANCE, DECEMBER 28, 1996 1,137,000 $10,350,000 $ (6,237,000) $ - $ 4,113,000
</TABLE>
See Notes to Consolidated Financial Statements.
APPLIANCE RECYCLING CENTERS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the fiscal year ended
-------------------------
DECEMBER 28, December 30, December 31,
1996 1995 1994
----------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (7,269,000) $ (943,000) $ 877,000
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 2,477,000 1,452,000 1,723,000
Common Stock issued for services 30,000 - -
(Gain) loss on sale of equipment (118,000) 15,000 (52,000)
Deferred income taxes 650,000 (586,000) (161,000)
Loss on impaired assets and non-recurring charges - 1,316,000 -
Change in assets and liabilities, net of effects
from acquisition of Universal Appliance Company, Inc.,
and Universal Appliance Recycling, Inc. in 1996:
Receivables 510,000 2,850,000 (2,663,000)
Inventories 37,000 (247,000) 77,000
Other current assets 88,000 (17,000) 498,000
Income taxes receivable (294,000) (106,000) 380,000
Accounts payable (327,000) 834,000 (26,000)
Accrued expenses 87,000 (433,000) 760,000
Income taxes payable (13,000) (429,000) 429,000
--------------- --------------- ---------------
Net cash provided by (used in)
operating activities $ (4,142,000) $ 3,706,000 $ 1,842,000
--------------- -------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment $ (1,285,000) $ (1,549,000) $ (654,000)
Cash acquired from 1996 acquisition of Universal
Appliance Company, Inc. and Universal Appliance
Recycling, Inc. 26,000 - -
Proceeds from disposal of property and equipment 415,000 177,000 318,000
Payments for non-compete agreements (110,000) - -
--------------- -------------- ---------------
Net cash used in investing activities $ (954,000) $ (1,372,000) $ (336,000)
--------------- --------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from line of credit $ 1,390,000 $ - $ -
Payments on long-term obligations (1,412,000) (788,000) (955,000)
Proceeds and tax benefit from stock options 55,000 181,000 232,000
Proceeds from long-term obligations 17,000 - 1,125,000
Proceeds from issuance of Common Stock 700,000 - -
-------------- --------------- ---------------
Net cash provided by (used in)
financing activities $ 750,000 $ (607,000) $ 402,000
-------------- --------------- ---------------
Effect of foreign currency exchange rate
changes on cash and cash equivalents $ 21,000 $ 18,000 $ (17,000)
-------------- -------------- ----------------
Increase (decrease) in cash and cash equivalents $ (4,325,000) $ 1,745,000 $ 1,891,000
CASH AND CASH EQUIVALENTS
Beginning 4,605,000 2,860,000 969,000
------------ ------------ ---------------
Ending $ 280,000 $ 4,605,000 $ 2,860,000
============== ============== ===============
</TABLE>
APPLIANCE RECYCLING CENTERS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the fiscal year ended
-------------------------
DECEMBER 28, December 30, December 31,
1996 1995 1994
-----------------------------------------------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments (receipts) for:
Interest $ 285,000 $ 288,000 $ 315,000
Income taxes $(103,000) $ 413,000 $(274,000)
========= ========= =========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES
Long-term obligations incurred on purchase
of equipment $ - $ 712,000 $ 41,000
========= ========= =========
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 non-compete
agreement 176,000 - -
Value assigned to goodwill 302,000 - -
Long-term debt assumed (207,000) - -
--------- --------- ---------
Total consideration, 21,000 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
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT
ACCOUNTING POLICIES
NATURE OF BUSINESS: Appliance Recycling Centers of America, Inc. and
subsidiaries (the "Company") is in the business of selling reconditioned
appliances and providing recycling services in an environmentally-sound manner
for major household appliances throughout the United States. The Company sells
reconditioned appliances through a chain of Company-owned stores under the name
"Encore(R) Recycled Appliances." The Company provides recycling services on a
credit basis to utilities, local governments, appliance retailers and waste
management companies.
A SUMMARY OF THE COMPANY'S SIGNIFICANT ACCOUNTING POLICIES IS AS FOLLOWS:
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the
accounts of Appliance Recycling Centers of America, Inc. and its subsidiaries.
All significant intercompany accounts and transactions have been eliminated in
consolidation.
FAIR VALUE OF FINANCIAL INSTRUMENTS: The following methods and assumptions are
used to estimate the fair value of each class of financial instruments:
CASH EQUIVALENTS: Due to their short-term maturities, the carrying amount
approximates fair value.
SHORT- AND LONG-TERM DEBT: The fair value of short- and long-term debt is
estimated based on interest rates for the same or similar debt offered to
the Company having the same or similar remaining maturities and
collateral requirements. At December 28, 1996, the carrying value of the
Company's short- and long-term debt approximates fair value.
FISCAL YEAR: The fiscal years ended December 28, 1996, December 30, 1995 and
December 31, 1994 include 52 weeks.
REVENUE RECOGNITION: The Company recognizes revenue from appliance sales in the
period the appliance is sold. Recycling revenue is recognized when a unit is
collected and processed. Byproduct revenue is recognized upon shipment.
CASH AND CASH EQUIVALENTS: For purposes of reporting cash flows, the Company
considers all cash and any treasury bills, commercial paper and money-market
funds with an initial maturity of three months or less to be cash equivalents.
The Company maintains its cash in bank deposits and money-market accounts which,
at times, exceed federally insured limits. The Company has not experienced any
losses in such accounts. As of December 28, 1996 and December 30, 1995, the
Company had cash equivalents of $1,000 and $3,654,000, respectively, consisting
of a money-market account.
INVENTORIES: Inventories, consisting primarily of reconditioned appliances, are
stated at the lower of cost, first-in, first-out (FIFO), or market.
START-UP COSTS: Costs incurred on the start-up of new recycling centers are
capitalized and upon opening of the center are amortized over the following
six-month period. Start-up costs for retail stores are expensed when incurred.
PROPERTY AND EQUIPMENT: Depreciation is computed using straight-line and
accelerated methods over the following estimated useful lives:
Years
-----
Buildings and improvements 18 - 30
Equipment 3 - 8
The Company reviews its long-lived assets periodically to determine potential
impairment by comparing the carrying value of the long-lived assets with the
estimated future net undiscounted cash flows expected to result from the use of
the assets, including cash flows from disposition. Should the sum of the
expected future net cash flows be less than the carrying value, the Company
would recognize an impairment loss at the date. An impairment loss would be
measured by comparing the amount by which the carrying value exceeds the fair
value (estimated discounted future cash flows) of the long-lived assets. In
1995, the Company recorded a charge for impairment of certain assets.
(See Note 11.)
INCOME TAXES: Deferred taxes are provided on a liability method whereby deferred
tax assets are recognized for deductible temporary differences and operating
loss and tax credit carryforwards, and deferred tax liabilities are recognized
for taxable temporary differences. Temporary differences are the differences
between the reported amounts of assets and liabilities and their tax bases.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of the deferred
tax assets will not be realized. Deferred tax assets and liabilities are
adjusted for the effects of changes in tax laws and rates on the date of
enactment.
EARNINGS (LOSS) PER SHARE: Earnings (loss) per share has been computed by
dividing net income (loss) by the weighted average number of common and common
equivalent shares. In 1996 and 1995, the common equivalent shares were not
included in the computation as their effect was antidilutive. In 1994, the
common equivalent shares included in the computation represented shares issuable
upon assumed exercise of stock options and warrants using the treasury stock
method. Earnings per share for 1996 and prior years have been restated to
reflect the impact of the 1-for-4 reverse stock split that was effective on
February 21, 1997. (See Note 9.)
ESTIMATES: The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NOTE 2. MARKET CLOSINGS AND CORPORATE LIQUIDITY
The Company withdrew from three under-performing markets in the fourth quarter
of 1996. The Company closed three centers and nine retail stores in Hartford,
Connecticut, Washington, D.C./Baltimore, Maryland and Oakland, California. In
addition, the Company closed its three retail stores in Los Angeles, California.
The Company incurred charges of approximately $2.0 million which included the
write-off of leasehold improvements, deferred tax assets, goodwill, certain
non-compete agreements, bad debts and inventory, and the accrual of potential
lease contingencies and other costs of which approximately $466,000 was accrued
as of December 28, 1996.
The Company believes the closing of these markets will allow the potential for
profitability and improved cash flows in 1997. The Company also believes the
funds generated from the remaining operations and the current line of credit
will be sufficient to finance operations and capital requirements through 1997.
NOTE 3. BUSINESS COMBINATIONS
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 21,000 shares of its Common Stock for 100% ownership of
the respective companies. The acquisitions were accounted for as an asset
purchase. Also, the selling shareholders received $110,000 under non-compete
agreements. In December 1996, the Company withdrew from the Baltimore,
Maryland/Washington D.C. market and closed the center and three retail
locations. Accordingly, the goodwill and non-compete agreements were written off
in the fourth quarter of 1996. Pro forma income statement information for 1995
has not been presented due to immateriality.
On August 23, 1995, the Company acquired Major Appliance Pickup Service of St.
Louis, Inc., a St. Louis, Missouri-based used appliance retailer and recycler,
by issuing 7,143 shares of its Common Stock. The acquisition has been accounted
for as a pooling of interests which did not have a material effect on previously
reported financial statements.
NOTE 4. LINE OF CREDIT
The Company had a bank line of credit of $2.5 million which expired in April
1996. In August 1996, the Company entered into a $1.5 million line of credit
with a lender. On November 8, 1996, the line of credit was increased to $2.0
million. The line of credit provides for a stated maturity date of August 30,
1999, and provides that the lender may demand payment in full of the entire
outstanding balance of the loan at any time. The amended loan provides for a
rate of interest equal to 5 percentage points over the prime lending rate per
annum, but never less than 10% per annum (the loan rate as of December 28, 1996
was 13-1/4%), and minimum monthly interest payments of $10,000 regardless of the
outstanding principal balance. Upon an event of default, the interest rate may
increase by 5 percentage points per annum. The line of credit is secured by
receivables, inventory, equipment, real estate and other assets of the Company
and a portion is guaranteed by the President of the Company. The loan also
requires that the Company meet certain financial covenants, provides payment
penalties for noncompliance, limits the amount of other debt the Company can
incur, limits the amount of spending on fixed assets and limits payments of
dividends.
NOTE 5. LONG-TERM OBLIGATIONS
Long-term obligations consisted of the following:
1996 1995
---- ----
9.00% mortgage, due in
monthly installments of
$11,411, including interest,
balance due February 2004,
secured by land
and building $1,010,000 $ 1,054,000
8.75% mortgage, due
in monthly installments of
$6,981, including interest,
interest rate adjustment in
1998, balance due January
2003, secured by land
and building 722,000 742,000
8.25% note payable, due in
monthly installments
of $11,039,
including interest,
due December 1997,
secured by equipment 127,000 243,000
8.49% notes payable - 676,000
Other 79,000 410,000
---------- -------
$1,938,000 $ 3,125,000
Less current maturities 227,000 1,041,000
---------- -------
$1,711,000 $ 2,084,000
========== ============
The annual maturities of long-term debt as of December 28, 1996 were as follows:
1997 $ 227,000
1998 95,000
1999 92,000
2000 103,000
2001 98,000
Thereafter 1,323,000
---------
$1,938,000
==========
NOTE 6. ACCRUED EXPENSES
Accrued expenses were as follows:
1996 1995
- -------------------------------------------------------
Compensation $ 218,000 $ 307,000
Lease contingencies
and closing costs 466,000 -
Other 476,000 734,000
---------- -----------
$1,160,000 $ 1,041,000
========== ===========
NOTE 7. COMMITMENTS
OPERATING LEASES: The Company leases certain of its recycling center facilities
and retail stores under noncancelable operating leases. The leases require the
payment of taxes, maintenance, utilities and insurance.
In the fourth quarter of 1996, the Company withdrew from three under-performing
markets and closed its retail locations in the Los Angeles, California, market.
The Company is currently negotiating the cancellation of leases in these
markets. At December 28, 1996, the Company had accrued $320,000 for estimated
settlements of these leases.
Minimum rental commitments under noncancelable operating leases excluding
disputed leases as of December 28, 1996 were as follows:
1997 $ 311,000
1998 $ 222,000
1999 $ 177,000
2000 $ 131,000
2001 $ 15,000
Rent expense for the fiscal years ended December 28, 1996, December 30, 1995 and
December 31, 1994 was $1,585,000, $1,010,000 and $1,139,000, respectively.
NOTE 8. INCOME TAXES
The provision for (benefit of) income taxes consisted of the following:
1996 1995 1994
- ------------------------------------------------------
Current:
Federal $(415,000) $ (4,000) $ 669,000
State - - 157,000
Deferred 650,000 (586,000) (161,000)
---------- ----------- ------------
$ 235,000 $ (590,000) $ 665,000
========= =========== ============
A reconciliation of the effective tax rates with the federal statutory tax rate
is shown below:
1996 1995 1994
- ---------------------------------------------------------------
Income taxes at
statutory rate $(2,462,000) $(566,000) $ 539,000
State taxes, net
of federal
tax effect (208,000) (24,000) 126,000
Permanent
differences 110,000 - -
Change in valuation
allowance 235,000 - -
Effect of NOL
with no current
tax benefit 2,560,000 - -
----------- --------- ----------
$ 235,000 $(590,000) $665,000
=========== ========== ==========
The Company recorded income tax benefits of $127,000 in 1995 and $139,000 in
1994, attributable to employee stock option transactions.
The tax effects of principal temporary differences are as follows:
1996 1995
- ---------------------------------------------------------
Accelerated tax depreciation $ 203,000 $ 244,000
----------- -----------
Gross deferred tax liability $ 203,000 $ 244,000
----------- -----------
Net operating loss carryforwards $(1,873,000) $ (32,000)
Loss on asset impairment (478,000) (478,000)
Federal and state tax credits (250,000) (87,000)
Deferred start-up costs - (80,000)
Accrued expenses (397,000) (217,000)
Valuation allowance 2,795,000 -
----------- -----------
Gross deferred tax asset $ (203,000) $ (894,000)
----------- -----------
Net deferred tax asset $ - $ (650,000)
=========== ===========
At December 28, 1996, the Company recorded a valuation allowance of $2,795,000
on deferred tax assets to reduce the total to an amount management believes will
ultimately be realized. Realization of deferred tax assets is dependent upon
sufficient future taxable income during the period that deductible temporary
differences and carryforwards are expected to be available to reduce taxable
income. At December 28, 1996, the Company had net operating loss carryforwards
of $4,515,000 that expire in 2011.
The components giving rise to the net deferred tax asset have been included in
the accompanying balance sheets as follows:
1996 1995
- -----------------------------------------------------
Net current asset $ - $ (277,000)
Net noncurrent asset - (373,000)
--------- ------------
Net deferred tax asset $ - $ 650,000)
======== ============
NOTE 9. SHAREHOLDERS' EQUITY
1989 STOCK OPTION PLAN: The Company has a 1989 Stock Option Plan (the "Plan")
that permits the granting of "incentive stock options" meeting the requirements
of Section 422 of the Internal Revenue Code of 1986, as amended, and
nonqualified options which do not meet the requirements of Section 422. The Plan
has 150,000 shares available for grant. The options that have been granted under
the Plan are exercisable for a period of five or seven years from the date of
grant and vest over a period of two or three years from the date of grant.
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation."
Accordingly, no compensation cost has been recognized for the Plan. Had
compensation cost for the Plan been determined based on the fair value at the
grant date for awards in 1996 consistent with the provisions of SFAS No. 123,
the Company's net loss and net loss per share would have been increased to the
pro forma amounts indicated below:
1996
- ------------------------------------------------------
Net loss - as reported $(7,269,000)
Net loss - pro forma $(7,348,000)
Net loss per share - as reported $ (6.53)
Net loss per share - pro forma $ (6.60)
- ------------------------------------------------------
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1996:
1996
- -----------------------------------------------------
Expected dividend yield $ -
Expected stock price volatility 51.02%
Risk-free interest rate 6.00%
Expected life of options (years) 3
- -----------------------------------------------------
Additional information relating to all outstanding options as of December 31,
1994, December 30, 1995 and December 28, 1996 is as follows:
Weighted
Average
Shares Exercise Price
------ --------------
Outstanding at
December 31, 1993 77,000 $19.44
Granted 29,000 $17.52
Exercised (34,000) $ 4.72
Cancelled (1,000) $45.52
------- ------
Outstanding at
December 31, 1994 71,000 $25.92
Granted - $ -
Exercised (6,000) $ 9.44
Cancelled (1,000) $28.20
------- ------
Outstanding at
December 30, 1995 64,000 $27.08
Granted 37,000 $12.72
Exercised (9,000) $ 9.60
Cancelled (12,000) $20.72
-------- ------
Outstanding at
December 28, 1996 80,000 $23.36
====== ======
The weighted average fair value per option of options granted during 1996 was
$4.92.
The following tables summarize information about stock options outstanding as of
December 28, 1996:
OPTIONS OUTSTANDING
Weighted
Average Weighted
Range of Number Remaining Average
Exercise Options Contractual Exercise
Prices Outstanding Life (Years) Price
- ------ ----------- ------------ --------
$35.52 to $48.00 22,000 1.5 $44.76
$28.00 4,000 0.1 $28.00
$17.52 28,000 4.7 $17.52
$9.00 to $12.76 26,000 6.5 $10.60
------
80,000
======
OPTIONS EXERCISABLE
Weighted
Range of Number Average
Exercise Options Exercise
Prices Exercisable Price
- ------ ----------- --------
$35.52 to $48.00 22,000 $44.76
$28.00 4,000 $28.00
$17.52 19,000 $17.52
$9.00 to $12.76 - $10.60
------
45,000
======
PRIVATE PLACEMENT: In May 1996, $700,000 was raised in a private placement of
Common Stock to an institutional investor by selling 50,000 shares at $14.00 per
share.
REVERSE SPLIT: Subsequent to year-end, the Company announced a 1-for-4 reverse
stock split and decreased the number of authorized shares to five million. The
effect of the reverse stock split has been retroactively reflected in these
financial statements and notes for all periods presented.
NOTE 10. MAJOR CUSTOMERS
Net revenues include sales to major customers as follows:
1996 1995 1994
- ---------------------------------------------------------
REVENUE PERCENTAGE:
Customer A 22.1% 23.5% 28.5%
Customer B 1.9% 14.0% 10.4%
------ ----- -----
Totals 24.0% 37.5% 38.9%
===== ===== =====
ENDING RECEIVABLE
BALANCE:
Customer A $ 268,000 $ 301,000 $ 1,676,000
Customer B - - 391,000
----------- --------- ------------
Totals $ 268,000 $ 301,000 $ 2,067,000
=========== =========== ==========
NOTE 11. LOSS ON IMPAIRED ASSETS AND NON-RECURRING CHARGES
As of December 30, 1995, the Company recorded a charge of $1,316,000 consisting
of a loss on impaired assets and accruals associated with the Company's business
with utility customers. The loss on impaired assets was $1,194,000 with related
charges of $122,000.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
No changes in or disagreements with accountants have occurred within
the two-year period ended December 28, 1996, which required reporting on Form
8-K.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Information regarding directors and executive officers of the Company
is set forth under Information Concerning Directors, Nominees and Executive
Officers and under Compliance With Section 16(a) in the Company's definitive
Proxy Statement for its 1997 Annual Meeting of Shareholders to be held April 24,
1997, and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding Executive Compensation set forth under Executive
Compensation in the Company's definitive Proxy Statement for its 1997 Annual
Meeting of Shareholders to be held April 24, 1997, other than the subsections
captioned Report of the Compensation and Benefits Committee and Performance
Graph, is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners
and management is set forth under Beneficial Ownership of Common Stock in the
Company's definitive Proxy Statement for its 1997 Annual Meeting of Shareholders
to be held April 24, 1997, and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions is
set forth under Information Concerning Directors, Nominees and Executive
Officers in the Company's definitive Proxy Statement for its 1997 Annual Meeting
of Shareholders to be held April 24, 1997, and is incorporated herein by
reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND EXHIBITS
1. FINANCIAL STATEMENTS
See Index to Financial Statements under Item 8 of this report.
2. FINANCIAL STATEMENT SCHEDULES
The financial statement schedules of the Company are omitted
because of the absence of conditions under which they are
required, or the information required is available in the
financial statements under Item 8 of this report.
3. EXHIBITS
See Index to Exhibits.
(B) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the last quarter of the fiscal
year covered by this report.
SIGNATURES
Pursuant to the requirements of Section 13 or Section 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.
Dated: March 25, 1997 APPLIANCE RECYCLING CENTERS OF
AMERICA, INC.
(Registrant)
By /s/ Edward R. Cameron
---------------------
Edward R. Cameron
President and Chief Executive Officer
By /s/ Kent S. McCoy
-----------------
Kent S. McCoy
Vice President of Finance and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ Edward R. Cameron Chairman of the Board, President and March 25, 1997
- --------------------------- Chief Executive Officer
Edward R. Cameron
/s/ Kent S. McCoy Vice President of Finance and Treasurer March 25, 1997
- --------------------------- (Principal Accounting Officer)
Kent S. McCoy
/s/ George B. Bonniwell Director March 25, 1997
- ---------------------------
George B. Bonniwell
/s/ Duane S. Carlson Director March 25, 1997
- ---------------------------
Duane S. Carlson
/s/ Harry W. Spell Director March 25, 1997
- ---------------------------
Harry W. Spell
</TABLE>
INDEX TO EXHIBITS
Exhibit
No. Description
------- -----------
3.1 Restated Articles of Incorporation of Appliance Recycling Centers
of America, Inc. [filed as Exhibit 3.1 to the Company's
Registration Statement on Form S-18 (Registration No. 33-43182C)
and incorporated herein by reference].
3.2 Restated Articles of Incorporation as amended June 3, 1993 [filed
as Exhibit 19.2 to the Company's Form 10-Q for the quarter ended
June 30, 1993 (File No. 0-19621) and incorporated herein by
reference].
+3.3 Articles of Amendment of Articles of Incorporation of Appliance
Recycling Centers of America, Inc. dated February 7, 1997.
3.4 Bylaws of Appliance Recycling Centers of America, Inc. [filed as
Exhibit 3.2 to the Company's Registration Statement on Form S-18
(Registration No. 33-43182C) and incorporated herein by
reference].
10.1 Restated 1989 Stock Option Plan, as amended [filed as Exhibit 10.7
to the Company's Registration Statement on Form S-1 (Registration
No. 33-58338) and incorporated herein by reference].
10.2 Amendment dated May 14, 1992, to lease between Six Brainard
Associates Limited Partnership and ARCA Connecticut, Inc. [filed
as Exhibit 10.11 to the Company's Registration Statement on Form
S-1 (Registration No. 33-58338) and incorporated herein by
reference].
10.3 Lease dated June 4, 1991, between ARCA Ohio, Inc. and The Eleven
Ten Parkway Company [filed as Exhibit 10.14 to the Company's
Registration Statement on Form S-18 (Registration No. 33-43182C)
and incorporated herein by reference].
*10.4 Amended Appliance Recycling Centers of America, Inc. 1989 Stock
Option Plan [filed as Exhibit 19.3 to the Company's Form 10-Q for
the quarter ended June 30, 1993 (File No. 0-19621) and
incorporated herein by reference].
**10.5 Shareholder agreement of Appliance Recycling Centers of
America-California, Inc. dated August 14, 1993, between Appliance
Recycling Centers of America, Inc. and COMCAL SYNERGITICS, Inc.
[filed as Exhibit 10.26 to the Company's Form 10-K for the year
ended December 31, 1993 (File No.0-19621) and incorporated herein
by reference].
10.6 Agreement dated December 17, 1992, between Appliance Recycling
Centers of America, Inc. and TCF Savings Bank [filed with the
Company's Form 8-K, dated December 17, 1992 (File No. 0-19621) and
incorporated herein by reference].
10.7 Agreement dated January 19, 1994, between Appliance Recycling
Centers of America, Inc. and Standard Insurance Corporation [filed
as Exhibit 10.29 to the Company's Form 10-K for the year ended
December 31, 1993 (File No.0-19621) and incorporated herein by
reference].
10.8 Agreement and Plan of Reorganization dated January 2, 1996,
between Appliance Recycling Centers of America, Inc., ARCA
Maryland, Inc., Universal Appliance Company, Inc. and Universal
Appliance Recycling, Inc. [filed as Exhibit 10.13 to the Company's
Form 10-K for the year ended December 30, 1995 (File No. 0-19621)
and incorporated herein by reference].
10.9 Agreement dated May 7, 1996, between Appliance Recycling Centers
of America, Inc. and Southern California Edison Company [filed as
exhibit 10.14 to the Company's Form 10-Q for the quarter ended
September 28, 1996 (File No. 0-19621) and incorporated herein by
reference].
10.10 Line of credit dated August 30, 1996, between Appliance Recycling
Centers of America, Inc. and Spectrum Commercial Services, a
division of Lyons Financial Services, Inc. [filed as exhibit 10.15
to the Company's Form 10-Q for the quarter ended September 28,
1996 (File No. 0-19621) and incorporated herein by reference].
10.11 Amended line of credit dated November 8, 1996, between Appliance
Recycling Centers of America, Inc. and Spectrum Commercial
Services, a division of Lyons Financial Services, Inc. [filed as
exhibit 10.16 to the Company's Form 10-Q for the quarter ended
September 28, 1996 (File No. 0-19621) and incorporated herein by
reference].
+21.1 Subsidiaries of Appliance Recycling Centers of America, Inc.
+23.1 Consent of McGladrey & Pullen, LLP, Independent Public
Accountants.
+27 Financial Data Schedule.
- --------------------
* Items that are management contracts or compensatory plans or arrangements
required to be filed as an exhibit pursuant to Item 14(c) of this Form
10-K.
** The Company has requested confidential treatment pursuant to Rule 406 for
portions of these Exhibits.
+ Filed herewith.
Exhibit 3.3
ARTICLES OF AMENDMENT OF
ARTICLES OF INCORPORATION OF
APPLIANCE RECYCLING CENTERS OF AMERICA, INC.
The undersigned, as President and Chief Executive Officer of Appliance
Recycling Centers of America, Inc., a corporation subject to the provisions of
Chapter 302A of the Minnesota Statutes (the "Corporation"), does hereby certify
that the following resolutions were adopted by the Corporation's Board of
Directors, by the required vote of said Directors, on February 7, 1997, pursuant
to which the Board of Directors (a) declared a share combination in the form of
a 1-for-4 reverse stock split of the outstanding shares of Common Stock of the
Corporation and (b) decreased the authorized Common Stock of the Corporation:
NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors hereby
declares a 1-for-4 stock combination (reverse stock split) of the
outstanding Common Stock of the Corporation held by all shareholders of
record as of the close of business on February 21, 1997 (the "Record
Date"), with each holder of record of Common Stock of the Corporation
as of the Record Date to be deemed the owner of one share of Common
Stock for each four shares of Common Stock owned by such holder as of
such date;
FURTHER RESOLVED, that fractional shares of Common Stock shall not be
issued, and that any fractional shares that would result in connection
with a 1-for-4 stock combination (reverse stock split) shall be rounded
up to the nearest whole number of shares of Common Stock;
FURTHER RESOLVED, that the Board of Directors hereby authorizes the
amendment of the Corporation's Articles of Incorporation decreasing the
shares of authorized capital stock from twenty million (20,000,000)
shares, without par value, to five million (5,000,000) shares, without
par value.
FURTHER RESOLVED, that, to effect said amendment, Article 3, paragraph
A of the Corporation's Articles of Incorporation hereby is amended to
read as follows:
"ARTICLE 3. AUTHORIZED SHARES
The total number of shares of stock which the
corporation shall have authority to issue is five million
(5,000,000) shares, all of which shares shall be Common Stock
without par value."
FURTHER RESOLVED, that, following the amendment of the Corporation's
Articles of Incorporation and upon the surrender of old certificates
evidencing ownership of pre-combination shares of the Corporation's
Common Stock, the Corporation's transfer agent hereby is authorized and
directed to issue, countersign and register certificates for up to an
aggregate of the full number of shares of Common Stock issuable in
accordance with the foregoing stock combination (reverse stock split)
and the President and any other officer are hereby authorized to
instruct the transfer agent with respect to the issuance of such shares
and any restrictive legends thereon;
FURTHER RESOLVED, that the number of shares reserved for issuance under
the Corporation's Stock Option Plan be reduced from 600,000 shares of
Common Stock to 150,000 shares of Common Stock to appropriately reflect
the foregoing 1-for-4 stock combination (reverse stock split) and that
each outstanding stock option of the Corporation issued pursuant to
such plan, and the exercise price with respect to each such option, be
appropriately adjusted to reflect the foregoing 1-for-4 stock
combination (reverse stock split); and
FURTHER RESOLVED, that the Corporation's officers are hereby authorized
and directed to execute such documents and certificates and to take
such other actions and incur such other expenses as they may deem
necessary to effectuate the stock combination (reverse stock split),
including, but not limited to, the execution and filing of Articles of
Amendment with the Minnesota Secretary of State.
I further certify that the Amendment to the Articles of Incorporation
referred to in the foregoing resolutions will not adversely affect the rights or
preferences of the holders of outstanding shares of any class or series of
capital stock of the Corporation and will not result in the percentage of
authorized shares that remains unissued after the stock combination exceeding
the percentage of authorized shares that were unissued before the stock
combination.
IN WITNESS WHEREOF, I have set my hand this 7th day of February, 1997.
/s/ Edward R. Cameron
----------------------
Edward R. Cameron
President and Chief Executive
Officer
State of Minnesota
Filed - Duplicate Copy
February 12, 1997
/s/ Joan Anderson Growe
Secretary of State
EXHIBIT 21.1
APPLIANCE RECYCLING CENTERS OF AMERICA, INC.
SUBSIDIARIES AS OF DECEMBER 28, 1996
JURISDICTION OF PERCENT VOTING
NAME OF SUBSIDIARY INCORPORATION SECURITIES OWNED
- ------------------ ------------- ----------------
Appliance Recycling Centers of
America-California, Inc. California 80%
ARCA Appliance Recycling Center
(B.C.), Ltd. British Columbia 100%
ARCA of St. Louis, Inc. Missouri 100%
ARCA-Maryland, Inc. Maryland 100%
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANT'S
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (commission file No. 33-51584) and on Form S-3
(commission file No. 333-15463) of our report dated February 18, 1997 with
respect to the consolidated financial statements of Appliance Recycling Centers
of America, Inc., appearing in this Annual Report on Form 10-K for the year
ended December 28, 1996.
McGLADREY & PULLEN, LLP
Minneapolis, Minnesota
March 28, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-28-1996
<PERIOD-END> DEC-28-1996
<CASH> 280,000
<SECURITIES> 0
<RECEIVABLES> 1,527,000
<ALLOWANCES> 0
<INVENTORY> 444,000
<CURRENT-ASSETS> 246,000
<PP&E> 11,505,000
<DEPRECIATION> 4,086,000
<TOTAL-ASSETS> 9,992,000
<CURRENT-LIABILITIES> 4,168,000
<BONDS> 0
0
0
<COMMON> 10,350,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 9,992,000
<SALES> 14,030,000
<TOTAL-REVENUES> 14,030,000
<CGS> 11,286,000
<TOTAL-COSTS> 11,286,000
<OTHER-EXPENSES> (122,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 294,000
<INCOME-PRETAX> (7,034,000)
<INCOME-TAX> 235,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,269,000)
<EPS-PRIMARY> (6.53)
<EPS-DILUTED> (6.53)
</TABLE>
