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 July 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 August 11, 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
July 1, 2000 and January 1, 2000
Consolidated Statements of Operations for the
Three and Six Months Ended July 1, 2000 and July 3, 1999
Consolidated Statements of Cash Flows for the
Six Months Ended July 1, 2000 and July 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>
July 1, January 1,
2000 2000
-----------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 394,000 $ 220,000
Accounts receivable, net of allowance of $24,000
and $25,000, respectively 1,940,000 1,452,000
Inventories, net of reserves of $462,000 and $275,000, respectively 3,277,000 1,586,000
Deferred income taxes 75,000 75,000
Other current assets 135,000 89,000
-----------------------------------------------------------------------------------------------------------
Total current assets $ 5,821,000 $ 3,422,000
-----------------------------------------------------------------------------------------------------------
Property and Equipment, at cost
Land $ 2,103,000 $ 2,103,000
Buildings and improvements 3,996,000 4,028,000
Equipment 3,671,000 3,542,000
-----------------------------------------------------------------------------------------------------------
$ 9,770,000 $ 9,673,000
Less accumulated depreciation 4,036,000 3,950,000
-----------------------------------------------------------------------------------------------------------
Net property and equipment $ 5,734,000 $ 5,723,000
-----------------------------------------------------------------------------------------------------------
Other Assets $ 236,000 $ 258,000
Goodwill, net of amortization of $95,000 and $76,000, respectively 95,000 114,000
-----------------------------------------------------------------------------------------------------------
Total assets $ 11,886,000 $ 9,517,000
===========================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Line of credit $ 1,742,000 $ 888,000
Current maturities of long-term obligations 250,000 135,000
Accounts payable 1,555,000 1,037,000
Accrued expenses (Note 2) 905,000 742,000
Income taxes payable 316,000 75,000
-----------------------------------------------------------------------------------------------------------
Total current liabilities $ 4,768,000 $ 2,877,000
Long-Term Obligations, less current maturities 4,678,000 4,831,000
-----------------------------------------------------------------------------------------------------------
Total liabilities $ 9,446,000 $ 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 (8,905,000) (9,536,000)
-----------------------------------------------------------------------------------------------------------
Total shareholders' equity $ 2,440,000 $ 1,809,000
-----------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 11,886,000 $ 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 Six Months Ended
July 1, July 3, July 1, July 3,
2000 1999 2000 1999
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues
Retail $ 3,020,000 $ 2,111,000 $ 5,227,000 $ 4,004,000
Recycling 2,799,000 1,942,000 4,766,000 2,867,000
------------------------------------------------------------------------------------------------------------------------
Total revenues $ 5,819,000 $ 4,053,000 $ 9,993,000 $ 6,871,000
Cost of Revenues 3,280,000 2,305,000 5,450,000 4,203,000
------------------------------------------------------------------------------------------------------------------------
Gross profit $ 2,539,000 $ 1,748,000 $ 4,543,000 $ 2,668,000
Selling, General and Administrative Expenses 1,734,000 1,345,000 3,165,000 2,531,000
------------------------------------------------------------------------------------------------------------------------
Operating income $ 805,000 $ 403,000 $ 1,378,000 $ 137,000
Other Income (Expense)
Other income 7,000 44,000 8,000 109,000
Interest expense (225,000) (196,000) (412,000) (393,000)
------------------------------------------------------------------------------------------------------------------------
Income (loss) before provision for income taxes $ 587,000 $ 251,000 $ 974,000 $ (147,000)
Provision for Income Taxes 246,000 -- 342,000 --
------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 341,000 $ 251,000 $ 632,000 $ (147,000)
========================================================================================================================
Earnings (Loss) per Common Share
Basic $ 0.15 $ 0.11 $ 0.28 $ (0.07)
Diluted $ 0.12 $ 0.11 $ 0.22 $ (0.07)
========================================================================================================================
Weighted Average Number of
Common Shares Outstanding:
Basic 2,287,000 2,267,000 2,287,000 2,018,000
Diluted 2,920,000 2,267,000 2,866,000 2,018,000
========================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
Appliance Recycling Centers of America, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
July 1, July 3,
2000 1999
---------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows from Operating Activities
Net income (loss) $ 632,000 $ (147,000)
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization 189,000 204,000
Accretion of long-term debt discount 19,000 16,000
(Gain) loss on disposal of equipment 6,000 (52,000)
Changes in current assets and liabilities:
(Increase) decrease in:
Receivables (488,000) (630,000)
Inventories (1,692,000) 628,000
Other current assets (48,000) (43,000)
Increase (decrease) in:
Accounts payable 504,000 (79,000)
Income taxes payable 240,000 --
Accrued expenses 176,000 (132,000)
---------------------------------------------------------------------------------------------------
Net cash used in operating activities $ (462,000) $ (235,000)
---------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Purchase of property and equipment $ (160,000) $ (48,000)
Proceeds from disposal of property and equipment -- 66,000
---------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities $ (160,000) $ 18,000
---------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Increase (decrease) in line of credit $ 854,000 $ (11,000)
Payments on long-term obligations (58,000) (56,000)
Proceeds from sale of common stock -- 476,000
---------------------------------------------------------------------------------------------------
Net cash provided by financing activities $ 796,000 $ 409,000
---------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents $ 174,000 $ 192,000
Cash and Cash Equivalents
Beginning 220,000 14,000
===================================================================================================
Ending $ 394,000 $ 206,000
===================================================================================================
Supplemental Disclosures of Cash Flow Information
Cash payments for interest $ 305,000 $ 279,000
Cash payments for income taxes $ 103,800 $ --
===================================================================================================
</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 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 July 1,
2000, and the results of operations for the three-month and six-month
periods ended July 1, 2000 and July 3, 1999 and its cash flows for the
six-month periods ended July 1, 2000 and July 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 year ended January 1, 2000.
Certain information and footnote disclosures included in the Company's
annual consolidated financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted.
2. Accrued Expenses
Accrued expenses were as follows:
July 1, January 1,
2000 2000
----------- -----------
Compensation $ 270,000 $ 178,000
Warranty 194,000 182,000
Other 441,000 382,000
----------- -----------
$ 905,000 $ 742,000
=========== ===========
PART I: ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
--------------------------------------------------------------------------------
The following discussion and analysis provides information that
management believes is relevant to an assessment and understanding of
the Company's level of 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
("CFCs") generated from processed appliances.
<PAGE>
RESULTS OF OPERATIONS - continued
Total revenues for the three and six months ended July 1, 2000 were
$5,819,000 and $9,993,000, respectively, compared to $4,053,000 and
$6,871,000 for the same periods in the prior year.
Retail sales accounted for approximately 52% of revenues in the second
quarter of 2000. Retail revenues for the three and six months ended July
1, 2000 increased by $909,000 or 43% and $1,223,000 or 31%,
respectively, from the same periods in the prior year. Second quarter
same-store retail sales increased 46% (a sales comparison of five stores
that were open the entire second quarters of both 2000 and 1999.) The
increase in retail sales was primarily due to increased advertising and
the opening of an additional store during the second quarter of 2000,
partially offset by a decrease in sales of reconditioned appliances.
Currently, the Company has six retail locations compared to seven retail
locations at the end of last year's second quarter. During the second
quarter of this year, the Company closed a smaller store in the
Minneapolis/Saint Paul market and also opened a 30,000 square foot store
in the Ohio market. 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 for the three and six months ended July 1, 2000
increased by $857,000 or 44% and $1,899,000 or 66%, respectively, from
the same periods in the prior year. The increases in recycling revenues
were primarily due to an increase in refrigerator recycling volumes
principally related to the contract with Southern California Edison
Company ("Edison"). In addition, the increases were also due to an
increase in CFC prices and scrap metal prices. In June 2000, the Company
signed a two-year contract with Edison to continue its refrigerator
recycling program through December 30, 2001. The two-year contract does
not provide for a minimum number of refrigerators to be recycled in
either the year 2000 or 2001. The contract is expected to generate
recycling volumes for each of the two years at approximately the same
level attained under the 1999 contract. The timing and amount of
revenues will be dependent on advertising by Edison.
Gross profit as a percentage of total revenues for the three and six
months ended July 1, 2000 increased to 44% and 45%, respectively, from
43% and 39%, respectively, for the three and six months ended July 3,
1999. The increases were 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 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 2000 will approximate the gross profit as a percentage of total
revenues for the first six months of this year.
<PAGE>
RESULTS OF OPERATIONS - continued
Selling, general and administrative expenses for the three and six
months ended July 1, 2000 increased by $389,000 or 29% and $634,000 or
25%, respectively, from the same periods in 1999. Selling expenses for
the three and six months ended July 1, 2000 increased by $237,000 or 51%
and $284,000 or 32%, respectively, from the same periods in 1999. The
increase in selling expenses was primarily due to opening an additional
retail store during the second quarter of 2000 and an increase in
advertising and sales commissions. General and administrative expenses
for the three and six months ended July 1, 2000 increased by $152,000 or
17% and $350,000 or 21%, respectively, from the same periods in 1999.
The increase in general and administrative expenses was primarily due to
an increase in personnel costs and consultant fees for the Company's
computer systems.
Interest expense was $225,000 for the three months and $412,000 for the
six months ended July 1, 2000 compared to $196,000 and $393,000 for the
same periods in 1999. The increase in interest expense was due to a
higher average borrowed amount for the three and six months ended July
1, 2000 than in the same periods in 1999 and an increase in the interest
rate on the line of credit during the second quarter of this year.
The Company recorded a provision for income taxes for the three and six
months ended July 1, 2000 of $246,000 and $342,000, respectively. The
Company has net operating loss carryovers of approximately $8,425,000 at
July 1, 2000, which are available to reduce taxable income and in turn
income taxes payable in future years. However, 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
maintaining 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 July 1, 2000, the Company
had a valuation allowance recorded against its net deferred tax assets
of approximately $4,085,000, due to undercertainty 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 $341,000 and $632,000 for the three
months and six months ended July 1, 2000, respectively, compared to net
income of $251,000 and a net loss of $147,000 in the same periods of
1999. The increase in net income for the three months ended July 1, 2000
compared to the same period in the previous year was primarily due to
higher revenues, gross profit as a percentage of total revenues
remaining about the same as the previous periods offset by an increase
in selling, general and administrative expenses. The increase in net
income for the six months ended July 1, 2000 compared to the same period
in the previous year was primarily due to an increase in the gross
profit as a percentage of total revenues offset by an increase in
selling, general and administrative expenses.
LIQUIDITY AND CAPITAL RESOURCES
At July 1, 2000, the Company had working capital of $1,053,000 compared
to working capital of $545,000 at January 1, 2000. Cash and cash
equivalents increased to $394,000 at July 1, 2000 from $220,000 at
January 1, 2000. Net cash used in operating activities was $462,000 for
the six months ended July 1, 2000 compared to $235,000 in the same
period of 1999. The increase in cash used in operating activities was
primarily due to an increase in inventories offset by an increase in the
net income for the period.
The Company's capital expenditures for the six months ended July 1, 2000
and July 3, 1999 were approximately $160,000 and $48,000, respectively.
The 2000 capital expenditures were related to the purchase of computer
equipment. The 1999 capital expenditures were primarily related to
building improvements and the purchase of computer equipment.
As of July 1, 2000, the Company has a $2.0 million line of credit with a
lender. The interest rate as of July 1, 2000 was 14.5%. 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
of 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 line 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 July 1, 2000, the Company had unused
borrowing capacity of $258,000. Currently, the Company is investigating
options to replace or renew its line of credit.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES - continued
In June 2000, the Company signed a two-year contract with Edison to
continue its refrigerator recycling program through December 30, 2001.
The two-year contract does not provide for a minimum number of
refrigerators to be recycled in either the year 2000 or 2001. The
contract is expected to generate recycling volumes for each of the two
years at approximately the same level attained under the 1999 contract.
The timing and amount of revenues will be dependent on advertising by
Edison.
The Company believes, based on the anticipated revenues from the Edison
contract and the anticipated sales per retail store, 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 upon, among other
things as discussed below, the recycling volumes generated from the
Edison program in 2000 and 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 replaced or 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 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
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 or the ability to replace the current
line of credit.
<PAGE>
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 long-term debt has a fixed rate.
However, the interest rate on the line of credit is based on the prime
rate. Also, the Company believes that inflation has not had a material
impact on the results of operations for the six-month period ended July
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 condition.
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
subsidiaries.
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 Annual Meeting of Shareholders of Appliance
Recycling Centers of America, Inc. was held to obtain the approval of
shareholders of record as of March 17, 2000 in connection with the
three matters indicated below. Proxies were mailed to the holders of
2,286,744 shares. Following is a brief description of each matter
voted on at the meeting and the number of votes cast for, against or
withheld, as well as the number of abstentions and broker nonvotes, as
to each matter:
Vote
---------------------------------
Matter For Withhold Authority
------ --- ------------------
1. Election of Directors:
Edward R. Cameron 1,968,282 5,588
George B. Bonniwell 1,968,282 5,588
Duane S. Carlson 1,968,332 5,538
Harry W. Spell 1,968,252 5,618
Marvin Goldstein 1,968,237 5,633
<PAGE>
OTHER INFORMATION - continued
2. Ratification of McGladrey & Pullen, LLP as independent public
accountants for fiscal year 2000.
Vote
--------------------------------------------------
For Against Abstain Not Voted
--- ------- ------- ---------
1,970,356 482 3,032 0
ITEM 5 - EXHIBITS AND REPORTS ON FORM 8-K
(i) Exhibit 10 - Agreement dated June 12, 2000 between Southern
California Edison Company and Appliance Recycling Centers of
America, Inc.
(ii) Exhibit No. 27 - Financial Data Schedule
(b) The Company did not file any reports on Form 8-K during the
three months ended July 1, 2000.
ITEM 6 - OTHER INFORMATION - None
<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: August 11, 2000 /s/ Edward R. Cameron
---------------------------------------
Edward R. Cameron
President
Date: August 11, 2000 /s/ Linda Koenig
---------------------------------------
Linda Koenig
Controller
