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 1, 2000
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 12, 2000, the number of shares outstanding of the registrant's no par
value Common Stock was 2,286,744 shares.
<PAGE>
APPLIANCE RECYCLING CENTERS of AMERICA, INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1: Financial Statements:
Consolidated Balance Sheets as of
April 1, 2000 and January 1, 2000
Consolidated Statements of Operations for the Three
Months Ended April 1, 2000 and April 3, 1999
Consolidated Statements of Cash Flows for the
Three Months Ended April 1, 2000 and April 3, 1999
Notes to Consolidated Financial Statements
Item 2: Management's Discussion and Analysis
of Financial Condition and Results of Operations
Item 3: Quantitative and Qualitative Disclosure about Market Risk
PART II. OTHER INFORMATION
<PAGE>
Appliance Recycling Centers of America, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
April 1, January 1,
----------------------------------
2000 2000
================================================================================================================
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 341,000 $ 220,000
Accounts receivable, net of allowance of $24,000
and $25,000, respectively 1,333,000 1,452,000
Inventories, net of reserves of $338,000 and $275,000, respectively 2,518,000 1,586,000
Deferred income taxes 75,000 75,000
Other current assets 71,000 89,000
- ----------------------------------------------------------------------------------------------------------------
Total current assets $ 4,338,000 $ 3,422,000
- ----------------------------------------------------------------------------------------------------------------
Property and Equipment, at cost
Land $ 2,103,000 $ 2,103,000
Buildings and improvements 4,011,000 4,028,000
Equipment 3,574,000 3,542,000
- ----------------------------------------------------------------------------------------------------------------
$ 9,688,000 $ 9,673,000
Less accumulated depreciation 3,998,000 3,950,000
- ----------------------------------------------------------------------------------------------------------------
Net property and equipment $ 5,690,000 $ 5,723,000
- ----------------------------------------------------------------------------------------------------------------
Other Assets $ 247,000 $ 258,000
Goodwill, net of amortization of $86,000 and $76,000, respectively 104,000 114,000
- ----------------------------------------------------------------------------------------------------------------
Total assets $ 10,379,000 $ 9,517,000
================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Line of credit $ 1,009,000 $ 888,000
Current maturities of long-term obligations 135,000 135,000
Accounts payable 1,340,000 1,037,000
Accrued expenses (Note 2) 879,000 742,000
Income taxes payable 104,000 75,000
- ----------------------------------------------------------------------------------------------------------------
Total current liabilities $ 3,467,000 $ 2,877,000
Long-Term Obligations, less current maturities 4,812,000 4,831,000
- ----------------------------------------------------------------------------------------------------------------
Total liabilities $ 8,279,000 $ 7,708,000
- ----------------------------------------------------------------------------------------------------------------
Shareholders' Equity
Common stock, no par value; authorized 10,000,000
shares; issued and outstanding 2,287,000 shares $ 11,345,000 $ 11,345,000
Accumulated deficit (9,245,000) (9,536,000)
- ----------------------------------------------------------------------------------------------------------------
Total shareholders' equity $ 2,100,000 $ 1,809,000
- ----------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 10,379,000 $ 9,517,000
================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
Appliance Recycling Centers of America, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
April 1, April 3,
----------------------------------
2000 1999
================================================================================================================
<S> <C> <C>
Revenues
Retail $ 2,207,000 $ 1,893,000
Recycling 1,967,000 925,000
- ----------------------------------------------------------------------------------------------------------------
Total revenues $ 4,174,000 $ 2,818,000
Cost of Revenues 2,170,000 1,898,000
- ----------------------------------------------------------------------------------------------------------------
Gross profit $ 2,004,000 $ 920,000
Selling, General and Administrative Expenses 1,431,000 1,186,000
- ----------------------------------------------------------------------------------------------------------------
Operating income (loss) $ 573,000 $ (266,000)
Other Income (Expense)
Other income 1,000 65,000
Interest expense (187,000) (197,000)
- ----------------------------------------------------------------------------------------------------------------
Income (loss) before provision for income taxes $ 387,000 $ (398,000)
Provision for Income Taxes 96,000 -
- ----------------------------------------------------------------------------------------------------------------
Net income (loss) $ 291,000 $ (398,000)
================================================================================================================
Basic Earnings (Loss) per Common Share $ 0.13 $ (0.23)
Diluted Earnings (Loss) per Common Share $ 0.10 $ (0.23)
================================================================================================================
Weighted Average Number of Common Shares Outstanding:
Basic 2,287,000 1,769,000
Diluted 2,812,000 1,769,000
================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
Appliance Recycling Centers of America, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
April 1, April 3,
----------------------------------
2000 1999
================================================================================================================
<S> <C> <C>
Cash Flows from Operating Activities
Net income (loss) $ 291,000 $ (398,000)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 94,000 104,000
Accretion of long-term debt discount 9,000 8,000
(Gain) loss on sale of equipment 5,000 (50,000)
Change in current assets and liabilities:
Accounts receivable 119,000 (109,000)
Inventories (932,000) 478,000
Other current assets 17,000 (2,000)
Accounts payable 289,000 (267,000)
Accrued expenses 150,000 (57,000)
Income taxes payable 29,000 -
- ----------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities $ 71,000 $ (293,000)
- ----------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Purchases of property and equipment $ (42,000) $ (1,000)
Proceeds from disposal of property and equipment - 58,000
- ----------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities $ (42,000) $ 57,000
- ----------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Increase (decrease) in line of credit $ 121,000 $ (135,000)
Net proceeds from issuance of Common Stock and warrants - 482,000
Payments on long-term obligations (29,000) (27,000)
- ----------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities $ 92,000 $ 320,000
- ----------------------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents $ 121,000 $ 84,000
Cash and Cash Equivalents
Beginning 220,000 14,000
- ----------------------------------------------------------------------------------------------------------------
Ending $ 341,000 $ 98,000
================================================================================================================
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest $ 171,000 $ 164,000
Income taxes 67,000 -
================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
Appliance Recycling Centers of America, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
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 1, 2000 and the results of operations and
its cash flows for the three-month periods ended April 1, 2000 and
April 3, 1999. 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
1, 2000.
Certain information and footnote disclosures included in the
consolidated financial statements in accordance with generally accepted
accounting principles have been condensed or omitted.
2. Accrued Expenses
Accrued expenses were as follows:
<TABLE>
<CAPTION>
April 1, January 1,
2000 2000
------------- --------------
<S> <C> <C>
Compensation $ 274,000 $ 178,000
Warranty 194,000 182,000
Lease contingencies
and closing costs 12,000 19,000
Other 399,000 363,000
------------- --------------
$ 879,000 $ 742,000
============= ==============
</TABLE>
<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 operations 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 two sources: retail and recycling.
Retail revenues are sales of appliances, warranty and service revenue
and delivery fees. Recycling revenues are fees charged for the disposal
of appliances and sales of scrap metal and reclaimed chlorofluorocarbons
("CFC's") generated from processed appliances.
Total revenues for the three months ended April 1, 2000 were $4,174,000
compared to $2,818,000 for the three months ended April 3, 1999, an
increase of 48%, mainly as a result of an increase in recycling
revenues. Retail revenues for the three months ended April 1, 2000 were
$2,207,000, compared to $1,893,000 for the three months ended April 3,
1999, an increase of 17%. Same-store retail sales increased 54% (a sales
comparison of six stores that were open the entire first three months of
both 2000 and 1999). The increase in retail sales was primarily due to
increased sales of Whirlpool products offset by a decrease in sales of
reconditioned products. Currently, the Company has six retail locations.
The Company closed a smaller store in the Minneapolis/Saint Paul market
in April 2000. The Company also opened a 30,000 square foot store in the
Ohio market in April 2000. 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 increased to $1,967,000 in the three months ended
April 1, 2000 from $925,000 in the same period of 1999, an increase of
113%. The increase in recycling revenues was primarily due to the
increase of $875,000 in the recycling volumes principally related to the
contract with Southern California Edison Company ("Edison"). In
addition, the sales of CFC's increased primarily due to an increased
volume of refrigerators recycled related to the contract with Edison.
The recycling volumes from the Edison contract increased in the first
quarter of 2000 compared to the previous year due to the continuance of
the program into the first quarter of 2000 prior to a new contract being
entered into. Edison has been approved by the California Public
Utilities Commission ("CPUC") for a program in 2000 and the Company
expects to shortly enter into a contract with Edison for the year 2000.
The contract for 2000 does not provide for a minimum number of
refrigerators to be recycled. The Company currently expects the year
2000 program to be at approximately the same level as 1999. The timing
and amount of revenues will be dependent on advertising by Edison.
<PAGE>
RESULTS OF OPERATIONS - Continued
Gross profit as a percentage of total revenues increased to 48.0% for
the three months ended April 1, 2000 from 32.6% for the three months
ended April 3, 1999. The increase was primarily due to higher recycling
revenues from the Edison contract without a corresponding increase in
expenses and improved mix of inventory for retail sales. 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 expected Edison contract, the mix of retail
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 for the year will approximate the gross profit as a
percentage of total revenues of the first quarter of 2000.
Selling, general and administrative expenses for the three months ended
April 1, 2000 increased by $245,000 or 20.7% from the same period in
1999. Selling expenses for the three months ended April 1, 2000
increased by $46,000 or 10.8% from the same period in 1999. The increase
in selling expenses was primarily due to an increase in advertising and
sales commissions. General and administrative expenses for the three
months ended April 1, 2000 increased by $199,000 or 26.2% from the same
period in 1999. The increase in general and administrative expense was
primarily due to an increase in personnel costs and consultant fees for
the Company's computer systems.
Interest expense was $187,000 for the three months ended April 1, 2000
compared to $197,000 for the same period in 1999. The decrease was due
to a lower average borrowed amount in the three months ended April 1,
2000 than in the same period in 1999.
The Company recorded a provision for income taxes for the three months
ended April 1, 2000 of $96,000. The Company has net operating loss
carryovers of approximately $8,425,000 at April 1, 2000, which are
available to reduce taxable income and in turn income taxes payable in
future years. Future utilization of these loss and credit carryforwards
is subject to certain limitations under provisions of the Internal
Revenue Code including limitations subject to Section 382, which relate
to a 50 percent change in control over a three-year period, and are
further dependent upon the Company attaining profitable operations. The
Company believes that the issuance of Common Stock during 1999 resulted
in an "ownership change" under Section 382. Accordingly, the Company's
ability to use net operating loss carryforwards generated prior to
February 1999 may be limited to approximately $56,000 per year. At April
1, 2000, the Company had a valuation allowance recorded against its net
deferred tax assets of approximately $4,085,000, due to uncertainty of
realization. The realization of deferred tax assets is dependent upon
sufficient future taxable income during the periods when deductible
temporary differences and carryforwards are expected to become available
to reduce taxable income.
<PAGE>
RESULTS OF OPERATIONS - Continued
The Company recorded net income of $291,000 for the three months ended
April 1, 2000 compared to a net loss of $398,000 in the same period of
1999. The increase in the net income was primarily due to an increase in
the gross profit as a percentage of total revenues offset by a slight
increase in selling, general and administrative expenses.
LIQUIDITY AND CAPITAL RESOURCES
At April 1, 2000, the Company had working capital of $871,000 compared
to working capital of $545,000 at January 1, 2000. Cash and cash
equivalents increased to $341,000 at April 1, 2000 from $220,000 at
January 1, 2000. Net cash provided by operating activities was $71,000
for the three months ended April 1, 2000 compared to net cash used in
operating activities of $293,000 in the same period of 1999. The
increase in cash provided by operating activities was primarily due to
the increase in net income.
The Company's capital expenditures for the three months ended April 1,
2000 and April 3, 1999 were approximately $42,000 and $1,000,
respectively. The 2000 capital expenditures were primarily related to
the purchase of computer equipment. The 1999 capital expenditures were
primarily related to building improvements.
As of April 1, 2000, the Company had a $2.0 million line of credit with
a lender. The interest rate on the line as of April 1, 2000 was 14%. The
amount of borrowings available under the line of credit is based on a
formula using receivables and inventories. The line of credit has a
stated maturity date of August 30, 2000, if not renewed, 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
substantially all the Company's assets, is guaranteed by the President
of the Company and requires minimum monthly interest payments of $5,625
regardless of the outstanding principal balance. The lender is also
secured by an inventory repurchase agreement with Whirlpool Corporation.
The loan 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 1, 2000, the Company
had unused borrowing capacity of $204,000.
Edison has been approved by the CPUC for a program in 2000 and the
Company expects to shortly enter into a contract with Edison for the
year 2000. The contract for 2000 does not provide for a minimum number
of refrigerators to be recycled. The Company currently expects the year
2000 program to be at approximately the same level as 1999. The timing
and amount of revenues will be dependent on advertising by Edison.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES - continued
The Company believes, based on the anticipated revenues from the
expected Edison contract, anticipated sales per retail store and the
related anticipated gross profit, that its cash balance, anticipated
funds generated from operations and its current line of credit, if
renewed in August 2000, will be sufficient to finance its operations and
capital expenditures through December 2000. The Company's total capital
requirements will depend, among other things as discussed below, on the
recycling volumes generated from the expected Edison program in 2000 and
on the number and size of retail stores operating during the fiscal
year. Currently, the Company has three centers and six 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 (common or preferred stock) or other
securities. There can be no assurance that the line of credit will be
renewed or such additional sources of financing will be available or
available on terms satisfactory to the Company or permitted by the
Company's current lenders.
FORWARD-LOOKING STATEMENTS
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. Any forward-looking information regarding the
operations of the Company will be affected primarily by the Company's
continued ability to purchase product from Whirlpool at acceptable
prices and the ability and timing of Edison to deliver units under its
expected contract with the Company. In addition, any forward-looking
information will also be affected by the ability of individual retail
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 Company's ability to secure an adequate
supply of used appliances for resale and the continued availability of
the Company's current line of credit.
PART I: ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
- --------------------------------------------------------------------------------
MARKET RISK AND IMPACT OF INFLATION
The Company does not believe there is any significant risk related to
interest rate fluctuations since all debt has a fixed rate. Also, the
Company believes that inflation has not had a material impact on the
results of operations for the three-month period ended April 1, 2000.
However, there can be no assurance that future inflation will not have
an adverse impact on the Company's operating results and financial
conditions.
<PAGE>
PART II. OTHER INFORMATION
- --------------------------------------------------------------------------------
ITEM 1 - 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 subsidiars.
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS - None
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES - None
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 27, 2000, the Company held its Annual Meeting of
Shareholders. At the meeting, Edward R. Cameron, Duane S. Carlson,
Harry W. Spell, Marvin Goldstein and George B. Bonniwell were
elected as directors for 2000. The shareholders also ratified the
appointment of McGladrey & Pullen, LLP as independent auditors for
the fiscal year ending December 30, 2000.
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 1, 2000.
<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 12, 2000 /s/Edward R. Cameron
--------------------
Edward R. Cameron
President
Date: May 12, 2000 /s/Linda Koenig
--------------------
Linda Koenig
Controller
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-30-2000
<PERIOD-START> JAN-02-2000
<PERIOD-END> APR-01-2000
<CASH> 341,000
<SECURITIES> 0
<RECEIVABLES> 1,333,000
<ALLOWANCES> 0
<INVENTORY> 2,518,000
<CURRENT-ASSETS> 4,338,000
<PP&E> 9,688,000
<DEPRECIATION> 3,998,000
<TOTAL-ASSETS> 10,379,000
<CURRENT-LIABILITIES> 3,467,000
<BONDS> 4,812,000
0
0
<COMMON> 11,345,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 10,379,000
<SALES> 4,174,000
<TOTAL-REVENUES> 4,174,000
<CGS> 2,170,000
<TOTAL-COSTS> 2,170,000
<OTHER-EXPENSES> (1,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 187,000
<INCOME-PRETAX> 387,000
<INCOME-TAX> 96,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 291,000
<EPS-BASIC> 0.13
<EPS-DILUTED> 0.10
</TABLE>
