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 September 28, 2002
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)
(952) 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 November 8, 2002, the number of shares outstanding of the registrant's no
par value common stock was 2,323,890 shares.
APPLIANCE RECYCLING CENTERS of AMERICA, INC.
INDEX
PART I. FINANCIAL INFORMATION Page No.
--------
Item 1: Financial Statements:
Consolidated Balance Sheets as of
September 28, 2002 and December 29, 2001....................3
Consolidated Statements of Operations for the
Three and Nine Months Ended September 28, 2002
and September 29, 2001......................................4
Consolidated Statements of Cash Flows for the
Nine Months Ended September 28, 2002
and September 29, 2001......................................5
Notes to Consolidated Financial Statements..................6
Item 2: Management's Discussion and Analysis
of Financial Condition and Results of Operations............9
Item 3: Quantitative and Qualitative Disclosure about
Market Risk................................................15
Item 4: Controls and Procedures....................................15
PART II. OTHER INFORMATION..........................................16
2
Appliance Recycling Centers of America, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 28,
2002 December 29,
(Unaudited) 2001
- ----------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents $ 1,166,000 $ 506,000
Accounts receivable, net of allowance of $26,000
and $100,000, respectively 3,413,000 4,375,000
Inventories, net of reserves of $742,000 and $464,000, respectively 7,181,000 6,748,000
Deferred income taxes 576,000 576,000
Other current assets 291,000 174,000
- ----------------------------------------------------------------------------------------------------------------
Total current assets 12,627,000 12,379,000
- ----------------------------------------------------------------------------------------------------------------
Property and Equipment, at cost
Land 2,050,000 2,050,000
Buildings and improvements 3,884,000 3,779,000
Equipment 4,895,000 4,689,000
- ----------------------------------------------------------------------------------------------------------------
10,829,000 10,518,000
Less accumulated depreciation 4,667,000 4,291,000
- ----------------------------------------------------------------------------------------------------------------
Net property and equipment 6,162,000 6,227,000
- ----------------------------------------------------------------------------------------------------------------
Other Assets 200,000 292,000
Goodwill, net of amortization of $152,000 (Note 4) 38,000 38,000
- ----------------------------------------------------------------------------------------------------------------
Total assets $ 19,027,000 $ 18,936,000
================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Line of credit $ 1,763,000 $ 4,708,000
Current maturities of long-term obligations 201,000 401,000
Accounts payable 3,527,000 1,960,000
Accrued expenses (Note 2) 1,443,000 1,365,000
Income taxes payable 1,062,000 757,000
- ----------------------------------------------------------------------------------------------------------------
Total current liabilities 7,996,000 9,191,000
Long-Term Obligations, less current maturities (Note 6) 4,509,000 4,280,000
- ----------------------------------------------------------------------------------------------------------------
Deferred income tax liabilities 68,000 68,000
- ----------------------------------------------------------------------------------------------------------------
Total liabilities 12,573,000 13,539,000
- ----------------------------------------------------------------------------------------------------------------
Shareholders' Equity
Common stock, no par value; authorized 10,000,000 shares;
issued and outstanding 2,324,000 and 2,297,000 shares, respectively 11,368,000 11,360,000
Accumulated deficit (4,914,000) (5,963,000)
- ----------------------------------------------------------------------------------------------------------------
Total shareholders' equity 6,454,000 5,397,000
- ----------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 19,027,000 $ 18,936,000
================================================================================================================
See Notes to Consolidated Financial Statements.
3
Appliance Recycling Centers of America, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
----------------------------------------------------------------
September 28, September 29, September 28, September 29,
2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------------------------------
Revenues
Retail $ 7,980,000 $ 5,784,000 $ 22,462,000 $ 15,452,000
Recycling 4,726,000 7,380,000 13,030,000 15,131,000
Byproduct 373,000 481,000 1,020,000 921,000
- -----------------------------------------------------------------------------------------------------------------------
Total revenues 13,079,000 13,645,000 36,512,000 31,504,000
Cost of revenues 8,503,000 8,053,000 23,473,000 18,827,000
- -----------------------------------------------------------------------------------------------------------------------
Gross profit 4,576,000 5,592,000 13,039,000 12,677,000
Selling, general and administrative expenses 3,737,000 3,307,000 10,395,000 8,706,000
- -----------------------------------------------------------------------------------------------------------------------
Operating income 839,000 2,285,000 2,644,000 3,971,000
Other income (expense)
Other income 4,000 24,000 21,000 71,000
Interest expense (385,000) (280,000) (913,000) (790,000)
- -----------------------------------------------------------------------------------------------------------------------
Income before provision for income taxes 458,000 2,029,00 1,752,000 3,252,000
Provision for income taxes 184,000 452,000 703,000 966,000
- -----------------------------------------------------------------------------------------------------------------------
Net income $ 274,000 $ 1,577,000 $ 1,049,000 $ 2,286,000
=======================================================================================================================
Basic Earnings per Common Share $ 0.12 $ 0.69 $ 0.45 $ 1.00
=======================================================================================================================
Diluted Earnings per Common Share $ 0.09 $ 0.50 $ 0.32 $ 0.76
=======================================================================================================================
Weighted Average Number of Common Shares Outstanding
Basic 2,324,000 2,292,000 2,318,000 2,289,000
Diluted 3,176,000 3,147,000 3,259,000 2,989,000
=======================================================================================================================
See Notes to Consolidated Financial Statements.
4
Appliance Recycling Centers of America, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
-----------------------------
September 28, September 29,
2002 2001
- --------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
Net income $ 1,049,000 $ 2,286,000
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 410,000 334,000
Write-off of deferred financing costs 124,000 --
Accretion of long-term debt discount 34,000 32,000
Deferred gain on building sale recognized -- (54,000)
Changes in assets and liabilities:
Receivables 962,000 (6,663,000)
Inventories (433,000) (869,000)
Other assets (183,000) (857,000)
Accounts payable 1,567,000 883,000
Accrued expenses 78,000 531,000
Income Taxes Payable 305,000 557,000
- ------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 3,913,000 (3,820,000)
- ------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Purchases of property and equipment (310,000) (768,000)
Proceeds from disposal of property and equipment -- 6,000
- ------------------------------------------------------------------------------------------------------
Net cash used in investing activities (310,000) (762,000)
- ------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Net borrowings (payments) under line of credit (2,945,000) 3,565,000
Proceeds from issuance of common stock 8,000 --
Payments on long-term obligations (3,476,000) (255,000)
Proceeds from current debt obligations -- 1,000,000
Proceeds from long-term debt obligations 3,470,000 283,000
- ------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (2,943,000) 4,593,000
- ------------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents 660,000 11,000
Cash and Cash Equivalents
Beginning 506,000 302,000
- ------------------------------------------------------------------------------------------------------
Ending $ 1,166,000 $ 313,000
- ------------------------------------------------------------------------------------------------------
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest $ 755,000 $ 758,000
Income taxes $ 455,000 $ 808,000
======================================================================================================
See Notes to Consolidated Financial Statements.
5
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 September
28, 2002, and the results of their operations for the three-month and
nine-month periods ended September 28, 2002 and September 29, 2001 and
their cash flows for the nine-month periods ended September 28, 2002 and
September 29, 2001. 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 consolidated financial statements and related notes in
the Company's Annual Report on Form 10-K for the year ended December 29,
2001.
Certain information and footnote disclosures included in the annual
consolidated financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
therefore condensed or omitted.
2. Accrued Expenses
----------------
Accrued expenses were as follows:
September 28, December 29,
2002 2001
---------------- ----------------
Compensation $ 632,000 $ 493,000
Warranty 121,000 225,000
Other 690,000 647,000
---------------- ----------------
$1,443,000 $ 1,365,000
================ ================
3. Earnings per Share
------------------
Basic per share amounts are computed, generally, by dividing net income
or loss by the weighted-average number of common shares outstanding.
Diluted per share amounts assume the conversion, exercise, or issuance
of all potential common stock instruments unless their effect is
antidilutive, thereby reducing the loss or increasing the income per
common share.
In arriving at diluted weighted-average shares and per share amounts for
the three and nine months ending September 28, 2002 and September 29,
2001, options and warrants with exercise prices below average market
prices for the respective fiscal quarters in which they were dilutive
were included using the treasury stock method.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
- ------------------------------------------------------
4. Accounting Standards Recently Adopted and Not Yet Adopted
Effective December 30, 2001, the Company adopted Statement No. 141,
Business Combinations, which eliminates the pooling method of accounting
for business combinations and Statement No. 142, Goodwill and Other
Intangible Assets, which eliminates the amortization of goodwill and
other intangibles that are determined to have an indefinite life and
requires, at a minimum, annual impairment tests of goodwill and other
intangible assets that are determined to have an indefinite life. The
adoption of these new standards resulted in no amortization of the
Company's goodwill ($38,000) for the nine months ended September 28,
2002.
Effective December 30, 2001, the Company adopted Statement 144,
Accounting for Impairment or Disposal of Long-Lived Assets. This
Statement addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. The adoption of this
statement had no impact on the Company's financial statements.
Not Yet Adopted:
In September 2001, the FASB issued Statement 143, Asset Retirement
Obligations. This Statement addresses financial accounting and reporting
for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. The Statement will be
effective for the Company's fiscal year ending December 2003. The
Company does not believe that the adoption of this pronouncement will
have a material effect on its financial statements.
5. Critical Accounting Policies
----------------------------
As a matter of policy, the Company reviews its major assets for
impairment. The Company's major operating assets are accounts
receivable, inventories, and property and equipment. The reserve for
doubtful accounts of $26,000 should be adequate for any exposure to loss
in the Company's September 28, 2002 accounts receivable. The Company has
also established reserves for slow moving and obsolete inventories and
believes the reserve of $742,000 is adequate. The Company depreciates
its property and equipment over their estimated useful lives and has not
identified any items that are impaired as of September 28, 2002. The
Company has established an accrual for warranty expense for future
service expense and believes that the accrual of $121,000 is adequate.
The Company evaluated the realizability of its deferred tax assets and
tax attributes and has provided a valuation allowance primarily for net
operating loss and tax credit carryovers for which the use is subject to
limitation. The Company has significant options and warrants outstanding
and utilizes relevant market and other valuation information relative to
accounting for and reporting equity transactions.
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
- ------------------------------------------------------
6. Long-Term Obligations
---------------------
Long-term obligations consisted of the following:
SEPTEMBER 28,
2002 December 29,
(UNAUDITED) 2001
--------------------------------------------------------------------------------------
9.00% mortgage, due in monthly installments of
$14,211, including interest, balance due February
2004, secured by land and building $ 667,000 $ 723,000
8.72% mortgage, due in monthly installments of
$7,027, including interest, balance due January
2003, secured by land and building -- 596,000
Adjustable rate mortgage based on the 30 day
LIBOR rate plus 2.7%, adjusted yearly, monthly
payments include interest and principal, due
October 2012, secured by land and building 3,470,000 --
13.00% note payable, due in monthly principal and
interest payments of $52,259 with balance due
September 2005, secured by equipment, land
and building 510,000 3,072,000
Other 63,000 290,000
----------- -----------
4,710,000 4,681,000
Less current maturities 201,000 401,000
----------- -----------
$ 4,509,000 $ 4,280,000
=========== ===========
The future annual maturities of long-term obligations are as follows:
Fiscal year
-----------
2002 $ 1,168,000
2003 156,000
2004 116,000
2005 113,000
2006 and thereafter 3,157,000
-------------
$ 4,710,000
=============
8
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 three sources: retail, recycling and
byproduct. Retail revenues are sales of appliances, warranty and service
revenue and delivery fees. Recycling revenues are fees charged for the
disposal of appliances. Byproduct revenues are sales of scrap metal and
reclaimed chlorofluorocarbons ("CFCs") generated from processed
appliances. The Company is managed as a unit and does not measure profit
or loss separately for its three primary revenue sources. Therefore, the
Company believes that it has one operating segment.
Total revenues for the three and nine months ended September 28, 2002
were $13,079,000 and $36,512,000, respectively, compared to $13,645,000
and $31,504,000 for the same periods in the prior year.
Retail sales accounted for approximately 61% of revenues in the third
quarter of 2002. Retail revenues for the three and nine months ended
September 28, 2002 increased by $2,196,000 or 38% and by $7,010,000 or
45%, respectively, from the same periods in the prior year. Third
quarter same-store retail sales increased 9% (a sales comparison of 8
stores that were open the entire third quarters of 2002 and 2001). The
increase in retail sales was primarily due to an increase in sales of
new in the box product due to additional purchases of new product and an
increase in special buy sales as a result of operating two additional
stores during the three and nine months ended September 28, 2002
compared to the same periods in the previous year. Special buy
appliances include manufacturer closeouts, factory over-runs, floor
samples, returned or exchanged items and scratch and dent appliances.
The Company continues to purchase appliances from three manufacturers,
Whirlpool Corporation, Maytag Corporation and Frigidaire. There are no
minimum purchase requirements with any of these manufacturers. The
Company believes purchases from these three manufacturers will provide
an adequate supply of high-quality appliances for its retail outlets;
however, there is a risk that one or more of these sources could be
lost.
Currently the Company has ten retail locations. The Company plans to
open one or two additional stores during 2003 in existing markets. 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.
9
RESULTS OF OPERATIONS - continued
- ---------------------------------
Recycling revenues for the three and nine months ended September 28,
2002 decreased by $2,654,000 or 36% and $2,101,000 or 14%, respectively,
from the same periods in the prior year. The decrease in recycling
revenues was primarily due to an overall decrease in total recycling
volumes from all the various recycling contracts in California. The
Company had been recycling appliances for Southern California Edison
Company ("Edison") under an extension of Edison's 2001 Residential
Recycling Program. In July 2002, the Company signed a contract in
support of California's Statewide Residential Recycling Program for 2002
to be administered by Edison. This contract was effective April 1, 2002
and continues to December 31, 2002. Recycling services for this
statewide program include customers of Edison, Pacific Gas and Electric
("PG&E") and San Diego Gas and Electric ("SDG&E"). The Company is
responsible for advertising in the PG&E and SDG&E areas only. Edison is
responsible for advertising in the Edison area.
The Appliance Early Retirement and Recycling Program is a
refrigerator/freezer/room air conditioner recycling program that
operated in San Diego and surrounding areas, a six county region in
California's Central Valley, including the cities of Fresno and Stockton
and the seven county Bay Area, including San Francisco. The program
began in June 2001 and was completed in August 2002. The Company was
responsible for advertising the program.
At this time the energy crisis has passed and energy conservation has
become less of a front-burner issue. The energy crisis in California has
not had a material adverse effect on the Company's operations. However,
there can be no assurance that it will not have an adverse effect in the
future if Edison is unable to perform under the terms of the statewide
contract with the Company.
Byproduct revenues for the three months ended September 28, 2002
decreased to $373,000 from $481,000 and increased to $1,020,000 from
$921,000 for the nine months ended September 28, 2002. The decrease in
the third quarter of 2002 was primarily due to a decrease in the volume
and price of CFCs offset by an increase in scrap metal. The increase in
the nine months ended September 28, 2002 was primarily due to an
increase in scrap prices compared to the same period in the previous
year.
Gross profit as a percentage of total revenues for the three months
ended September 28, 2002 decreased to 35% from 41% for the same period
in 2001 and decreased to 36% from 40% for the nine month period ended
September 28, 2002 compared to the same periods in 2001. The decreases
were primarily due to higher recycling costs related to the recycling
programs offset by higher gross margins in sales of special buy
appliances. 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 statewide 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 2002 will approximate the
gross profit as a percentage of total revenues for the first nine months
of this year.
10
RESULTS OF OPERATIONS - continued
- ---------------------------------
Selling, general and administrative expenses for the three and nine
months ended September 28, 2002 increased by $430,000 or 13% and
$1,689,000 or 19%, respectively, from the same periods in 2001. Selling
expenses for the three and nine months ended September 28, 2002
increased by $646,000 or 45% and $1,721,000 or 42%, respectively, from
the same periods in 2001. The increases in selling expenses was
primarily due to the expenses of opening one store during the first
quarter of 2002 and operating two additional stores in 2002 as compared
to the same periods in the previous year. General and administrative
expenses for the three and nine months ended September 28, 2002
decreased by $216,000 or 11% and $32,000 or 1%, respectively, from the
same periods in 2001. The decreases were primarily due to a decrease in
personnel costs as a result of more efficient operations and a decrease
in the recycling volumes related to the recycling programs.
After discussion with the Company's outside accountants after the 3rd
quarter 2002 press release was issued, the one-time write-off of
$124,000 of deferred financing costs in the 3rd quarter of 2002 was
reclassed from selling, general and administrative expenses to interest
expense. This one-time write-off is related to a pay down of long-term
debt. This reclassification more accurately reflects accounting
principles generally accepted in the United States of America.
Interest expense was $385,000 for the three months and $913,000 for the
nine months ended September 28, 2002 compared to $280,000 and $790,000
for the same periods in 2001. The increase in interest expense was due
to a one-time write-off of deferred financing costs related to a pay
down of long-term debt and a higher minimum interest amount on the line
of credit offset by a lower average borrowed amount and a lower
effective interest rate on the line of credit.
The Company recorded a provision for income taxes for the three and nine
months ended September 28, 2002 of $184,000 and $703,000, respectively
compared to $452,000 and $966,000 in the same periods in 2001. The
decrease was due to lower pre-tax income for the three and nine months
ended September 28, 2002 compared to the same periods in the prior year.
The Company had net operating loss carryovers and credit carryforwards
of approximately $7 million at September 28, 2002, which may be
available to reduce taxable income and therefore income taxes payable in
future years. However, future utilization of these loss and credit carry
forwards is subject to certain significant 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 is limited to
approximately $56,000 per year or less than $1 million through 2018.
11
RESULTS OF OPERATIONS - continued
- ---------------------------------
At September 28, 2002, the Company had recorded cumulative valuation
allowances of approximately $2,998,000 against its net deferred tax
assets due to the uncertainty of their 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.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
At September 28, 2002, the Company had working capital of $4,631,000
compared to working capital of $3,188,000 at December 29, 2001. Cash and
cash equivalents increased to $1,166,000 at September 28, 2002 from
$506,000 at December 29, 2001. Net cash provided by operating activities
was $3,913,000 for the nine months ended September 28, 2002 compared to
net cash used in operating activities of $3,820,000 in the same period
of 2001. The increase in cash provided by operating activities was
primarily due to a decrease in receivables offset by an increase in
payables for the period.
The Company's capital expenditures for the nine months ended September
28, 2002 and September 29, 2001 were approximately $310,000 and
$768,000, respectively. The 2002 capital expenditures were primarily
related to leasehold improvements for the retail store opened in March
2002. The 2001 capital expenditures were primarily related to the
continued upgrade of computer systems and the purchase of equipment
related to the refrigerator recycling operation.
As of September 28, 2002, the Company had a $10.0 million line of credit
with a lender. The interest rate as of September 28, 2002 was 5.75%. 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, 2004 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 and requires minimum monthly interest payments of
$37,500 regardless of the outstanding principal balance. The lender also
has an inventory repurchase agreement with Whirlpool Corporation that
secures the line of credit. The line requires that the Company meet
certain financial covenants, provides payment penalties for
noncompliance and prepayment, limits the amount of other debt the
Company can incur, limits the amount of spending on fixed assets and
limits payments of dividends. At September 28, 2002, the Company had
unused borrowing capacity of $3,110,000.
12
LIQUIDITY AND CAPITAL RESOURCES - continued
- -------------------------------------------
A summary of our contractual cash obligations for the next five years at
September 28, 2002 is as follows:
----------------------------------------------------------------------------------
(in thousands) PAYMENTS DUE BY PERIOD
----------------------- ----------------------------------------------------------------------------------
CONTRACTUAL TOTAL 2002 2003 2004 2005 2006 2007
OBLIGATIONS 4TH QTR
----------------------- ------------ ------------ ------------ ----------- ----------- --------- ---------
Long-term debt,
including
interest $2,783 $1,237 $ 374 $ 329 $ 312 $267 $264
----------------------- ------------ ------------ ------------ ----------- ----------- --------- ---------
Operating leases $5,418 $ 519 $1,510 $1,309 $1,317 $585 $178
----------------------- ------------ ------------ ------------ ----------- ----------- --------- ---------
Total contractual Cash
obligations $8,201 $ 1,756 $1,884 $1,638 $1,629 $ 852 $442
----------------------- ------------ ------------ ------------ ----------- ----------- --------- ---------
We also have a commercial commitment as described below:
------------------------------------------------------------------------------
OTHER COMMERCIAL TOTAL AMOUNT OUTSTANDING AT DATE OF EXPIRATION
COMMITMENT COMMITTED 9/28/02
------------------------------------------------------------------------------
Line of credit $10,000,000 $1,763,000 August 30,2004
------------------------------------------------------------------------------
We believe that our cash balance, availability under our line of credit,
if needed, and anticipated cash flows from operations will be adequate
to fund our cash requirements for fiscal 2002.
In July 2002, the Company signed a contract in support of California's
Statewide Residential Recycling Program for 2002 to be administered by
Edison. This contract was effective April 1, 2002 and continues to
December 31, 2002. Recycling services for this statewide program include
customers of Edison, Pacific Gas and Electric ("PG&E") and San Diego Gas
and Electric ("SDG&E"). The Company is responsible for advertising in
the PG&E and SDG&E areas only. Edison is responsible for advertising in
the Edison area.
In September 2002, the Company refinanced the building in. St. Louis
Park, Minnesota and used the proceeds to pay down long-term debt. The
new long-term debt is for $3,470,000. The terms are 20 year
amortization, 10 year balloon and the interest rate is variable based on
30-day LIBOR. The interest rate as of September 28, 2002 was 4.5191%.
At this time the energy crisis has passed and energy conservation has
become less of a front-burner issue. The energy crisis in California has
not had a material adverse affect on the Company's operations. However
there can be no assurance that it will not have had adverse effect in
the future if Edison is unable to perform under the terms of the
statewide contract with the Company.
13
LIQUIDITY AND CAPITAL RESOURCES - continued
- -------------------------------------------
The Company believes, based on the anticipated revenues from the
Statewide Residential Recycling Program contract, the anticipated sales
per retail store and its anticipated gross profit, that its cash
balance, anticipated funds generated from operations and its current
line of credit will be sufficient to finance its operations and capital
expenditures through December 2002. The Company's total capital
requirements for the remainder of 2002 and for 2003 will depend upon,
among other things as discussed below, the recycling volumes generated
from the Statewide Residential Recycling Program, if renewed for 2003,
and the number and size of retail stores operating during the fiscal
year. Currently, the Company has three centers and ten stores in
operation. If revenues are lower than anticipated or expenses are higher
than anticipated, 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
such additional sources of financing will be available or available on
terms satisfactory to the Company or permitted by the Company's current
lender.
FORWARD-LOOKING STATEMENTS
- --------------------------
Statements contained in this quarterly report regarding the Company's
future operations, performance and results, and anticipated liquidity
discussed herein are forward-looking and therefore are subject to
certain risks and uncertainties, including, but not limited to, 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, Maytag and
Frigidaire at acceptable prices and the ability and timing of Edison to
deliver units under the Statewide Residential Recycling Program contract
with the Company. In addition, any forward-looking information will also
be affected by the ability of individual stores to meet planned revenue
levels, the rate of sustainable growth in the number of retail stores,
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.
14
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 on all but one of its long-term debt since it
has fixed rates. However, there is interest rate risk on the line of
credit since its interest rate floats and is based on the prime rate and
on the long-term debt entered into in September 2002 since its interest
rate is based on LIBOR. Also, the Company believes that inflation has
not had a material impact on the results of operations for the
nine-month period ended September 28, 2002. 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 I. ITEM 4 CONTROLS AND PROCEDURES
- --------------------------------------------------------------------------------
Under the supervision and with the participation of the Company's
management, including its principal executive officer and principal
financial officer, the Company has evaluated the effectiveness of the
design and operation of its disclosure controls and procedures within 90
days of the filing date of this quarterly report, and, based on the
evaluation, its principal executive officer and principal financial
officer have concluded that these controls and procedures are effective.
There were no significant changes in the Company's internal controls or
in other factors that could significantly affect these controls
subsequent to the date of their evaluation.
Disclosure controls and procedures are the Company's controls and other
procedures that are designed to ensure that information required to be
disclosed by the Company in the reports that it files or submits under
the Exchange Act is recorded, processed, summarized and reported, within
the time periods specified in the Securities and Exchange Commission's
rules and forms. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information
required to be disclosed by the Company in the reports that it files
under the Exchange Act is accumulated and communicated to its
management, including its principal executive officer and principal
financial officer, as appropriate to allow timely decisions regarding
required disclosure.
15
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 - None
---------------------------------------------------
ITEM 5 - OTHER INFORMATION - None
-----------------
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) (i) Exhibit 10.1 - Loan agreement dated September 19, 2002
between Appliance Recycling Centers of America, Inc. and
General Electric Capital Business Asset Funding Corporation.
(b) (i) The Company filed a Form 8-K on August 5, 2002 announcing
the Statewide Residential Recycling Program for 2002.
(ii) The Company filed a Form 8-K on August 5, 2002 announcing
its second quarter results.
16
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: November 8, 2002 /s/ Edward R. Cameron
--------------------------------------------
Edward R. Cameron
President
Date: November 8, 2002 /s/ Linda Koenig
--------------------------------------------
Linda Koenig
Controller
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, each of the undersigned hereby certifies in his/her
capacity as an officer of Appliance Recycling Centers of America, Inc. (the
"Company") that (a) the Quarterly Report of the Company on Form 10-Q for the
period ended September 28, 2002 fully complies with the requirements of Section
13(a) of the Securities Exchange Act of 1934 and (b) the information contained
in such report fairly presents, in all material respects, the financial
condition of the Company at the end of such period and the results of operations
of the Company for such period.
/s/ Linda Koenig
--------------------------------------------
Linda Koenig
Controller
/s/ Edward R. Cameron
--------------------------------------------
Edward R. Cameron
President
17
FORM 10-Q CEO CERTIFICATION
---------------------------
CERTIFICATIONS:
I, Edward R. Cameron, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Appliance
Recycling Centers of America, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements are made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 8, 2002 By: /s/ Edward R. Cameron
-------------------- ----------------------------
Edward R. Cameron, President
18
FORM 10-Q CFO CERTIFICATION
---------------------------
CERTIFICATIONS:
I, Linda Koenig, certify that:
7. I have reviewed this quarterly report on Form 10-Q of Appliance
Recycling Centers of America, Inc.;
8. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements are made, not misleading with respect to
the period covered by this quarterly report;
9. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
10. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
11. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
12. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 8, 2002 By: /s/ Linda Koenig
-------------------- ----------------------------
Linda Koenig, Controller
19