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 March 29, 1997
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 41-1454591
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7400 Excelsior Blvd.
Minneapolis, Minnesota 55426-4517
(Address of principal executive
offices)
(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 May 8, 1997, the number of shares outstanding of the registrant's no par
value Common Stock was 1,356,295 shares.
APPLIANCE RECYCLING CENTERS of AMERICA, INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1: Financial Statements:
Consolidated Balance Sheets as of
March 29, 1997 and December 28, 1996
Consolidated Statements of Operations for the
Three Months Ended March 29, 1997 and March 30, 1996
Consolidated Statements of Cash Flows for the
Three Months Ended March 29, 1997 and March 30, 1996
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)
March 29, December 28,
1997 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 209,000 $ 280,000
Accounts receivable, net of allowance of $110,000 in 1997
and $84,000 in 1996 1,628,000 1,127,000
Inventories 458,000 444,000
Other current assets 177,000 246,000
Income taxes receivable - 400,000
- ---------------------------------------------------------------------------------------------------------------
Total current assets $ 2,472,000 $ 2,497,000
- ---------------------------------------------------------------------------------------------------------------
Property and Equipment, at cost
Land $ 2,103,000 $ 2,103,000
Buildings and improvements 3,770,000 3,798,000
Equipment 5,552,000 5,604,000
- ---------------------------------------------------------------------------------------------------------------
$ 11,425,000 $ 11,505,000
Less accumulated depreciation 4,308,000 4,086,000
- ---------------------------------------------------------------------------------------------------------------
Net property and equipment $ 7,117,000 $ 7,419,000
- ---------------------------------------------------------------------------------------------------------------
Other Assets $ 66,000 $ 76,000
- ---------------------------------------------------------------------------------------------------------------
Total assets $ 9,655,000 $ 9,992,000
===============================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Line of credit $ 1,290,000 $ 1,390,000
Current maturities of long-term obligations 195,000 227,000
Accounts payable 1,348,000 1,391,000
Accrued expenses 949,000 1,160,000
- ---------------------------------------------------------------------------------------------------------------
Total current liabilities $ 3,782,000 $ 4,168,000
Minority Interest in Subsidiary 13,000 -
Long-Term Obligations, less current maturities 1,684,000 1,711,000
- ---------------------------------------------------------------------------------------------------------------
Total liabilities $ 5,479,000 $ 5,879,000
- ---------------------------------------------------------------------------------------------------------------
Shareholders' Equity
Common, no par value; authorized 5,000,000
shares; issued and outstanding 1,137,000 shares as of
March 29, 1997 and 1,137,000 shares as of December 28, 1996 $ 10,350,000 $ 10,350,000
Accumulated deficit (6,174,000) (6,237,000)
- ---------------------------------------------------------------------------------------------------------------
Total shareholders' equity $ 4,176,000 $ 4,113,000
- ---------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 9,655,000 $ 9,992,000
===============================================================================================================
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
March 29, March 30,
1997 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenues
Recycling revenues $ 1,815,000 $ 1,767,000
Encore revenues 938,000 834,000
Byproduct revenues 490,000 459,000
- ---------------------------------------------------------------------------------------------------------------
Total revenues $ 3,243,000 $ 3,060,000
Cost of Revenues 1,685,000 2,850,000
- ---------------------------------------------------------------------------------------------------------------
Gross profit $ 1,558,000 $ 210,000
Selling, General and Administrative Expenses 1,448,000 2,047,000
- ---------------------------------------------------------------------------------------------------------------
Operating income (loss) $ 110,000 $ (1,837,000)
Other Income (Expense):
Other income (expense) 58,000 (13,000)
Interest income 1,000 28,000
Interest expense (93,000) (70,000)
- ----------------------------------------------------------------------------------------------------------------
Income (loss) before provision for income taxes
and minority interest $ 76,000 $ (1,892,000)
Provision for (Benefit of) Income Taxes - -
- ---------------------------------------------------------------------------------------------------------------
Income (loss) before minority interest $ 76,000 $ (1,892,000)
Minority Interest in Net Income of Subsidiary 13,000 -
- ---------------------------------------------------------------------------------------------------------------
Net income (loss) $ 63,000 $ (1,892,000)
===============================================================================================================
Net Earnings (Loss) per Common and
Common Equivalent Share $ 0.06 $ (1.75)
===============================================================================================================
Weighted Average Number of Common and
Common Equivalent Shares 1,137,000 1,081,000
===============================================================================================================
See Notes to Consolidated Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
Appliance Recycling Centers of America, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 29, March 30,
1997 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows from Operating Activities
Net income (loss) $ 63,000 $ (1,892,000)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 300,000 365,000
Minority interest in net income of subsidiary 13,000 -
(Gain) loss on sale of equipment (34,000) 16,000
Change in assets and liabilities, net of effects from acquisition
of Universal Appliance Company, Inc. and Universal
Appliance Recycling, Inc. in 1996:
(Increase) decrease in:
Receivables (501,000) 260,000
Inventories (14,000) (319,000)
Other current assets 69,000 (71,000)
Income taxes receivable 400,000 40,000
Increase (decrease) in:
Accounts payable (43,000) (444,000)
Accrued expenses (211,000) (326,000)
Income taxes payable - (15,000)
- ----------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities $ 42,000 $ (2,386,000)
- ----------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Purchase of equipment $ - $ (627,000)
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 46,000 -
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities $ 46,000 $ (711,000)
- ----------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Payments on line of credit $ (100,000) $ -
Payments on long-term obligations (59,000) (360,000)
Proceeds and tax benefit from stock options - 33,000
- ---------------------------------------------------------------------------------------------------------------
Net cash used in financing activities $ (159,000) $ (327,000)
- ----------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents $ (71,000) $ (3,424,000)
Cash and Cash Equivalents
Beginning 280,000 4,605,000
- ---------------------------------------------------------------------------------------------------------------
Ending $ 209,000 $ 1,181,000
===============================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
March 29, March 30,
1997 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Supplemental Disclosures of Cash Flow Information
Cash payments (receipts) for:
Interest $ 93,000 $ 70,000
Income taxes net of refunds $ (398,000) $ (25,000)
===============================================================================================================
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, 21,000 shares of Common Stock $ - $ 389,000
===============================================================================================================
See Notes to Consolidated Financial Statements.
</TABLE>
Appliance Recycling Centers of America, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. Financial Statements - In the opinion of the 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 March 29, 1997 and the results of operations and
its cash flows for the three-month periods ended March 29, 1997 and
March 30, 1996. 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 fiscal year ended December
28, 1996.
2. Accrued Expenses
Accrued expenses were as follows:
March 29, December 28,
1997 1996
------------ --------------
Compensation $ 151,000 $ 218,000
Lease contingencies
and closing costs 347,000 466,000
Other 451,000 476,000
------------ --------------
$ 949,000 $ 1,160,000
============ ==============
3. Reverse Split - During the quarter ended March 29, 1997, 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
for all prior periods presented. In addition, on April 24, 1997, the
Company's shareholders approved an amendment to the Company's Articles
of Incorporation increasing the number of authorized shares to ten
million.
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
The Company generates revenues from three sources: recycling revenues,
Encore(R) revenues and byproduct revenues. Recycling revenues are fees
charged for the disposal of appliances. Encore revenues are sales of
appliances, extended warranty sales and delivery fees. Byproduct
revenues are sales of materials generated from processed appliances.
Total revenues for the three months ended March 29, 1997 were $3,243,000
compared to $3,060,000 for the three months ended March 30, 1996.
Recycling revenues increased to $1,815,000 in the three months ended
March 29, 1997 from $1,767,000 in the same period of 1996. The increase
in recycling revenues was primarily due to the increase in refrigerator
recycling volume related to the contract with Southern California Edison
Company ("Edison"). The contract is expected to generate a minimum of
$3.5 million in revenues in 1997. The timing and amount of revenues will
be dependent on advertising by Edison.
Encore revenues for the three months ended March 29, 1997 were $938,000
compared to $834,000 for the three months ended March 30, 1996, an
increase of 12%. The increase was primarily due to an increase in
same-store Encore retail sales of 23% (a sales comparison of six stores
that were open the entire first three months of 1997 and 1996). As of
March 30, 1996, the Company operated 19 retail locations. Currently, the
Company has 14 retail locations and does not plan to open any new stores
in 1997. The Company expects retail sales for the remainder of 1997 to
be lower when compared to 1996 due to fewer stores but expects a growth
in retail sales per store when compared to 1996. The Company experiences
seasonal fluctuations and expects retail sales to be higher in the
second and third calendar quarters than in the first and fourth calendar
quarters, reflecting consumer purchasing cycles.
Byproduct revenues for the three months ended March 29, 1997 were
$490,000 compared to $459,000 for the same period in the previous year.
The increase was primarily due to higher sales of reclaimed
chlorofluorocarbons ("CFCs") offset by lower sales of scrap metals.
Gross profit as a percentage of total revenues increased to 48.0% for
the three months ended March 29, 1997 from 6.9% for the three months
ended March 30, 1996. The increase was primarily due to an increase in
recycling volumes from Edison, higher than planned retail sales and
significantly lower operating expenses as a result of restructuring the
Company underwent in the fourth quarter of 1996.
Gross profit as a percentage of total revenues for future periods can be
affected favorably or unfavorably by numerous factors, including the
volume of appliances recycled from the Edison contract, the speed at
which appliance sales increase and the price and volume of byproduct
revenues.
Selling, general and administrative expenses for the three months ended
March 29, 1997 decreased to $1,448,000 from $2,047,000 in the same
period of 1996. Selling expenses for the three months ended March 29,
1997 decreased to $382,000 from $555,000 in the same period in 1996. The
decrease in selling expenses was primarily due to a decrease in costs
associated with operating fewer retail stores than in the first quarter
of 1996. The Company closed 18 underperforming stores during 1996.
General and administrative expenses for the three months ended March 29,
1997 decreased to $1,066,000 from $1,492,000 in the same period in 1996.
The decrease in general and administrative expenses was primarily due to
operating fewer locations in the first three months of 1997 compared to
1996 and a decrease in personnel costs.
Interest income decreased to $1,000 for the three months ended March 29,
1997 compared to $28,000 in the same period in 1996. The decrease was
due to lower cash balances during the first quarter of 1997 compared to
the first quarter of 1996.
Interest expense was $93,000 for the three months ended March 29, 1997
compared to $70,000 for the same period in 1996. The increase was due to
a higher average borrowed amount in the three months ended March 29,
1997 than in the same period in 1996.
The Company recorded no provision for income taxes for the three months
ended March 29, 1997 due to availability of net operating loss
carryforwards, which total approximately $4,500,000 and expire in 2011.
At March 29, 1997, the Company had a valuation allowance recorded
against its net deferred tax assets of approximately $2,800,000, due to
uncertainty of realization. Realization of deferred tax assets is
dependent upon the generation of sufficient future taxable income during
the period that deductible temporary differences and carryforwards are
expected to become available to reduce taxable income.
ARCA California, Inc., a subsidiary of the Company, is owned 80% by the
Company and 20% by a minority shareholder. Accordingly, a minority
interest was recorded as of March 29, 1997, of $13,000.
The Company recorded a net income of $63,000 for the three months ended
March 29, 1997 compared to a net loss of $1,892,000 in the same period
of 1996. The increase in income was primarily due to higher than planned
retail sales and significantly lower operating and selling, general and
administrative expenses as a result of the Encore restructuring in the
fourth quarter of 1996, and increased recycling volumes from the Edison
contract.
LIQUIDITY AND CAPITAL RESOURCES
At March 29, 1997, the Company had a working capital deficit of
$1,310,000 compared to a working capital deficit of $1,671,000 at
December 28, 1996. Cash and cash equivalents decreased to $209,000 at
March 29, 1997 from $280,000 at December 28, 1996. Net cash provided by
operating activities was $42,000 for the three months ended March 29,
1997 compared to net cash used in operating activities of $2,386,000 in
the same period of 1996. The increase in cash provided by operating
activities was primarily due to the net income and a decrease in income
taxes receivable offset by an increase in accounts receivable.
The Company did not have any capital expenditures for the three months
ended March 29, 1997. The Company's capital expenditures were
approximately $627,000 for the three months ended March 30, 1996. The
Company has purchase commitments of $112,000 related to building
improvements as of March 29, 1997.
As of March 29, 1997, the Company had a $2.0 million line of credit with
a lender. The loan rate as of March 29, 1997 was 13-1/2%. 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 March
29, 1997, the Company had borrowings of $1,290,000 under this line.
The Company believes, based on 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.
Statements 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.
PART II. OTHER INFORMATION
- --------------------------------------------------------------------------------
ITEM 1 - LEGAL PROCEEDINGS
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 2 to the Consolidated Financial
Statements.)
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 April 24, 1997 the Company held its Annual Shareholders' Meeting. At
the meeting, Edward R. Cameron, Duane S. Carlson, Harry W. Spell and
George B. Bonniwell were elected as directors for 1997. The
shareholders also approved an Amendment to the Articles of
Incorporation to increase the number of authorized shares of Common
Stock to ten million, ratified and approved the Company's 1997 Stock
Option Plan and ratified the appointment of McGladrey & Pullen, LLP as
independent auditors for the fiscal year ending December 27, 1997.
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 March 29, 1997.
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: May 9, 1997 /s/ Edward R. Cameron
--------------------------------------------
Edward R. Cameron
President
Date: May 9, 1997 /s/ Kent S. McCoy
--------------------------------------------
Kent S. McCoy
Vice President of Finance, Treasurer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-27-1997
<PERIOD-START> DEC-29-1996
<PERIOD-END> MAR-29-1997
<CASH> 209,000
<SECURITIES> 0
<RECEIVABLES> 1,628,000
<ALLOWANCES> 0
<INVENTORY> 458,000
<CURRENT-ASSETS> 177,000
<PP&E> 11,425,000
<DEPRECIATION> 4,308,000
<TOTAL-ASSETS> 9,655,000
<CURRENT-LIABILITIES> 3,782,000
<BONDS> 0
0
0
<COMMON> 10,350,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 9,655,000
<SALES> 3,243,000
<TOTAL-REVENUES> 3,243,000
<CGS> 1,685,000
<TOTAL-COSTS> 1,685,000
<OTHER-EXPENSES> (58,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 93,000
<INCOME-PRETAX> 76,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 63,000
<EPS-PRIMARY> 0.06
<EPS-DILUTED> 0.06
</TABLE>
