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 April 4, 1998
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 15, 1998, the number of shares outstanding of the registrant's no par
value Common Stock was 1,136,744 shares.
<PAGE>
APPLIANCE RECYCLING CENTERS of AMERICA, INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1: Financial Statements:
Consolidated Balance Sheets as of
April 4, 1998 and January 3, 1998
Consolidated Statements of Operations for the Three
Months Ended April 4, 1998 and March 29, 1997
Consolidated Statements of Cash Flows for the
Three Months Ended April 4, 1998 and March 29, 1997
Notes to Consolidated Financial Statements
Item 2: Management's Discussion and Analysis
of Financial Condition and Results of Operations
PART II. OTHER INFORMATION
<PAGE>
<TABLE>
<CAPTION>
Appliance Recycling Centers of America, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(Unaudited)
April 4, January 3,
1998 1998
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 127,000 $ 13,000
Accounts receivable, net of allowance of $32,000 in 1998
and $35,000 in 1997 600,000 736,000
Inventories 899,000 694,000
Other current assets 155,000 140,000
Refundable income taxes 29,000 29,000
- ---------------------------------------------------------------------------------------------------------------
Total current assets $ 1,810,000 $ 1,612,000
- ---------------------------------------------------------------------------------------------------------------
Property and Equipment, at cost
Land $ 2,103,000 $ 2,103,000
Buildings and improvements 4,139,000 3,955,000
Equipment 4,887,000 5,461,000
- ---------------------------------------------------------------------------------------------------------------
$ 11,129,000 $ 11,519,000
Less accumulated depreciation 4,407,000 4,807,000
- ---------------------------------------------------------------------------------------------------------------
Net property and equipment $ 6,722,000 $ 6,712,000
- ---------------------------------------------------------------------------------------------------------------
Other Assets $ 50,000 $ 55,000
Goodwill, net 181,000 190,000
- ---------------------------------------------------------------------------------------------------------------
Total assets $ 8,763,000 $ 8,569,000
===============================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Line of credit $ 1,926,000 $ 1,513,000
Current maturities of long-term obligations 110,000 101,000
Accounts payable 1,388,000 1,136,000
Accrued expenses 850,000 821,000
- ---------------------------------------------------------------------------------------------------------------
Total current liabilities $ 4,274,000 $ 3,571,000
Long-Term Obligations, less current maturities 1,816,000 1,633,000
- ---------------------------------------------------------------------------------------------------------------
Total liabilities $ 6,090,000 $ 5,204,000
- ---------------------------------------------------------------------------------------------------------------
Shareholders' Equity
Common stock, no par value; authorized 10,000,000
shares; issued and outstanding 1,137,000 shares as of
April 4, 1998 and January 3, 1998 $ 10,350,000 $ 10,350,000
Accumulated deficit (7,677,000) (6,985,000)
- ----------------------------------------------------------------------------------------------------------------
Total shareholders' equity $ 2,673,000 $ 3,365,000
- ----------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 8,763,000 $ 8,569,000
===============================================================================================================
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Appliance Recycling Centers of America, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
April 4, March 29,
1998 1997
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenues
Retail revenues $ 1,512,000 $ 938,000
Recycling revenues 817,000 1,815,000
Byproduct revenues 306,000 490,000
- ---------------------------------------------------------------------------------------------------------------
Total revenues $ 2,635,000 $ 3,243,000
Cost of Revenues 1,995,000 1,685,000
- ---------------------------------------------------------------------------------------------------------------
Gross profit $ 640,000 $ 1,558,000
Selling, General and Administrative Expenses 1,463,000 1,448,000
- ---------------------------------------------------------------------------------------------------------------
Operating income (loss) $ (823,000) $ 110,000
Other Income (Expense)
Other income 232,000 58,000
Interest income 1,000 1,000
Interest expense (102,000) (93,000)
- ----------------------------------------------------------------------------------------------------------------
Income (loss) before provision for income taxes
and minority interest $ (692,000) $ 76,000
Provision for (Benefit of) Income Taxes - -
- ---------------------------------------------------------------------------------------------------------------
Income (loss) before minority interest $ (692,000) $ 76,000
Minority Interest in Net Income of Subsidiary - 13,000
- ---------------------------------------------------------------------------------------------------------------
Net income (loss) $ (692,000) $ 63,000
===============================================================================================================
Basic and Diluted Earnings (Loss) per Common Share $ (0.61) $ 0.06
===============================================================================================================
Weighted Average Number of Common Shares 1,137,000 1,137,000
===============================================================================================================
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Appliance Recycling Centers of America, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
April 4, March 29,
1998 1997
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows from Operating Activities
Net income (loss) $ (692,000) $ 63,000
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 220,000 300,000
Minority interest in net income of subsidiary - 13,000
(Gain) loss on sale of equipment (204,000) (34,000)
Change in assets and liabilities:
(Increase) decrease in:
Accounts receivable 136,000 (501,000)
Inventories (205,000) (14,000)
Other current assets (15,000) 69,000
Refundable income taxes - 400,000
Increase (decrease) in:
Accounts payable 252,000 (43,000)
Accrued expenses 29,000 (211,000)
- ----------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities $ (479,000) $ 42,000
- ---------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Purchases of property & equipment $ (221,000) $ -
Proceeds from disposal of property and equipment 209,000 46,000
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities $ (12,000) $ 46,000
- ---------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Increase (decrease) in line of credit $ 413,000 $ (100,000)
Proceeds from long-term debt obligations 250,000 -
Payments on long-term obligations (58,000) (59,000)
- ----------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities $ 605,000 $ (159,000)
- ----------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents $ 114,000 $ (71,000)
Cash and Cash Equivalents
Beginning 13,000 280,000
- ---------------------------------------------------------------------------------------------------------------
Ending $ 127,000 $ 209,000
===============================================================================================================
Supplemental Disclosures of Cash Flow Information
Cash payments (receipts) for:
Interest $ 83,000 $ 93,000
Income taxes net of refunds $ 5,000 $ (398,000)
===============================================================================================================
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
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 April 4, 1998 and the results of operations and
its cash flows for the three-month periods ended April 4, 1998 and
March 29, 1997. 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 January
3, 1998.
2. Accrued Expenses
Accrued expenses were as follows:
April 4, January 3,
1998 1998
------------- --------------
Compensation $ 240,000 $ 167,000
Lease contingencies
and closing costs 220,000 289,000
Other 390,000 365,000
------------- --------------
$ 850,000 $ 821,000
============= ==============
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. 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.
4. Preferred Stock - In April 1998, the Company's shareholders approved an
Amendment to the Company's Articles of Incorporation authorizing up to
two million shares of Preferred Stock of the Company ("Preferred
Stock") which may be issued from time to time in one or more series.
<PAGE>
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: retail revenues,
recycling revenues and byproduct revenues. Retail revenues are sales of
appliances, extended warranty sales and delivery fees. Recycling
revenues are fees charged for the disposal of appliances. Byproduct
revenues are sales of materials generated from processed appliances.
Total revenues for the three months ended April 4, 1998 were $2,635,000
compared to $3,243,000 for the three months ended March 29, 1997, a
decrease of 19%, mainly as a result of a decrease in recycling revenue.
Retail revenues for the three months ended April 4, 1998 were $1,512,000
compared to $938,000 for the three months ended March 29, 1997, an
increase of 61%. Same-store retail sales increased 65% (a sales
comparison of thirteen stores that were open the entire first three
months of 1998 and 1997). The increase in retail sales was primarily due
to increased sales of Whirlpool product. Currently, the Company has 13
retail locations and does not plan to open any additional new stores in
1998. 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.
Recycling revenues decreased to $817,000 in the three months ended April
4, 1998 from $1,815,000 in the same period of 1997, a decrease of 55%.
The decrease in recycling revenues was primarily due to the decrease in
refrigerator recycling volumes related to the contract with Southern
California Edison Company ("Edison"). Edison started advertising for its
refrigerator recycling program in late March 1998, whereas in 1997,
advertising started in January. The contract is expected to generate a
minimum of $3.0 million in revenues in 1998. The timing and amount of
revenues will be dependent on advertising by Edison.
Byproduct revenues for the three months ended April 4, 1998 were
$306,000 compared to $490,000 for the same period in the previous year.
The decrease was primarily due to lower sales of reclaimed
chlorofluorocarbons.
Gross profit as a percentage of total revenues decreased to 24.3% for
the three months ended April 4, 1998 from 48.0% for the three months
ended March 29, 1997. The decrease was primarily due to a decrease in
recycling volumes from Edison and higher operating expenses partially
offset by higher retail sales.
<PAGE>
RESULTS OF OPERATIONS - Continued
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 volume of
Whirlpool product sold during the period and the price and volume of
byproduct revenues. The Company believes that gross profit as a
percentage of total revenues will improve in the second quarter due to
anticipated higher recycling revenues from the Edison contract.
Selling, general and administrative expenses for the three months ended
April 4, 1998 increased to $1,463,000 from $1,448,000 in the same period
of 1997. Selling expenses for the three months ended April 4, 1998
increased to $429,000 from $382,000 in the same period in 1997. The
increase in selling expenses was primarily due to an increase in costs
associated with opening an additional retail store during the first
quarter of 1998 and an increase in advertising. General and
administrative expenses for the three months ended April 4, 1998
decreased to $1,034,000 from $1,066,000 in the same period in 1997. The
decrease in general and administrative expenses was primarily due to a
decrease in personnel costs.
Interest expense was $102,000 for the three months ended April 4, 1998
compared to $93,000 for the same period in 1997. The increase was due to
a higher average borrowed amount in the three months ended April 4, 1998
than in the same period in 1997.
The Company recorded no provision for income taxes for the three months
ended April 4, 1998 due to availability of net operating loss
carryforwards, which total approximately $4,500,000 and expire in 2011.
At April 4, 1998, the Company had a valuation allowance recorded against
its net deferred tax assets of approximately $2,900,000, 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.
During the fourth quarter of 1997, the Company purchased all the
minority shareholder's stock in ARCA California, Inc., a subsidiary of
the Company. Prior to that time, the California subsidiary was 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 loss of $692,000 for the three months ended
April 4, 1998 compared to a net income of $63,000 in the same period of
1997. The decrease in income was primarily due to lower recycling
revenues and higher operating and selling, general and administrative
expenses offset by higher retail sales.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At April 4, 1998, the Company had a working capital deficit of
$2,464,000 compared to a working capital deficit of $1,959,000 at
January 3, 1998. Cash and cash equivalents increased to $127,000 at
April 4, 1998 from $13,000 at January 3, 1998. Net cash used in
operating activities was $479,000 for the three months ended April 4,
1998 compared to net cash provided by operating activities of $42,000 in
the same period of 1997. The decrease in cash provided by operating
activities was primarily due to the net loss offset by a decrease in
accounts receivable and an increase in accounts payable.
The Company had capital expenditures of $221,000 for the three months
ended April 4, 1998. The Company did not have any capital expenditures
for the three months ended March 29, 1997.
As of April 4, 1998, the Company had a $2.75 million line of credit with
a lender. The loan rate as of April 4, 1998 was 13-1/2%. The amount of
borrowings available under the line of credit is based on a formula
using receivables, inventories and property and equipment. The line of
credit has 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 line of credit is secured by receivables,
inventories, 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 April 4, 1998, the Company's borrowing
capacity was fully utilized.
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 1998. 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 13
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.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES - Continued
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 retail stores reach profitability, costs and expenses being
realized at higher than expected levels, the continued ability to
purchase product from Whirlpool at acceptable prices, 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.
<PAGE>
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 AND USE OF PROCEEDS
On May 19, 1998, the Company sold in a private placement, 100,000
shares of Common Stock at a price of $2.00 per share. The sale,
which represents approximately 8% of the Common Stock outstanding
after such sale, was made to a client of Perkins Capital Management,
Inc. (Perkins Capital). Prior to this sale, Perkins Capital had sole
dispositive power of approximately 126,000 shares of the Company's
stock based on their Schedule 13G dated January 30, 1998.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES - None
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 30, 1998, the Company held its Annual Meeting of
Shareholders. At the meeting, Edward R. Cameron, Duane S. Carlson,
Harry W. Spell and George B. Bonniwell were elected as directors for
1998. The shareholders also approved an Amendment to the Articles of
Incorporation to authorize two million shares of Preferred Stock and
ratified the appointment of McGladrey & Pullen, LLP as independent
auditors for the fiscal year ending January 2, 1999.
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 April 4, 1998.
<PAGE>
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 15, 1998 /s/Edward R. Cameron
--------------------
Edward R. Cameron
President
Date: May 15, 1998 /s/Kent S. McCoy
----------------
Kent S. McCoy
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-START> JAN-04-1998
<PERIOD-END> APR-04-1998
<CASH> 127,000
<SECURITIES> 0
<RECEIVABLES> 629,000
<ALLOWANCES> 0
<INVENTORY> 899,000
<CURRENT-ASSETS> 1,810,000
<PP&E> 11,129,000
<DEPRECIATION> 4,407,000
<TOTAL-ASSETS> 8,763,000
<CURRENT-LIABILITIES> 4,274,000
<BONDS> 0
0
0
<COMMON> 10,350,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 8,763,000
<SALES> 2,635,000
<TOTAL-REVENUES> 2,635,000
<CGS> 1,995,000
<TOTAL-COSTS> 1,995,000
<OTHER-EXPENSES> (232,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 102,000
<INCOME-PRETAX> (692,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (692,000)
<EPS-PRIMARY> (0.61)
<EPS-DILUTED> (0.61)
</TABLE>
