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 27, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-19621
APPLIANCE RECYCLING CENTERS OF AMERICA, INC.
MINNESOTA
(State or other jurisdiction of
incorporation or organization) 41-1454591
7400 Excelsior Blvd. (I.R.S. Employer
Minneapolis, Minnesota 55426-4517 Identification No.)
(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 November 7, 1997, the number of shares outstanding of the registrant's no
par value common stock was 1,136,744 shares.
APPLIANCE RECYCLING CENTERS OF AMERICA, INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1: Financial Statements:
Consolidated Balance Sheets as of
September 27, 1997 and December 28, 1996
Consolidated Statements of Operations for the Three and Nine
Months Ended September 27, 1997 and September 28, 1996
Consolidated Statements of Cash Flows for the
Nine Months Ended September 27, 1997
and September 28, 1996
Notes to Consolidated Financial Statements
Item 2: Management's Discussion and Analysis
of Financial Condition and Results of Operations
PART II. OTHER INFORMATION
Appliance Recycling Centers of America, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 27, December 28,
1997 1996
- ---------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents $ 102,000 $ 280,000
Accounts receivable, net of allowance of $36,000 in 1997
and $84,000 in 1996 998,000 1,127,000
Inventories 460,000 444,000
Other current assets 142,000 246,000
Income taxes receivable 29,000 400,000
- ---------------------------------------------------------------------------------------------------------------
Total current assets $ 1,731,000 $ 2,497,000
- ---------------------------------------------------------------------------------------------------------------
Property and Equipment, at cost
Land $ 2,103,000 $ 2,103,000
Buildings and improvements 3,926,000 3,798,000
Equipment 5,551,000 5,604,000
- ---------------------------------------------------------------------------------------------------------------
$ 11,580,000 $ 11,505,000
Less accumulated depreciation 4,771,000 4,086,000
- ---------------------------------------------------------------------------------------------------------------
Net property and equipment $ 6,809,000 $ 7,419,000
- ---------------------------------------------------------------------------------------------------------------
Other Assets $ 104,000 $ 76,000
- ---------------------------------------------------------------------------------------------------------------
Total assets $ 8,644,000 $ 9,992,000
===============================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Line of credit $ 1,091,000 $ 1,390,000
Current maturities of long-term obligations 131,000 227,000
Accounts payable 922,000 1,391,000
Accrued expenses 741,000 1,160,000
- ---------------------------------------------------------------------------------------------------------------
Total current liabilities $ 2,885,000 $ 4,168,000
Minority Interest in Subsidiary 85,000 -
Long-Term Obligations, less current maturities 1,635,000 1,711,000
- ---------------------------------------------------------------------------------------------------------------
Total liabilities $ 4,605,000 $ 5,879,000
- ---------------------------------------------------------------------------------------------------------------
Shareholders' Equity
Common stock, no par value; authorized 10,000,000
shares; issued and outstanding 1,137,000 shares as of
September 27, 1997 and 1,137,000 shares as of December 28, 1996 $ 10,350,000 $ 10,350,000
Accumulated deficit (6,311,000) (6,237,000)
- ----------------------------------------------------------------------------------------------------------------
Total shareholders' equity $ 4,039,000 $ 4,113,000
- ---------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 8,644,000 $ 9,992,000
===============================================================================================================
See Notes to Consolidated Financial Statements.
Appliance Recycling Centers of America, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
--------------------------------------------------------------
September 27, September 28, September 27, September 28,
1997 1996 1997 1996
- -------------------------------------------------------------------------------------------------------------------------------
Revenues
Recycling revenues $ 1,411,000 $ 1,834,000 $ 4,881,000 $ 5,000,000
Encore revenues 1,047,000 1,666,000 3,013,000 3,851,000
Byproduct revenues 331,000 701,000 1,134,000 1,682,000
- -------------------------------------------------------------------------------------------------------------------------------
Total revenues $ 2,789,000 $ 4,201,000 $ 9,028,000 $ 10,533,000
Cost of Revenues 1,716,000 2,772,000 5,077,000 8,314,000
- -------------------------------------------------------------------------------------------------------------------------------
Gross profit $ 1,073,000 $ 1,429,000 $ 3,951,000 $ 2,219,000
Selling, General and Administrative Expenses 1,175,000 2,130,000 3,842,000 6,385,000
- -------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) $ (102,000) $ (701,000) $ 109,000 $ (4,166,000)
Other Income (Expense)
Other income (1,000) 21,000 118,000 92,000
Interest income 4,000 2,000 8,000 34,000
Interest expense (82,000) (67,000) (255,000) (203,000)
- -------------------------------------------------------------------------------------------------------------------------------
Income (loss) before provision for income taxes
and minority interest $ (181,000) $ (745,000) $ (20,000) $ (4,243,000)
Provision for (Benefit of) Income Taxes (2,000) -- (31,000) --
- -------------------------------------------------------------------------------------------------------------------------------
Income (loss) before minority interest $ (179,000) $ (745,000) $ 11,000 $ (4,243,000)
Minority Interest in Net Income of Subsidiary 31,000 -- 85,000 --
- -------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (210,000) $ (745,000) $ (74,000) $ (4,243,000)
===============================================================================================================================
Net Earnings (Loss) per Common and
Common Equivalent Share $ (0.18) $ (0.66) $ (0.07) $ (3.84)
===============================================================================================================================
Weighted Average Number of Common and
Common Equivalent Shares 1,137,000 1,137,000 1,137,000 1,106,000
===============================================================================================================================
See Notes to Consolidated Financial Statements.
Appliance Recycling Centers of America, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
----------------------------
September 27, September 28,
1997 1996
- ---------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
Net income (loss) $ (74,000) $(4,243,000)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 814,000 1,148,000
Minority interest in subsidiary 85,000 --
Common stock issued for services -- 30,000
(Gain) loss on sale of equipment (66,000) (76,000)
Deferred income taxes -- 29,000
Change in assets and liabilities, net of effects from
acquisition of Universal Appliance Company, Inc.
and Universal Appliance Recycling, Inc. in 1996:
(Increase) decrease in:
Receivables 129,000 41,000
Inventories (16,000) (327,000)
Other current assets 56,000 41,000
Income taxes receivable 371,000 106,000
(Increase) decrease in:
Accounts payable (469,000) (270,000)
Accrued expenses (419,000) (424,000)
Income taxes payable -- (28,000)
- ---------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities $ 411,000 $(3,973,000)
- ---------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Purchase of equipment $ (204,000) $(1,226,000)
Cash acquired for acquisition of Universal Appliance
Company, Inc. and Universal Appliance Recycling, Inc. -- 26,000
Payments for noncompete agreements -- (110,000)
Proceeds from disposal of equipment 86,000 272,000
- ---------------------------------------------------------------------------------------------------
Net cash used in investing activities $ (118,000) $(1,038,000)
- ---------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Payments on line of credit $ (299,000) $ -
Increase (decrease) in note payable to bank -- 1,169,000
Payments on long-term obligations (172,000) (1,332,000)
Proceeds from placement of common stock -- 700,000
Proceeds and tax benefit from stock options -- 54,000
- ---------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities $ (471,000) $ 591,000
- ---------------------------------------------------------------------------------------------------
Effect of foreign currency exchange rate changes
on cash and cash equivalents $ - $ 21,000
- ---------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents $ (178,000) $(4,399,000)
Cash and Cash Equivalents
Beginning 280,000 4,605,000
- ---------------------------------------------------------------------------------------------------
Ending $ 102,000 $ 206,000
===================================================================================================
Appliance Recycling Centers of America, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS - continued
(Unaudited)
Nine Months Ended
------------------------
September 27, September 28,
1997 1996
- -------------------------------------------------------------------------------------------------
Supplemental Disclosures of Cash Flow Information
Cash payments (receipts) for:
Interest $ 255,000 $ 202,000
Income taxes net of refunds $(400,000) $(103,000)
=================================================================================================
Supplemental Schedule of Non-Cash Investing and
Financing Activities
Acquisition of Universal Appliance Company, Inc. and
Universal Appliance Recycling, Inc.
Working capital acquired, including cash and cash
equivalents of $26,000 $ -- $ 118,000
Fair value of other assets acquired, principally
property and equipment and a
noncompete agreement -- 176,000
Value assigned to goodwill -- 302,000
Long-term debt assumed -- (207,000)
- -------------------------------------------------------------------------------------------------
Total consideration, 84,000 shares of common stock $ -- $ 389,000
=================================================================================================
See Notes to Consolidated Financial Statements.
Appliance Recycling Centers of America, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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
27, 1997, and the results of operations for the three-month and
nine-month periods and its cash flows for the nine-month periods ended
September 27, 1997 and September 28, 1996. The results of operations for
any interim period are not necessarily indicative of the results for the
year. These interim consolidated financial statements should be read in
conjunction with the Company's annual financial statements and related
notes in the Company's Annual Report on Form 10-K for the year ended
December 28, 1996.
2. Accrued Expenses
Accrued expenses were as follows:
September 27, December 28,
1997 1996
-------------- --------------
Compensation $ 153,000 $ 218,000
Lease contingencies
and closing costs 195,000 466,000
Other 393,000 476,000
-------------- --------------
$ 741,000 $ 1,160,000
============== ==============
3. Issued But Not Yet Adopted Accounting Standard
The FASB has issued Statement No. 128, Earnings per Share, which
supersedes APB Opinion No. 15. Statement No. 128 requires the
presentation of earnings per share by all entities that have common
stock or potential common stock, such as options, warrants and
convertible securities, outstanding that trade in a public market.
Those entities that have only common stock outstanding are required to
present basic earnings per-share amounts. All other entities are
required to present basic and diluted per-share amounts. Diluted
per-share amounts assume the conversion, exercise or issuance of all
potential common stock instruments unless the effect is to reduce a
loss or increase the income per common share from continuing
operations. All entities required to present per-share amounts must
initially apply Statement No. 128 for annual and interim periods ending
after December 15, 1997. Earlier application is not permitted.
Management believes the adoption of Statement No. 128 will have no
effect on reported earnings per share.
PART I: ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
The following discussion and analysis provides information that management
believes is relevant to an assessment and understanding of the Company's level
of operation and financial condition. This discussion should be read with the
consolidated financial statements appearing in Item 1.
RESULTS OF OPERATIONS
The Company generates revenues from three sources: recycling revenues,
Encore(R) revenues and byproduct revenues. Recycling revenues are
fees charged for the disposal of appliances. Encore revenues are retail
and wholesale sales of appliances, extended warranty sales and delivery
fees. Byproduct revenues are sales of materials generated from processed
appliances.
Total revenues for the three and nine months ended September 27, 1997
were $2,789,000 and $9,028,000, respectively, compared to $4,201,000 and
$10,533,000 for the same periods in the prior year.
Recycling revenues for the three and nine months ended September 27,
1997 decreased by $423,000 or 23.1% and $119,000 or 2.4%, respectively,
from the same periods in the prior year. The decrease in the three month
periods is due primarily to lower recycling revenues generated from the
contract with Southern California Edison Company ("Edison"). The
decrease in revenues between the nine month periods is due to less
revenues associated with programs ended in 1996 partially offset by
significant increased recycling fees generated from the Edison, Sears
and Coca-Cola contracts. Recycling revenues are expected to decline in
the fourth quarter of 1997 due to decreased promotional activities
associated with the Edison program. Edison has filed with the California
Public Utility Commission ("CPUC") for approval for a 1998 program. The
Company expects to have a program with Edison in 1998, contingent on
contract negotiations with Edison and CPUC approval.
Encore revenues for the three and nine months ended September 27, 1997
decreased by $619,000 or 37.2% and $838,000 or 21.8%, respectively, from
the same periods in the prior year. The decrease in Encore revenues was
primarily due to a lower number of retail locations. In addition, the
Company had lower than expected Encore revenues in the first month of
the third quarter in fiscal 1997. As of September 27, 1997, the Company
operated 13 retail locations compared to 26 as of September 28, 1996.
Same-store Encore sales increased by 24% for the third quarter (a sales
comparison of 12 stores that were open the entire third quarter in 1997
and 1996). The Company expects retail sales for the remainder of 1997 to
be lower when compared to 1996 due to fewer stores but expects a growth
in retail sales per store when compared to 1996. The Company believes
the improvement in same-store sales is a result of the growing awareness
and acceptance of Encore stores and increased supply of product
generated from a contract with Whirlpool
RESULTS OF OPERATIONS - continued
Corporation, Inc. ("Whirlpool"), the nation's largest manufacturer of
major household appliances. The contracts with Whirlpool allow the
Company to purchase damaged appliances, recondition suitable units and
sell them through the Company's Encore retail stores. The Company
expects these contracts to provide its retail stores with a significant
new supply of high quality appliances. The Company expects Encore
revenues to increase over the next twelve months. Revenues, however,
will be impacted by seasonality (revenues in the second and third
quarters are generally higher than in the first and fourth quarters) and
the speed and acceptance of the roll out of the Whirlpool contracts.
Byproduct revenues for the three and nine months ended September 27,
1997 decreased by $370,000 or 52.8% and $548,000 or 32.6%, respectively,
from the same periods in the prior year. The decrease was primarily due
to lower sales of reclaimed chlorofluorocarbons ("CFCs") and scrap
metals due to fewer appliances recycled. The Company expects byproduct
revenues for the remainder of 1997 to continue to decrease because of
lower CFC sales and numbers of appliances recycled.
Gross profit as a percentage of total revenues for the three and nine
months ended September 27, 1997 increased to 38.5% and 43.8%,
respectively, from 34.0% and 21.1%, respectively, for the three and nine
months ended September 28, 1996. The increase was primarily due to an
increase in recycling volumes from Edison and significantly lower
operating expenses as a result of the restructuring the Company
underwent in the fourth quarter of 1996. Gross profit as a percentage of
total revenues for future periods can be affected favorably or
unfavorably by numerous factors, including the volume of appliances
recycled from the Edison contract, the speed at which appliance sales
increase and the price and volume of byproduct revenues.
Selling, general and administrative expenses for the three and nine
months ended September 27, 1997 decreased by $955,000 or 44.8% and
$2,543,000 or 39.8%, respectively, from the same periods in 1996.
Selling expenses for the three and nine months ended September 27, 1997
decreased by $500,000 or 58.3% and $1,058,000 or 49.3%, respectively,
from the same periods in 1996. The decrease in selling expenses was
primarily due to a decrease in costs associated with operating fewer
retail stores than in the same periods in the prior year. General and
administrative expenses for the three and nine months ended September
27, 1997 decreased by $455,000 or 35.7% and $1,485,000 or 35.0%,
respectively, from the same periods of 1996. The decrease in general and
administrative expenses was primarily due to operating fewer locations
in 1997 compared to 1996 and a decrease in personnel costs.
Interest expense was $82,000 for the three months and $255,000 for the
nine months ended September 27, 1997 compared to $67,000 and $203,000
for the same periods in 1996. The increase in interest expense was due
to a higher average borrowed amount on the line of
RESULTS OF OPERATIONS - continued
credit in the three and nine months ended September 27, 1997 than in the
same periods in 1996.
The Company recorded a benefit of income taxes of $31,000 for the nine
months ended September 27, 1997 due to the liquidation of its Canadian
subsidiary. The Company also has available net operating loss
carryforwards which total approximately $4,500,000 and expire in 2011.
At September 27, 1997, the Company had a valuation allowance recorded
against its net deferred tax assets of approximately $2,800,000, due to
uncertainty of realization. Realization of deferred tax assets is
dependent upon the generation of sufficient future taxable income during
the period that deductible temporary differences and carryforwards are
expected to become available to reduce taxable income.
ARCA California, Inc., a subsidiary of the Company, is owned 80% by the
Company and 20% by a minority shareholder. Accordingly, a minority
interest was recorded for the three and nine months ended September 27,
1997, of $31,000 and $85,000, respectively. Previously, the subsidiary
had not recognized net income. As part of the settlement described
below, the Company will acquire 100% ownership.
The Company recorded a net loss of $210,000 for the three months and
$74,000 for the nine months ended September 27, 1997 compared to a net
loss of $745,000 and $4,243,000 in the same periods of 1996. The
decrease in the net loss was primarily due to increased recycling
volumes from the Edison contract and significantly lower operating and
selling, general and administrative expenses as a result of the Encore
restructuring in the fourth quarter of 1996.
LIQUIDITY AND CAPITAL RESOURCES
At September 27, 1997, the Company had a working capital deficit of
$1,154,000 compared to a working capital deficit of $1,671,000 at
December 28, 1996. Cash and cash equivalents decreased to $102,000 at
September 27, 1997 from $280,000 at December 28, 1996. Net cash provided
by operating activities was $411,000 for the nine months ended September
27, 1997 compared to net cash used in operating activities of $3,973,000
in the same period of 1996. The increase in cash provided by operating
activities was primarily due to significantly improved operating results
in 1997 compared to 1996 and a net loss of $74,000 as of September 27,
1997 versus a net loss of $4,243,000 in the same period in the prior
year.
The Company's capital expenditures for the nine months ended September
27, 1997 and September 28, 1996 were approximately $204,000 and
$1,226,000, respectively. The 1997 capital expenditures were primarily
related to building improvements. The 1996 capital expenditures were
primarily related to leasehold improvements to the Company's recycling
centers and retail stores.
LIQUIDITY AND CAPITAL RESOURCES - continued
As of September 27, 1997, the Company had a $2.0 million line of credit
with a lender. The loan rate as of September 27, 1997 was 13-1/2%. The
line of credit is secured by receivables, inventory, equipment, real
estate and other assets of the Company, is subject to borrowing base
limitations and a portion is guaranteed by the President of the Company.
The loan also requires that the Company meet certain financial
covenants, provides payment penalties for noncompliance, limits the
amount of other debt the Company can incur, limits the amount of
spending on fixed assets and limits payments of dividends. At September
27, 1997, the Company had borrowings of $1,091,000 under this line and
had an additional $416,000 available. Due to the legal proceedings
commenced against the Company on August 6, 1997, the Company's secured
lender called its note in October 1997. The Company has reached an
interim arrangement with its lender which allows the Company to borrow
an amount comparable to its previous line of credit on substantially the
same terms. See "Legal Proceedings."
The Company believes, based on the anticipated revenues from the Edison
contract, the anticipated growth in sales per retail store and the
anticipated improvement in gross profit, that its current cash balance,
funds generated from operations and current line of credit will be
sufficient to finance its operations and capital expenditures through
September 1998. The Company's total capital requirements will depend,
among other things as discussed below, on the number of recycling
centers operating and the number and size of retail stores operating
during the fiscal year.
Currently, the Company has four centers and 13 stores in operation. If
revenues are lower than anticipated or expenses are higher than
anticipated or the line of credit cannot be maintained, the Company may
require additional capital to finance operations. Sources of additional
financing, if needed in the future, may include further debt financing
or the sale of equity or other securities. There can be no assurance
that such additional sources of financing will be available or available
on terms satisfactory to the Company or permitted by the Company's
current lender.
Statements regarding the Company's future operations, performance and
results, and anticipated liquidity discussed herein are forward-looking
and therefore are subject to certain risks and uncertainties, including
those discussed herein. In addition, any forward-looking information
regarding the operations of the Company will be affected by the ability
of individual stores to meet planned revenue levels, the speed at which
individual Encore stores reach profitability, costs and expenses being
realized at higher than expected levels, the Company's ability to secure
an adequate supply of used appliances for resale, the timing and
profitability of the Whirlpool contracts, the continued availability of
the Company's current line of credit, the renewal of the contract with
Edison in 1998 and the ability of Edison to deliver units under its
contract with the Company and the timing of such delivery.
PART II. OTHER INFORMATION
- --------------------------------------------------------------------------------
ITEM 1 - LEGAL PROCEEDINGS
Due to the legal proceedings brought against Appliance Recycling Centers
of America-California, Inc. ("ARCA California") by its minority
shareholder, ARCA California filed a voluntary petition for relief
seeking a reorganization of the subsidiary under Chapter 11 of the
Federal Bankruptcy Act on October 9, 1997. On November 5, 1997, a cash
settlement agreement between ARCA, Inc., ARCA California, its officers
and directors, and the minority shareholder was reached in which all
claims between the parties were settled and ARCA, Inc. acquired all of
the minority shareholder's stock in ARCA California. The agreement needs
approval by the United States Bankruptcy Court. ARCA California has
filed a motion with the Bankruptcy Court to approve the settlement
agreement with its minority shareholder and to dismiss the Chapter 11
filing. A hearing is scheduled for November 26, 1997. ARCA California
accounts for all of the revenues from the Edison contract.
In addition, the Company is involved in certain legal proceedings
arising from the cancellation of leases in connection with the closing
of certain facilities. The Company has established a reserve for lease
settlements and closing costs. (See Note 2 to the Consolidated Financial
Statements.)
ITEM 2 - CHANGES IN SECURITIES - None
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES - None
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - None
ITEM 5 - OTHER INFORMATION - None
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit No. 27 - Financial Data Schedule
(b) On October 21, 1997, the Company filed a Report on Form 8K to
report the filing by its subsidiary, Appliance Recycling Centers
of America-California, Inc. of a voluntary petition for relief
seeking a reorganization of such subsidiary under Chapter 11 of
the Federal Bankruptcy Act.
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 12, 1997 /s/Edward R. Cameron
-----------------------------------
Edward R. Cameron
President
Date: November 12, 1997 /s/Kent S. McCoy
-----------------------------------
Kent S. McCoy
Vice President of Finance, Treasurer