Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x      Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended June 30, 2012

 

or

 

o         Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

Commission File No. 0-19621

 

APPLIANCE RECYCLING CENTERS OF AMERICA, INC.

(Exact name of registrant as specified in its charter)

 

Minnesota

(State or other jurisdiction of

incorporation or organization)

 

41-1454591

(I.R.S. Employer

Identification No.)

 

 

 

7400 Excelsior Boulevard, Minneapolis, Minnesota

(Address of principal executive offices)

 

55426-4517

(Zip Code)

 

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 (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  x Yes  o No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  x Yes  o No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer o

 

Accelerated filer o

 

 

 

Non-accelerated filer o
(Do not check if a smaller reporting company)

 

Smaller reporting company x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  o Yes  x No

 

As of August 6, 2012, there were outstanding 5,555,927 shares of the registrant’s Common Stock, without par value.

 

 

 



Table of Contents

 

APPLIANCE RECYCLING CENTERS OF AMERICA, INC.

 

INDEX TO FORM 10-Q

 

 

 

Page

PART I.  FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements

2

 

 

 

 

Consolidated Balance Sheets as of June 30, 2012 (unaudited) and December 31, 2011

2

 

 

 

 

Unaudited Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2012 and July 2, 2011

3

 

 

 

 

Unaudited Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2012 and July 2, 2011

4

 

 

 

 

Notes to Unaudited Consolidated Financial Statements

6

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

15

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

23

 

 

 

Item 4.

Controls and Procedures

23

 

 

 

PART II.  OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

24

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

24

 

 

 

Item 3.

Defaults Upon Senior Securities

24

 

 

 

Item 5.

Other Information

24

 

 

 

Item 6.

Exhibits

25

 

 

 

SIGNATURES

26

 

1



Table of Contents

 

PART I.                 FINANCIAL INFORMATION

 

Item 1.                   Financial Statements

 

APPLIANCE RECYCLING CENTERS OF AMERICA, INC.

CONSOLIDATED BALANCE SHEETS

(In Thousands)

 

 

 

June 30,
2012

 

December 31,
2011

 

 

 

(unaudited)

 

 

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

3,734

 

$

4,401

 

Accounts receivable, net of allowance of $33 and $18, respectively

 

6,181

 

7,445

 

Inventories, net of reserves of $83 and $85, respectively

 

21,112

 

18,456

 

Other current assets

 

2,481

 

1,420

 

Deferred tax assets

 

173

 

173

 

Total current assets

 

33,681

 

31,895

 

Property and equipment, net

 

12,614

 

12,535

 

Goodwill

 

1,120

 

1,120

 

Other assets

 

1,127

 

1,232

 

Deferred income taxes

 

27

 

27

 

Total assets (a)

 

$

48,569

 

$

46,809

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

5,566

 

$

4,323

 

Accrued expenses

 

4,936

 

4,453

 

Line of credit

 

11,903

 

10,685

 

Current maturities of long-term obligations

 

955

 

989

 

Total current liabilities

 

23,360

 

20,450

 

 

 

 

 

 

 

Long-term obligations, less current maturities

 

6,830

 

7,251

 

Deferred gain, net of current portion

 

609

 

853

 

Deferred income tax liabilities

 

875

 

875

 

Total liabilities (a)

 

31,674

 

29,429

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

Common Stock, no par value; 10,000 shares authorized; issued and outstanding: 5,556 shares and 5,527 shares, respectively

 

20,492

 

20,338

 

Accumulated deficit

 

(5,504

)

(4,797

)

Accumulated other comprehensive loss

 

(372

)

(361

)

Total shareholders’ equity

 

14,616

 

15,180

 

Noncontrolling interest

 

2,279

 

2,200

 

 

 

16,895

 

17,380

 

Total liabilities and shareholders’ equity

 

$

48,569

 

$

46,809

 

 


(a)

Assets of ARCA Advanced Processing, LLC (AAP), our consolidated variable interest entity (VIE) that can only be used to settle obligations of AAP were $11,383 and $11,771 as of June 30, 2012 and December 31, 2011, respectively. Liabilities of AAP for which creditors do not have recourse to the general credit of Appliance Recycling Centers of America, Inc. were $1,928 and $2,186 as of June 30, 2012 and December 31, 2011, respectively.

 

See Notes to Consolidated Financial Statements.

 

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APPLIANCE RECYCLING CENTERS OF AMERICA, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In Thousands, Except Per Share Amounts)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,
2012

 

July 2,
2011

 

June 30,
2012

 

July 2,
2011

 

Revenues:

 

 

 

 

 

 

 

 

 

Retail

 

$

18,964

 

$

18,385

 

$

38,720

 

$

37,604

 

Recycling

 

6,145

 

9,612

 

11,410

 

15,350

 

Byproduct

 

4,233

 

4,894

 

8,644

 

9,863

 

Total revenues

 

29,342

 

32,891

 

58,774

 

62,817

 

 

 

 

 

 

 

 

 

 

 

Costs of revenues

 

21,771

 

23,244

 

43,591

 

44,181

 

Gross profit

 

7,571

 

9,647

 

15,183

 

18,636

 

Selling, general and administrative expenses

 

7,764

 

7,394

 

15,292

 

14,855

 

Operating income (loss)

 

(193

)

2,253

 

(109

)

3,781

 

 

 

 

 

 

 

 

 

 

 

Other expense:

 

 

 

 

 

 

 

 

 

Interest expense, net

 

(279

)

(284

)

(533

)

(602

)

Other expense, net

 

(25

)

(45

)

(9

)

(74

)

Income (loss) before income taxes and noncontrolling interest

 

(497

)

1,924

 

(651

)

3,105

 

Provision for (benefit of) income taxes

 

54

 

(152

)

(23

)

292

 

Net income (loss)

 

(551

)

2,076

 

(628

)

2,813

 

Net income attributable to noncontrolling interest

 

(90

)

(48

)

(79

)

(111

)

Net income (loss) attributable to controlling interest

 

$

(641

)

$

2,028

 

$

(707

)

$

2,702

 

 

 

 

 

 

 

 

 

 

 

Income (loss) per common share:

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.12

)

$

0.37

 

$

(0.13

)

$

0.49

 

Diluted

 

$

(0.12

)

$

0.35

 

$

(0.13

)

$

0.47

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

5,555

 

5,493

 

5,546

 

5,493

 

Diluted

 

5,555

 

5,820

 

5,546

 

5,801

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(551

)

$

2,076

 

$

(628

)

$

2,813

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

Effect of foreign currency translation adjustments

 

(71

)

17

 

(11

)

85

 

Total other comprehensive income (loss), net of tax

 

(71

)

17

 

(11

)

85

 

Comprehensive income (loss)

 

(622

)

2,093

 

(639

)

2,898

 

Comprehensive income attributable to noncontrolling interest

 

(90

)

(48

)

(79

)

(111

)

Comprehensive income (loss) attributable to controlling interest

 

$

(712

)

$

2,045

 

$

(718

)

$

2,787

 

 

See Notes to Consolidated Financial Statements.

 

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APPLIANCE RECYCLING CENTERS OF AMERICA, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

 

 

 

Six Months Ended

 

 

 

June 30,

 

July 2,

 

 

 

2012

 

2011

 

Operating activities

 

 

 

 

 

Net income (loss)

 

$

(628

)

$

2,813

 

Adjustments to reconcile net income (loss) to net cash and cash equivalents (used in) provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

609

 

667

 

Share-based compensation

 

68

 

213

 

Amortization of deferred gain

 

(244

)

(244

)

Amortization of debt issuance costs

 

99

 

93

 

Reversal of deferred tax asset valuation allowance

 

 

(917

)

Excess tax benefits related to share-based compensation

 

 

(36

)

Other

 

35

 

(4

)

Changes in assets and liabilities:

 

 

 

 

 

Accounts receivable

 

1,256

 

(4,405

)

Inventories

 

(2,656

)

240

 

Other current assets

 

(1,064

)

(713

)

Other assets

 

(34

)

31

 

Accounts payable and accrued expenses

 

1,726

 

1,822

 

Income taxes payable

 

 

803

 

Net cash flows (used in) provided by operating activities

 

(833

)

363

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

Purchases of property and equipment

 

(625

)

(1,316

)

Decrease in restricted cash

 

 

701

 

Proceeds from sale of property and equipment

 

 

9

 

Net cash flows used in investing activities

 

(625

)

(606

)

 

 

 

 

 

 

Financing activities

 

 

 

 

 

Checks issued in excess of cash in bank

 

 

(42

)

Net borrowings under line of credit

 

1,218

 

621

 

Payments on debt obligations

 

(503

)

(7,771

)

Proceeds from issuance of debt obligations

 

 

9,400

 

Proceeds from issuance of Common Stock

 

86

 

 

Payment of debt issuance costs

 

 

(669

)

Excess tax benefits related to share-based compensation

 

 

36

 

Net cash flows provided by financing activities

 

801

 

1,575

 

 

 

 

 

 

 

Effect of changes in exchange rate on cash and cash equivalents

 

(10

)

80

 

 

 

 

 

 

 

Increase (decrease) in cash and cash equivalents

 

(667

)

1,412

 

Cash and cash equivalents at beginning of period

 

4,401

 

3,065

 

Cash and cash equivalents at end of period

 

$

3,734

 

$

4,477

 

 

See Notes to Consolidated Financial Statements.

 

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APPLIANCE RECYCLING CENTERS OF AMERICA, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(In Thousands)

 

 

 

Six Months Ended

 

 

 

June 30,

 

July 2,

 

 

 

2012

 

2011

 

Supplemental disclosures of cash flow information

 

 

 

 

 

Cash payments for interest

 

$

431

 

$

502

 

Cash payments for income taxes

 

$

123

 

$

407

 

 

 

 

 

 

 

Non-cash investing and financing activities

 

 

 

 

 

Equipment acquired under capital leases and other financing obligations

 

$

146

 

$

33

 

Repayment of debt from trade-in of equipment

 

$

87

 

$

 

 

See Notes to Consolidated Financial Statements.

 

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APPLIANCE RECYCLING CENTERS OF AMERICA, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, Except Per Share Amounts)

 

1.                                      Nature of Business and Basis of Presentation

 

Appliance Recycling Centers of America, Inc. and subsidiaries (“we,” the “Company” or “ARCA”) are in the business of providing turnkey appliance recycling and replacement services for electric utilities and other sponsors of energy efficiency programs.  We also sell new major household appliances through a chain of Company-owned stores under the name ApplianceSmart®.  In addition, we have a 50% interest in a joint venture operating under the name ARCA Advanced Processing, LLC (“AAP”), which recycles appliances from twelve states in the Northeast and Mid-Atlantic regions of the United States for General Electric Company (“GE”) acting through its GE Appliances business component.  These appliances include units manufactured by GE as well as by other manufacturers.

 

The accompanying consolidated financial statements of the Company are unaudited and have been prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States of America for interim financial information and Article 8 of Regulation S-X promulgated by the United States Securities and Exchange Commission (the “SEC”).  Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements.  In the opinion of management, normal and recurring adjustments and accruals considered necessary for a fair presentation for the periods indicated have been included.  Operating results for the three-month and six-month periods ended June 30, 2012 and July 2, 2011 are presented using 13-week and 26-week periods, respectively.  The results of operations for any interim period are not necessarily indicative of the results for the year.

 

These financial statements should be read in conjunction with the Company’s audited consolidated financial statements and related notes thereto for the year ended December 31, 2011 included in the Company’s Annual Report on Form 10-K filed with the SEC on March 15, 2012.

 

Principles of consolidation:  The consolidated financial statements include the accounts of Appliance Recycling Centers of America, Inc. and our subsidiaries.  All significant intercompany accounts and transactions have been eliminated in consolidation.

 

ApplianceSmart, Inc., a Minnesota corporation, is a wholly-owned subsidiary that was formed through a corporate reorganization in July 2011 to hold our business of selling new major household appliances through a chain of Company-owned retail stores.  ARCA Canada Inc., a Canadian corporation, is a wholly-owned subsidiary that was formed in September 2006 to provide turnkey recycling services for electric utility energy efficiency programs.  ARCA California, Inc., a California corporation, is a wholly-owned subsidiary that was formed in November 1991 to provide turnkey recycling services for electric utility efficiency programs.  The operating results of our wholly-owned subsidiaries are consolidated in our financial statements.

 

AAP is a joint venture that was formed in October 2009 between ARCA and 4301 Operations, LLC (“4301”) to support ARCA’s agreement, as amended, with GE acting through its GE Appliances business component.  Both ARCA and 4301 have a 50% interest in AAP.  GE sells its recyclable appliances generated from twelve states in the Northeast and Mid-Atlantic regions of the United States to ARCA, which collects, processes and recycles the appliances.  These appliances include units manufactured by GE as well as by other manufacturers.  The agreement requires that ARCA will only recycle, and will not sell for re-use or resale, the recyclable appliances purchased from GE.  AAP established a regional processing center in Philadelphia, Pennsylvania, at which the recyclable appliances are processed.  The term of the agreement is for six years from the first date of appliance collection, which was March 31, 2010.  AAP commenced operations in February 2010 and has the exclusive rights to service the GE agreement as a subcontractor for ARCA.  The financial position and results of operations of AAP are consolidated in our financial statements based on our conclusion that AAP is a variable interest entity and because we have the ability to significantly influence the economic performance of the entity through our contractual agreement with GE.

 

Fair value of financial instruments:  The following methods and assumptions are used to estimate the fair value of each class of financial instrument:

 

Cash and cash equivalents, accounts receivable and accounts payable:  Due to their nature and short-term maturities, the carrying amounts approximate fair value.

 

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Short- and long-term debt:  The fair value of short- and long-term debt approximates carrying value and has been estimated based on discounted cash flows using interest rates being offered for similar debt having the same or similar remaining maturities and collateral requirements.

 

No separate comparison of fair values versus carrying values is presented for the aforementioned financial instruments since their fair values are not significantly different than their balance sheet carrying amounts.  In addition, the aggregate fair values of the financial instruments would not represent the underlying value of our Company.

 

2.                                Recent Accounting Pronouncements

 

Presentation of Comprehensive Income

 

In June 2011, the FASB issued an Accounting Standards Update (“ASU”) related to the presentation of comprehensive income.  This ASU amends the FASB Accounting Standards Codification (“Codification”) to allow an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income.  This ASU eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity.  The amendments to the Codification in the ASU do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income.  This ASU is effective for fiscal years beginning after December 15, 2011.  The adoption of this ASU did not have a material effect on our results of operations, financial position or cash flows.

 

Testing for Goodwill Impairment

 

In September 2011, the FASB issued an ASU that permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. This ASU is effective for fiscal years beginning after December 15, 2011. The adoption of this ASU did not have a significant impact on our consolidated results of operations, financial position, or cash flows.

 

3.                                      Significant Accounting Policies

 

Trade receivables:  We carry unsecured trade receivables at the original invoice amount less an estimate made for doubtful accounts based on a monthly review of all outstanding amounts.  Management determines the allowance for doubtful accounts by regularly evaluating individual customer receivables and considering a customer’s financial condition, credit history and current economic conditions.  We write off trade receivables when we deem them uncollectible.  We record recoveries of trade receivables previously written off when we receive them.  We consider a trade receivable to be past due if any portion of the receivable balance is outstanding for more than ninety days.  We do not charge interest on past due receivables.  Our management considers the allowance for doubtful accounts of $33 and $18 to be adequate to cover any exposure to loss at June 30, 2012 and December 31, 2011, respectively.

 

Inventories:  Inventories, consisting principally of appliances, are stated at the lower of cost, determined on a specific identification basis, or market and consist of:

 

 

 

June 30,
2012

 

December 31,
2011

 

Appliances held for resale

 

$

20,657

 

$

18,291

 

Processed metals from recycled appliances held for resale

 

538

 

250

 

Less provision for inventory obsolescence

 

(83

)

(85

)

 

 

$

21,112

 

$

18,456

 

 

We provide estimated provisions for the obsolescence of our appliance inventories, including adjustments to market, based on various factors, including the age of such inventory and our management’s assessment of the need for such provisions.  We look at historical inventory agings and margin analysis in determining our provision estimate.  A revised cost basis is used once a provision for obsolescence is recorded.

 

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Property and equipment:  Property and equipment consists of the following:

 

 

 

June 30,
2012

 

December 31,
2011

 

Land

 

$

1,140

 

$

1,140

 

Buildings and improvements

 

3,393

 

3,303

 

Equipment (including computer software)

 

19,951

 

19,472

 

Projects under construction

 

96

 

35

 

 

 

24,580

 

23,950

 

Less accumulated depreciation and amortization

 

(11,966

)

(11,415

)

 

 

$

12,614

 

$

12,535

 

 

Software development costs:  We capitalize software developed for internal use and are amortizing such costs over their estimated useful lives of three to five years.  Costs capitalized were $36 and $47 for the three months ended June 30, 2012 and July 2, 2011, respectively.  Costs capitalized were $85 and $76 for the six months ended June 30, 2012 and July 2, 2011, respectively.

 

Product warranty:  We provide a warranty for the replacement or repair of certain defective units which varies based on the product sold.  Our standard warranty policy requires us to repair or replace certain defective units at no cost to our customers.  We estimate the costs that may be incurred under our warranty and record an accrual in the amount of such costs at the time we recognize product revenue.  Factors that affect our warranty accrual for covered units include the number of units sold, historical and anticipated rates of warranty claims on these units, and the cost of such claims.  We periodically assess the adequacy of our recorded warranty accrual and adjust the amounts as necessary.

 

Changes in our warranty accrual are as follows:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,
2012

 

July 2,
2011

 

June 30,
2012

 

July 2,
2011

 

Beginning Balance

 

$

66

 

$

37

 

$

71

 

$

36

 

Standard accrual based on units sold

 

12

 

36

 

24

 

51

 

Actual costs incurred

 

(4

)

(4

)

(8

)

(8

)

Periodic accrual adjustments

 

(13

)

(10

)

(26

)

(20

)

Ending Balance

 

$

61

 

$

59

 

$

61

 

$

59

 

 

Share-based compensation:  We recognize share-based compensation expense on a straight-line basis over the vesting period for all share-based awards granted.  We use the Black-Scholes option pricing model to determine the fair value of awards at the grant date.  We calculate the expected volatility for stock awards using historical volatility.  We estimate a 0%-5% forfeiture rate for stock awards issued to all employees and members of the Board of Directors, but will continue to review these estimates in future periods.  The risk-free rates for the expected terms of the stock awards are based on the U.S. Treasury yield curve in effect at the time of the grant.  The expected life represents the period that the stock awards are expected to be outstanding.  The expected dividend yield is zero as we have not paid or declared any cash dividends on our Common Stock.  Based on these valuations, we recognized share-based compensation expense of $32 and $114 for the three months ended June 30, 2012 and July 2, 2011, respectively, and $68 and $213 for the six months ended June 30, 2012 and July 2, 2011, respectively.  We estimate that the remaining expense for fiscal 2012 will be approximately $80 based on the value of stock awards outstanding as of June 30, 2012.  This estimate does not include any expense for additional awards that may be granted and vest during 2012.

 

Comprehensive income (loss):  Other comprehensive income (loss) refers to revenues, expenses, gains and losses that under generally accepted accounting principles are included in comprehensive income but are excluded from net income as these amounts are recorded directly as an adjustment to shareholders’ equity.  Our other comprehensive income (loss) is comprised of foreign currency translation adjustments.

 

Basic and diluted income (loss) per share:  Basic income per common share is computed based on the weighted average number of common shares outstanding.  Diluted income (loss) per common share is computed based on the weighted average number of common shares outstanding adjusted by the number of additional shares that would have been outstanding had the potentially dilutive common shares been issued.  Potentially dilutive shares of Common Stock include unexercised stock options and warrants.  Basic per share amounts are computed, generally, by dividing net income (loss) attributable to controlling

 

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interest 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 anti-dilutive, thereby reducing the loss or increasing the income per common share.  In calculating diluted weighted average shares and per share amounts, we included stock options and warrants with exercise prices below average market prices, for the respective reporting periods in which they were dilutive, using the treasury stock method.  We calculated the number of additional shares by assuming the outstanding stock options were exercised and that the proceeds from such exercises were used to acquire Common Stock at the average market price during the quarter.  For the three and six months ended June 30, 2012, we excluded 798 and 790, respectively, options and warrants from the diluted weighted average share outstanding calculation as the effect of these options and warrants is anti-dilutive due to the net loss incurred.  For the three and six months ended July 2, 2011, we excluded 232 and 251, respectively, options and warrants from the diluted weighted average share outstanding calculation as the effect of these options and warrants is anti-dilutive.

 

A reconciliation of the denominator in the basic and diluted income or loss per share is as follows:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,
2012

 

July 2,
2011

 

June 30,
2012

 

July 2,
2011

 

Numerator:

 

 

 

 

 

 

 

 

 

Net income (loss) attributable to controlling interest

 

$

(641

)

$

2,028

 

$

(707

)

$

2,702

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding — basic

 

5,555

 

5,493

 

5,546

 

5,493

 

Employee stock options

 

 

117

 

 

101

 

Stock warrants

 

 

210

 

 

207

 

Weighted average shares outstanding - diluted

 

5,555

 

5,820

 

5,546

 

5,801

 

 

 

 

 

 

 

 

 

 

 

Income (loss) per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.12

)

$

0.37

 

$

(0.13

)

$

0.49

 

Diluted

 

$

(0.12

)

$

0.35

 

$

(0.13

)

$

0.47

 

 

4.                                      Variable Interest Entity

 

The financial position and results of operations of AAP are consolidated in our financial statements based on our conclusion that AAP is a variable interest entity and because we have the ability to significantly influence the economic performance of the entity through our contractual agreement with GE.

 

The following table summarizes the assets and liabilities of AAP as of June 30, 2012 and December 31, 2011:

 

 

 

June 30,
2012

 

December 31,
2011

 

Assets

 

 

 

 

 

Current assets

 

$

881

 

$

1,134

 

Property and equipment, net

 

9,265

 

9,419

 

Goodwill

 

1,082

 

1,082

 

Other assets

 

155

 

136

 

 

 

$

11,383

 

$

11,771

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

Accounts Payable

 

$

652

 

$

858

 

Accrued Expenses

 

250

 

250

 

Current maturities of long-term debt obligations

 

614

 

593

 

Long-term debt obligations, net of current maturities

 

4,760

 

5,022

 

Other liabilities (a)

 

549

 

647

 

 

 

$

6,825

 

$

7,370

 

 


(a)          Other liabilities represent loans between ARCA and AAP that are eliminated in consolidation.

 

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The following table summarizes the operating results of AAP for the three and six months ended June 30, 2012 and July 2, 2011:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,
2012

 

July 2,
2011

 

June 30,
2012

 

July 2,
2011

 

Revenues

 

$

2,725

 

$

2,583

 

$

5,433

 

$

5,236

 

Gross profit

 

360

 

269

 

551

 

542

 

Operating income

 

290

 

185

 

355

 

379

 

 

5.                                      Other Assets

 

Other assets as of June 30, 2012 and December 31, 2011 consist of the following:

 

 

 

June 30,
 2012

 

December 31,
2011

 

Deposits

 

$

429

 

$

400

 

Recycling contract, net

 

299

 

339

 

Debt issuance costs, net

 

379

 

476

 

Patent Costs

 

20

 

17

 

 

 

$

1,127

 

$

1,232

 

 

For both the three and six months ended June 30, 2012 and July 2, 2011, we recorded amortization expense of $20 and $40, respectively, related to our recycling contract.  For the three and six months ended June 30, 2012, we recorded non-cash interest expense of $50 and $99, respectively, related to debt issuance costs.  For the three and six months ended July 2, 2011, we recorded non-cash interest expense of $47 and $93, respectively, related to debt issuance costs.

 

6.                                      Accrued Expenses

 

Accrued expenses as of June 30, 2012 and December 31, 2011 consist of the following:

 

 

 

June 30,
2012

 

December 31,
2011

 

Compensation and benefits

 

$

1,077

 

$

1,023

 

Accrued incentive and rebate checks

 

582

 

728

 

Accrued rent

 

1,275

 

1,336

 

Warranty expense

 

61

 

71

 

Accrued payables

 

740

 

408

 

Current portion of deferred gain on sale-leaseback of building

 

487

 

487

 

Deferred revenue

 

152

 

96

 

Other

 

562

 

304

 

 

 

$

4,936

 

$

4,453

 

 

7.                                      Line of Credit

 

On January 24, 2011, we entered into a Revolving Credit, Term Loan and Security Agreement (“Revolving Credit Agreement”) with PNC Bank, National Association (“PNC”) that provides us with a $15,000 revolving line of credit.  See Note 9 for further discussion regarding the Term Loan entered into with PNC.  The Revolving Credit Agreement has a stated maturity date of January 24, 2014, if not renewed.  The Revolving Credit Agreement includes a lockbox agreement and a subjective acceleration clause and as a result we have classified the revolving line of credit as a current liability.  The Revolving Credit Agreement is collateralized by a security interest in substantially all of our assets and PNC is also secured by an inventory repurchase agreement with Whirlpool Corporation for Whirlpool purchases only.  We also issued a $750 letter of credit in favor of Whirlpool Corporation.  The Revolving Credit Agreement requires, starting with the fiscal quarter ending April 2, 2011 and continuing at the end of each quarter thereafter, that we meet a minimum fixed charge coverage ratio of 1.10 to 1.00, measured on a trailing twelve month basis.  The Revolving Credit Agreement limits investments we can purchase, the amount of other debt and leases we can incur, the amount of loans we can issue to our affiliates and the amount we can spend on fixed assets along with prohibiting the payment of dividends.  As of June 30, 2012, we were in compliance with all the covenants of the

 

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Revolving Credit Agreement.  The interest rate on the revolving line of credit is PNC Base Rate plus 1.75%, or 1-, 2- or 3-month PNC LIBOR Rate plus 2.75%.  The PNC Base Rate shall mean, for any day, a fluctuating per annum rate of interest equal to the highest of (i) the interest rate per annum announced from time to time by PNC at its prime rate, (ii) the Federal Funds Open Rate plus ½ of 1%, and (iii) the one month LIBOR rate plus 100 basis points (1%).  As of June 30, 2012, the outstanding balance under the Revolving Credit Agreement was $11,903 with a weighted average interest rate of 3.73%, which included both PNC LIBOR Rate and PNC Base Rate loans.  As of December 31, 2011, the outstanding balance under the Revolving Credit Agreement was $10,685 with a weighted average interest rate of 3.72%, which included both PNC LIBOR Rate and PNC Base Rate loans.  The amount of revolving borrowings under the Revolving Credit Agreement is based on a formula using accounts receivable and inventories.  We may not have access to the full $15,000 revolving line of credit due to the formula using accounts receivable and inventories, the amount of the letter of credit issued in favor of Whirlpool Corporation and the amount of outstanding loans between PNC and our AAP joint venture.  As of June 30, 2012 and December 31, 2011, our available borrowing capacity under the Revolving Credit Agreement was $2,228 and $3,505, respectively.

 

8.                                      Deferred Gain

 

In connection with the September 25, 2009 sale-leaseback of our St. Louis Park, Minnesota, building, we recorded a deferred gain of $2,436.  The deferred gain is being amortized over the initial lease period of five years.  For both the three and six months ended June 30, 2012 and July 2, 2011, we amortized $122 and $244, respectively, of the deferred gain.  The deferred gain amortization is netted against rent expense as a component of selling, general and administrative expenses in the consolidated statements of operations.

 

9.                                      Borrowings

 

Long-term debt, capital lease and other financing obligations as of June 30, 2012 and December 31, 2011 consist of the following:

 

 

 

June 30,
2012

 

December 31,
2011

 

Floating rate term loan, due in monthly installments of $21, plus interest, due February 2021, collateralized by land and building

 

$

2,168

 

$

2,295

 

Floating rate term loans, due in monthly installments of $54, including interest, due March 2021, collateralized by equipment

 

4,348

 

4,537

 

2.75% note, due in monthly installments of $3, including interest, due October 2024, collateralized by equipment

 

426

 

440

 

10.00% note, due in monthly installments of $10, including interest, due December 2014

 

341

 

400

 

Capital leases and other financing obligations

 

502

 

568

 

 

 

7,785

 

8,240

 

Less current maturities

 

955

 

989

 

 

 

$

6,830

 

$

7,251

 

 

On January 24, 2011, we entered into a $2,550 term loan with PNC Bank to refinance the existing mortgage on our California facility.  The term loan is payable as follows, subject to acceleration upon the occurrence of an event of default or termination of the Revolving Credit Agreement: 119 consecutive monthly principal payments of $21 plus interest commencing on February 1, 2011 and continuing on the first day of each month thereafter followed by a 120th payment of all unpaid principal, interest and fees on February 1, 2021. The term loan is collateralized with our California facility located in Compton, California. The term loan bears interest at PNC Base Rate plus 2.25%, or 1-, 2- or 3-month PNC LIBOR Rate plus 3.25%.  As of June 30, 2012 and December 31, 2011, the interest rate was 5.50%.

 

On March 10, 2011, ARCA Advanced Processing, LLC entered into three separate commercial term loans (“Term Loans”) with Susquehanna Bank, pursuant to the guidelines of the U.S. Small Business Administration 7(a) Loan Program.  The total amount of the Term Loans is $4,750, split into three separate loans for $2,100; $1,400; and $1,250.  The Term Loans mature in ten years and bear an interest rate of Prime plus 2.75%.  As of June 30, 2012 and December 31, 2011, the interest rate was 6.00%.  Borrowings under the Term Loans are secured by substantially all of the assets of AAP along with liens on the business assets and certain personal assets of the owners of 4301 Operations, LLC. We are a guarantor of the Term Loans along with 4301 Operations, LLC and its owners.

 

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Capital leases and other financing obligations:  We acquire certain equipment under capital leases and other financing obligations.  The cost of the equipment was approximately $1,946 and $1,940 at June 30, 2012 and December 31, 2011, respectively.  Accumulated amortization at June 30, 2012 and December 31, 2011 was approximately $1,514 and $1,458, respectively.  Depreciation and amortization expense is included in cost of revenues and selling, general and administrative expenses.

 

10.                               Commitments and Contingencies

 

Contracts:  We have entered into material contracts with three appliance manufacturers.  Under the agreements there are no minimum purchase commitments; however, we have agreed to indemnify the manufacturers for certain claims, allegations or losses with respect to appliances we sell.

 

Litigation:  We are party from time to time to ordinary course disputes that we do not believe to be material or have merit.  We intend to vigorously defend ourselves against these ordinary course disputes.

 

11.                               Income Taxes

 

For the three and six months ended June 30, 2012, we recorded a provision for (benefit of) income taxes of $54 and $(23), respectively, related to our Canadian operations. We are not projecting a taxable loss in 2012 due to expatriating foreign earnings, however, as a result of limitations on the ability to utilize foreign tax credits expected to be generated in 2012, we have not recorded a tax benefit for U.S. losses incurred for the six months ended June 30, 2012.  For the three and six months ended July 2, 2011, we recorded a provision for (benefit of) income taxes of $(152) and $292, respectively.  We regularly evaluate both positive and negative evidence related to retaining a valuation allowance against our deferred tax assets.  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 be available to reduce taxable income.  During the second quarter of 2011, we concluded, based on the assessment of all available evidence, including previous three-year cumulative income before infrequent and unusual items, a history of generating income before taxes for six consecutive quarters and estimates of future profitability, that it is more-likely-than-not that we would be able to realize a portion of our deferred tax assets in the future and recorded a $917 non-cash reversal of our deferred tax asset valuation allowance.   As a result of generating taxable income for the six months ended July 2, 2011, we recorded a provision for income taxes of $1,209 that was partially offset by the reversal of the deferred tax asset valuation allowance.

 

We recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position.  For tax positions meeting the more-likely-than-not threshold, the amount recognized in the consolidated financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority.  As of June 30, 2012 and December 311, 2011, we did not have any material uncertain tax positions.

 

It is our practice to recognize interest related to income tax matters as a component of interest expense and penalties as a component of selling, general and administrative expense.  As of June 30, 2012 and December 31, 2011, we had an immaterial amount of accrued interest and penalties.

 

We are subject to income taxes in the U.S. federal jurisdiction, foreign jurisdictions and various state jurisdictions.  Tax regulations from each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply.  With few exceptions, we are no longer subject to U.S. federal, foreign, state or local income tax examinations by tax authorities for the years before 2008.  We are not currently under examination by any taxing jurisdiction.

 

We had no significant unrecognized tax benefits as of June 30, 2012 and December 31, 2011 that would reasonably be expected to affect our effective tax rate during the next twelve months.

 

12.                               Shareholders’ Equity

 

Stock options:  On May 12, 2011, our shareholders approved and adopted the 2011 Stock Compensation Plan (the “2011 Plan”).  The 2011 Plan authorizes the granting of awards in any of the following forms: (i) stock options, (ii) stock appreciation rights, and (iii) other share-based awards, including but not limited to restricted stock, restricted stock units or performance shares and expires on the earlier of May 12, 2021 or the date that all shares reserved under the 2011 Plan are issued or no longer available.  The 2011 Plan provides for the issuance of up to 700 shares of Common Stock pursuant to awards granted under the 2011 Plan.  Options granted to employees typically vest over two years while grants to non-employee directors vest in six months.  As of June 30, 2012, 45 options were outstanding under the 2011 Plan.  On May 10, 2012, we granted 30 options to non-employee directors with an exercise price $4.05 per share, a vesting period of six months

 

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and a weighted average fair value of $3.57 per share.  Our 2006 Stock Option Plan (the “2006 Plan”) expired on June 30, 2011, but the options outstanding under the 2006 Plan continue to be exercisable in accordance with their terms.  As of June 30, 2012, 481 options were outstanding to employees and non-employee directors under the 2006 Plan.  Our Restated 1997 Stock Option Plan (the “1997 Plan”) has expired, but the options outstanding under the expired 1997 Plan continue to be exercisable in accordance with their terms.  As of June 30, 2012, options to purchase an aggregate of 8 shares were outstanding under the 1997 Plan.

 

The following table summarizes the assumptions used to estimate the fair value of stock options granted on May 10, 2012 using the Black-Scholes Model:

 

 

 

May 10,
2012

 

Expected dividend yield

 

 

Expected stock price volatility

 

95.5

%

Risk-free interest rate

 

1.87

%

Expected life of options

 

10 years

 

 

Preferred Stock:  Our amended Articles of Incorporation authorize two million shares of Preferred Stock that may be issued from time to time in one or more series having such rights, powers, preferences and designations as the Board of Directors may determine.  To date no such preferred shares have been issued.

 

13.                         Segment Information

 

We operate within targeted markets through two reportable segments: retail and recycling.  The retail segment is comprised of income generated through our ApplianceSmart stores, which includes appliance sales and byproduct revenues from collected appliances.  The recycling segment includes all fees charged and costs incurred for collecting, recycling and installing appliances for utilities and other customers and includes byproduct revenue, which is primarily generated through the recycling of appliances.  We have included the results from consolidating AAP in our recycling segment.  The nature of products, services and customers for both segments varies significantly.  As such, the segments are managed separately.  Our Chief Executive Officer has been identified as the Chief Operating Decision Maker (“CODM”).  The CODM evaluates performance and allocates resources based on revenues and income from operations of each segment.  Income from operations represents revenues less cost of revenues and operating expenses, including certain allocated selling, general and administrative costs.  There are no inter-segment sales or transfers.

 

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Table of Contents

 

The following tables present our segment information for periods indicated:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,
2012

 

July 2,
2011

 

June 30,
2012

 

July 2,
2011

 

Revenues:

 

 

 

 

 

 

 

 

 

Retail

 

$

19,273

 

$

18,809

 

$

39,344

 

$

38,428

 

Recycling

 

10,069

 

14,082

 

19,430

 

24,389

 

Total revenues

 

$

29,342

 

$

32,891

 

$

58,774

 

$

62,817

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss):

 

 

 

 

 

 

 

 

 

Retail

 

$

(559

)

$

91

 

$

(458

)

$

283

 

Recycling

 

436

 

2,204

 

401

 

3,638

 

Unallocated corporate

 

(70

)

(42

)

(52

)

(140

)

Total operating income (loss)

 

$

(193

)

$

2,253

 

$

(109

)

$

3,781

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

Retail

 

$

22,399

 

$

17,352

 

$

22,399

 

$

17,352

 

Recycling

 

19,699

 

22,830

 

19,699

 

22,830

 

Corporate assets not allocable

 

6,471

 

7,416

 

6,471

 

7,416

 

Total assets

 

$

48,569

 

$

47,598

 

$

48,569

 

$

47,598

 

 

 

 

 

 

 

 

 

 

 

Cash capital expenditures:

 

 

 

 

 

 

 

 

 

Retail

 

$

131

 

$

21

 

$

170

 

$

42

 

Recycling

 

152

 

285

 

202

 

1,132

 

Corporate assets not allocable

 

(8

)

83

 

253

 

142

 

Total cash capital expenditures

 

$

275

 

$

389

 

$

625

 

$

1,316

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization:

 

 

 

 

 

 

 

 

 

Retail

 

$

54

 

$

85

 

$

112

 

$

181

 

Recycling

 

155

 

119

 

299

 

235

 

Unallocated corporate

 

97

 

98

 

198

 

251

 

Total depreciation and amortization

 

$

306

 

$

302

 

$

609

 

$

667

 

 

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

 

 

Retail

 

$

98

 

$

62

 

$

178

 

$

164

 

Recycling

 

118

 

143

 

240

 

301

 

Unallocated corporate

 

64

 

81

 

117

 

140

 

Total interest expense

 

$

280

 

$

286

 

$

535

 

$

605

 

 

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Table of Contents

 

Item 2.            Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Forward-Looking and Cautionary Statements

 

This quarterly report contains statements that are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Act of 1934, as amended.  Any statements contained in this quarterly report that are not purely historical or relate to our future operations, performance and results, and anticipated liquidity are forward looking.  These forward-looking statements are based on information available to us on the date of this quarterly report, but are subject to risks and uncertainties, including, but not limited to, those discussed herein.  Our actual results could differ materially from those discussed in this quarterly report.

 

The forward-looking statements contained in this quarterly report, and other written and oral forward-looking statements made by us from time to time, are subject to risks and uncertainties that could cause actual results to differ materially from those anticipated in the forward-looking statements.  Any forward-looking information regarding our operations will be affected primarily by the speed at which individual retail stores reach profitability, the volume of appliance sales and the strength of energy conservation recycling programs.  Any forward-looking information will also be affected by our continued ability to purchase product from our suppliers at acceptable prices, the ability of individual retail stores to meet planned revenue levels, the number of retail stores, costs and expenses being realized at higher than expected levels, our ability to secure an adequate supply of special-buy appliances for resale, the ability to secure appliance recycling and replacement contracts with sponsors of energy efficiency programs, the ability of customers to supply units under their recycling contracts with us, the performance of our consolidated variable interest entity and the continued availability of our current line of credit.  Other factors that might cause such a difference include, but are not limited to, those discussed in Item 1A “Risk Factors” in our annual report on Form 10-K for the year ended December 31, 2011.

 

The following discussion and analysis provides information that we believe is relevant to an assessment and understanding of our operations and financial condition.  This discussion should be read with the consolidated financial statements appearing in Item 1.

 

Overview

 

We operate two reportable segments: retail and recycling.  Our retail segment is comprised of income generated from the sale of appliances through retail stores and includes a portion of our byproduct revenues from collected appliances.  Our recycling segment includes all income generated from collecting, recycling and installing appliances for utilities and other customers and includes a significant portion of our byproduct revenue, which is primarily generated through the recycling of appliances.  Our recycling segment also includes all income generated from our agreement with General Electric (GE) acting through its GE Appliances business component.  GE sells its recyclable appliances in certain regions of the United States to us and we collect, process and recycle the appliances.  These appliances include units manufactured by GE as well as by other manufacturers.  The agreement requires that we will only recycle, and will not sell for re-use or resale, the recyclable appliances purchased from GE.  We have established regional processing centers in Philadelphia and Louisville to support our agreement with GE.  The regional processing center in Philadelphia is operated by ARCA Advanced Processing, LLC (AAP) through a joint venture agreement between ARCA and 4301 Operations, LLC (4301).

 

Our business components are uniquely positioned in the industry to work together to provide a full array of appliance-related services.  ApplianceSmart, Inc.® operates twenty-one company-owned stores and sells new appliances directly to consumers and provides affordable ENERGY STAR® options for energy efficiency appliance replacement programs.  Our twelve regional centers process appliances at end of life to remove environmentally damaging substances and produce material byproducts for recycling for over 200 utilities in the U.S. and Canada.  AAP employs advanced technology to refine traditional appliance recycling techniques to achieve optimal revenue-generating and environmental benefits. We are also the exclusive North American distributor for UNTHA Recycling Technology (URT), one of the world’s leading manufacturers of technologically advanced refrigerator recycling systems and recycling facilities for electrical household appliances and electronic scrap.

 

We believe the GE contract and AAP model is the future of appliance recycling and expect to open similar centers throughout the United States.  We cannot predict when these centers may open or if the appropriate volumes can be obtained to support the AAP model at future locations.

 

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Our retail segment is similar to many other retailers in that it is seasonal in nature.  Historically, the fourth quarter is our weakest quarter in terms of both revenues and earnings.  We believe this is primarily because the fourth quarter includes several holidays during which consumers tend to focus less on purchasing major household appliances.

 

Revenues and earnings in our recycling segment are impacted by seasonal variances, with the both the second and third quarters generally having higher levels of revenues and earnings.  This seasonality is due primarily to our utility customers supporting more marketing and advertising during the spring and summer months.  Our customers tend to promote the recycling programs more aggressively during the warmer months because they believe more people want to clean up their garages and basements during that time of the year.  However, the addition of the GE agreement and some customers shifting to marketing their appliance recycling programs year-round has helped to mitigate some seasonality.

 

We monitor specific economic factors such as retail trends, consumer confidence, manufacturing by the major appliance companies, sales of existing homes and mortgage interest rates as key indicators of industry demand, particularly in our retail segment.  Competition in the home appliance industry is intense in the four retail markets we serve.  This includes competition not only from independent retailers, but also from such major retailers as Sears, Best Buy, The Home Depot and Lowe’s.  We also closely monitor the metals and various other scrap markets because of the type of components recovered in our recycling process.  This includes monitoring the American Metal Market and the regions throughout the U.S. where we have our recycling centers.

 

Reporting Period.  Operating results for the three and six months ended June 30, 2012 and July 2, 2011 are presented using 13- and 26-week periods, respectively.  The results of operations for any interim period are not necessarily indicative of the results for the year.

 

Results of Operations

 

The following table sets forth our consolidated financial data as a percentage of total revenues for the three and six months ended June 30, 2012 and July 2, 2011:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,
2012

 

July 2,
2011

 

June 30,
2012

 

July 2,
2011

 

Revenues:

 

 

 

 

 

 

 

 

 

Retail

 

64.7

%

55.9

%

65.9

%

59.9

%

Recycling

 

20.9

 

29.2

 

19.4

 

24.4

 

Byproduct

 

14.4

 

14.9

 

14.7

 

15.7

 

Total revenues

 

100.0

 

100.0

 

100.0

 

100.0

 

Cost of revenues

 

74.2

 

70.7

 

74.2

 

70.3

 

Gross profit

 

25.8

 

29.3

 

25.8

 

29.7

 

Selling, general and administrative expenses

 

26.5

 

22.5

 

26.0

 

23.6

 

Operating income (loss)

 

(0.7

)

6.8

 

(0.2

)

6.1

 

 

 

 

 

 

 

 

 

 

 

Other expense:

 

 

 

 

 

 

 

 

 

Interest expense, net

 

(1.0

)

(0.9

)

(0.9

)

(1.0

)

Other expense, net

 

(0.1

)

(0.1

)

(0.0

)

(0.1

)

Income (loss) before income taxes and noncontrolling interest

 

(1.8

)

5.8

 

(1.1

)

5.0

 

Provision for (benefit of) income taxes

 

0.2

 

(0.5

)

(0.0

)

0.5

 

Net income (loss)

 

(2.0

)

6.3

 

(1.1

)

4.5

 

Net income attributable to noncontrolling interest

 

(0.3

)

(0.1

)

(0.1

)

(0.2

)

Net income (loss) attributable to controlling interest

 

(2.3

)%

6.2

%

(1.2

)%

4.3

%

 

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For the Three Months Ended June 30, 2012 and July 2, 2011

 

The following table sets forth the key results of operations by segment for the three months ended June 30, 2012 and July 2, 2011 (dollars in millions):

 

 

 

Three Months Ended

 

 

 

June 30,
2012

 

July 2,
2011

 

%
Change

 

Revenues:

 

 

 

 

 

 

 

Retail

 

$

19.3

 

$

18.8

 

2

%

Recycling

 

10.0

 

14.1

 

(29

)%

Total revenues

 

$

29.3

 

$

32.9

 

(11

)%

 

 

 

 

 

 

 

 

Operating income (loss):

 

 

 

 

 

 

 

Retail

 

$

(0.6

)

$

0.1

 

(714

)%

Recycling

 

0.4

 

2.2

 

(80

)%

Unallocated corporate costs

 

(0.0

)

(0.0

)

(67

)%

Total operating income (loss)

 

$

(0.2

)

$

2.3

 

(109

)%

 

Our total revenues of $29.3 million for the second quarter of 2012 decreased $3.6 million or 11% from $32.9 million in the second quarter of 2011.  Retail segment revenues increased $0.5 million or 2% to $19.3 million compared to $18.8 million in the second quarter of 2012.  The increase was primarily related to revenues generated by our St. Cloud, Minnesota store that was not operating in the second quarter of 2011.  Recycling segment revenues decreased $4.1 million or 29% to $10.0 million compared to $14.1 million in the second quarter of 2011.  The decrease in recycling segment revenues is attributed primarily to 26% decline in our energy efficiency program volumes, which had an impact on fees charged and byproduct materials sold.  Also the second quarter of 2011 benefited from replacing and recycling over 3,000 additional refrigerators through a replacement contract in California that was not repeated this year.

 

Our total operating loss of $0.2 million for the second quarter of 2012 decreased $2.5 million compared to total operating income of $2.3 million in the second quarter of 2011.  The decline is primarily the result of a 26% downturn in energy efficiency program volumes and lower profit margins at ApplianceSmart stores.  We also incurred over $0.1 million in general and administrative expenses during the quarter related to opening a regional processing center in Louisville, opening a new retail store in July and additional call center expenses to implement new programs and technology.

 

Revenues.  Revenues for the three months ended June 30, 2012 and July 2, 2011 were as follows (dollars in millions):

 

 

 

Three Months Ended

 

 

 

June 30,
2012

 

July 2,
2011

 

%
Change

 

Retail

 

$

19.0

 

$

18.4

 

3

%

Recycling

 

6.1

 

9.6

 

(36

)%

Byproduct

 

4.2

 

4.9

 

(14

)%

 

 

$

29.3

 

$

32.9

 

(11

)%

 

Retail Revenues.  Our retail revenues of $19.0 million for the second quarter of 2012 increased $0.6 million or 3% from $18.4 million in the second quarter of 2011.  The increase in retail revenues was due primarily to revenues generated by our new store in St. Cloud, Minnesota.  Comparable store revenues from ApplianceSmart stores operating during the second quarters of 2012 and 2011 were flat, however; compared to the second quarter of 2011, ApplianceSmart stores increased its average appliance sale from $484 to $554 per unit.

 

Recycling Revenues.  Our recycling revenues of $6.1 million for the second quarter of 2012 decreased $3.5 million or 36% from $9.6 million in the second quarter of 2011.  Recycling revenues are comprised of two components: (1) appliance recycling revenues generated by collecting and recycling appliances for utilities and other sponsors of energy efficiency programs and (2) replacement program revenues generated by recycling and replacing old appliances with new energy efficient models for programs sponsored by utility companies.  Appliance recycling revenues decreased 30% to $3.4 million in the second quarter of 2012 compared to $4.9 million in the second quarter of 2011, due primarily to lower volumes in our California and Canada energy efficiency programs.  The number of units driving our appliance recycling revenues was down approximately 23% in the second quarter of 2012 compared to the same quarter of the prior year.  We

 

17



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also had a 9% decline in the average revenue per unit.  Replacement program revenues decreased 42% to $2.7 million in the second quarter of 2012 compared to $4.7 million in the second quarter of 2011.  The replacement program units were down approximately 3,600 units in the second quarter of 2012 compared to the same quarter of the prior year.  The second quarter of 2011 benefited from replacing and recycling over 3,000 additional refrigerators representing approximately $1.5 million in revenues that was not repeated in the second quarter of 2012.

 

Byproduct Revenues.  Our byproduct revenues of $4.2 million for the second quarter of 2012 decreased $0.7 million or 14% from $4.9 million in the second quarter of 2011.  The decrease in byproduct revenues was primarily the result of lower volumes generated from energy efficiency and replacement programs and to a lesser extent a decline in scrap metal prices that occurred later in the second quarter.  During the second quarter of 2012, we recognized $0.1 million in carbon offset revenues and expect to recognize another $0.4 million in the future pending the transfer and verification of the carbon offsets.  We continue to reclaim and inventory refrigerants and expect to generate carbon offset revenues in the future although the frequency of these transactions will vary based on volume levels and market conditions.  Byproduct revenues also include all of the revenues generated by AAP.  Revenues from AAP increased $0.1 million to $2.7 million in the second quarter of 2012 compared to $2.6 million in the second quarter of 2011.  The increase was primarily the result of recycling additional units under the GE agreement.

 

Gross Profit.  Our gross profit of $7.4 million in the second quarter of 2012 decreased $2.2 million or 22% compared to $9.6 million in the second quarter of 2011.  Gross profit as a percentage of total revenues decreased to 26% for the second quarter of 2012 compared to 29% in the second quarter of 2011.  The decline in overall gross profit percentage was due primarily to lower recycling volumes and lower retail profit margins.  Gross profit percentage for the recycling segment decreased to 26% for the second quarter of 2012 compared to 31% for the second quarter of 2011, primarily related to lower volumes from our energy efficiency and replacement programs and price compression within certain contracts.  The lower volumes and price compression resulted in higher transportation and processing costs per unit along with lower revenues covering the fixed costs of the regional processing centers.  Gross profit percentage for the retail segment was 26% in the second quarter of 2012 compared to 28% in the second quarter of 2011.  The decrease was due primarily to a shift in our product mix and cost increases from manufacturers.  We are selling a higher level of close-out and factory-overrun appliances which typically have a smaller profit margin than special-buy appliances.

 

Recycling gross profit percentages are typically higher than retail gross profit percentages.  Our gross profit as a percentage of total revenues for future periods can be affected favorably or unfavorably by numerous factors, including:

 

1.               The mix of retail products we sell.

2.               The prices at which we purchase product from the major manufacturers who supply product to us.

3.               The volume of appliances we receive through our recycling contracts.

4.               The volume and price of byproduct materials.

5.               The volume and price of carbon offset sales created by the destruction of ozone-depleting refrigerants.

 

Selling, General and Administrative Expenses.  Our selling, general and administrative (“SG&A”) expenses for the second quarter of 2012 increased $0.4 million to $7.8 million compared to $7.4 million for the same period of the prior year.  Our SG&A expenses as a percentage of total revenues increased to 27% in the second quarter of 2012 compared to 23% in the second quarter of 2011.  Selling expenses increased $0.4 million to $5.0 million or 17% of total revenues in the second quarter of 2012 compared to $4.6 million or 14% of total revenues for the second quarter of 2011.  The increase in selling expenses was due primarily to additional expenses as a result of new stores not open in the second quarter of 2011.  General and administrative expenses of $2.8 million for the second quarter of 2012 were flat compared to the second quarter of the prior year.  However, general and administrative expenses in the second quarter of 2012 included over $100,000 in expenses related to opening a new recycling center in Louisville for GE business, a new retail store in Minnesota and additional call center expenses related to implementing new programs and technology.

 

Provision for Income Taxes.  We recorded a $0.1 million provision for income taxes in the second quarter of 2012 compared to $0.2 million benefit of income taxes in the second quarter of 2011.  The provision recorded for the three months ended June 30, 2012 is related to our Canadian operations.  We are not projecting a taxable loss in 2012 due to expatriating foreign earnings, however, as a result of limitations on the ability to utilize foreign tax credits expected to be generated in 2012, we have not recorded a tax benefit for U.S. losses incurred for the three months ended June 30, 2012. At January 1, 2011, we recorded a full valuation allowance against our U.S. net deferred tax assets due to the uncertainty of their realization.  We regularly evaluate both positive and negative evidence related to retaining a valuation allowance against our deferred tax assets that are more-likely-than-not unable to be realized in future periods.  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 be available to reduce taxable income.  During the second quarter of 2011, we concluded, based on the assessment of all available evidence, including previous three-year cumulative income before infrequent and unusual items, a history of generating income before taxes for six consecutive quarters and estimates of future profitability, that it is more-likely-than-

 

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not that we would be able to realize a portion of our deferred tax assets in the future and recorded a $0.9 million non-cash reversal of our deferred tax asset. The reversal of the valuation allowance was partially offset by a $0.7 million provision for income taxes related to taxable income generated for the second quarter of 2011.

 

Noncontrolling Interest.  Noncontrolling interest represents 4301’s share of AAP’s net income.  Under the AAP joint venture agreement, ARCA and 4301 each have a 50% interest in AAP.  AAP reported a net income of $180,000 for the second quarter of 2012, of which $90,000 represented the income attributable to noncontrolling interest.  AAP reported a net income of $96,000 for the second quarter of 2011, of which $48,000 represented the income attributable to noncontrolling interest.

 

For the Six Months Ended June 30, 2012 and July 2, 2011

 

The following table sets forth the key results of operations by segment for the six months ended June 30, 2012 and July 2, 2011 (dollars in millions):

 

 

 

Six Months Ended

 

 

 

June 30,
2012

 

July 2,
2011

 

%
Change

 

Revenues:

 

 

 

 

 

 

 

Retail

 

$

39.4

 

$

38.4

 

2

%

Recycling

 

19.4

 

24.4

 

(20

)%

Total revenues

 

$

58.8

 

$

62.8

 

(6

)%

 

 

 

 

 

 

 

 

Operating income (loss):

 

 

 

 

 

 

 

Retail

 

$

(0.5

)

$

0.3

 

(262

)%

Recycling

 

0.4

 

3.6

 

(89

)%

Unallocated corporate costs

 

(0.0

)

(0.1

)

63

%

Total operating income (loss)

 

$

(0.1

)

$

3.8

 

(103

)%

 

Our total revenues of $58.8 million for the six months ended June 30, 2012 decreased $4.0 million or 6% compared to $62.8 million for the six months ended July 2, 2011.  Retail segment revenues accounted for 67% of total revenues for the six months ended June 30, 2012 compared to 61% in same period of 2011.  Recycling segment revenues and retail segment revenues each include a portion of byproduct revenues.  Retail segment revenues of $39.4 million for the six months ended June 30, 2012 increased $1.0 million or 2% compared to $38.4 million in the same period of 2011.  The increase was primarily related to revenues generated by our St. Cloud, Minnesota store that was not operating in the six months ended July 2, 2011.  Recycling segment revenues of $19.4 million for the six months ended June 30, 2012 decreased $5.0 million or 20% compared to $24.4 million in the same period of 2011.  The decrease in recycling segment revenues is attributed primarily to 25% decline in our energy efficiency program and replacement program volumes, which had an impact on fees charged and byproduct materials sold.  Also the second quarter of 2011 benefited from replacing and recycling over 3,000 additional refrigerators through a replacement contract in California that was not repeated this year.

 

Revenues.  Revenues for the six months ended June 30, 2012 and July 2, 2011 were as follows (dollars in millions):

 

 

 

Six Months Ended

 

 

 

June 30,
2012

 

July 2,
2011

 

% Change

 

Retail

 

$

38.7

 

$

37.6

 

3

%

Recycling

 

11.4

 

15.3

 

(26

)%

Byproduct

 

8.7

 

9.9

 

(12

)%

 

 

$

58.8

 

$

62.8

 

(6

)%

 

Retail Revenues.  Our retail revenues of $38.7 million for the six months ended June 30, 2012 increased $1.1 million or 3% compared to $37.6 million for the six months ended July 2, 2011.  The increase in retail revenues was due primarily to revenues generated by our new store in St. Cloud, Minnesota.  Comparable store revenues from ApplianceSmart stores operating during the six months ended June 30, 2012 and July 2, 2012 were flat, however; compared to the same six month period of 2011, ApplianceSmart stores increased its average appliance sale from $498 to $538 per unit.

 

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Recycling Revenues.  Our recycling revenues of $11.4 million for the six months ended June 30, 2012 decreased $3.9 million or 26% compared to $15.3 million in the same period of 2011.  Appliance recycling revenues decreased 25% to $6.4 million for the six months ended June 30, 2012 compared to $8.6 million in the same period of 2011, due primarily to a 25% decline in energy efficiency program volumes.  Replacement program revenues decreased 27% to $5.0 million for the six months ended June 30, 2012 compared to $6.7 million in the same period of 2011.  The replacement program units were down 3,250 units for the six months ended June 30, 2012 compared to the same period of the prior year.  The six month period ending July 2, 2011 benefited from replacing and recycling over 3,000 additional refrigerators representing approximately $1.5 million in revenues that was not repeated in the same period of 2012.

 

Byproduct Revenues.  Our byproduct revenues of $8.7 million for the six months ended June 30, 2012 decreased $1.2 million or 12% from $9.9 million in the same period of 2011.  The decrease in byproduct revenues was primarily the result lower volumes generated from energy efficiency and replacement programs and to a lesser extent a decline in scrap metal prices that occurred later in the second quarter.  During the latter part of the second quarter, we experienced a decline in scrap metal across the United States.  We are uncertain if this is a temporary decline and will have an impact on byproduct revenues for the remainder of 2012.  During the six month period ending June 30, 2012, we recognized $0.1 million in carbon offset revenues compared to $0.4 million in the same period of 2011.  We continue to reclaim and inventory refrigerants and expect to generate carbon offset revenues in the future although the frequency of these transactions will vary based on volume levels and market conditions.  Byproduct revenues also include all of the revenues generated by AAP.  Revenues from AAP increased $0.2 million to $5.4 million for the six months ended June 30, 2012 compared to $5.2 million in the same period of 2011.  The increase was primarily the result of recycling additional units under the GE agreement.

 

Gross Profit.  Our gross profit of $15.2 million for the six months ended June 30, 2012 decreased $3.4 million or 19% compared to $18.6 million for the six months ended July 2, 2011.  Gross profit as a percentage of total revenues decreased to 26% for the six months ended June 30, 2012 compared to 30% in the same period of 2011.  The gross profit percentage for the recycling segment decreased to 25% for the six months ended June 30, 2012 compared to 32% in the same period 2011.  The decrease is primarily related to lower volumes from our energy efficiency and replacement programs and a lower carbon offset sales.  The lower volumes resulted in higher transportation and processing costs per unit along with lower revenues covering the fixed costs of the regional processing centers.  The gross profit percentage for the retail segment decreased to 27% for the six months ended June 30, 2012 compared to 28% in the same period of 2011.  The decrease was due primarily to a shift in our product mix and cost increases from manufacturers.  We are selling a higher level of close-out and factory-overrun appliances which typically have a smaller profit margin than special-buy appliances.

 

Selling, General and Administrative Expenses.  Our selling, general and administrative (“SG&A”) expenses of $15.3 million for the six months ended June 30, 2012 increased $0.4 million or 3% compared to $14.9 million for the six months ended July 2, 2011.  Our SG&A expenses as a percentage of total revenues increased to 26% for the six months ended June 30, 2012 compared to 24% in the same period of 2011.  Selling expenses of $9.7 million for the six months ended June 30, 2012 increased 3% or $0.2 million compared to $9.5 million in the same period of 2011.  The increase in selling expenses was due primarily to additional expenses to operate new retail stores and partially offset by a reduction in advertising expenses.  General and administrative expenses of $5.6 million for the six months ended June 30, 2012 increased 3% or $0.2 million compared to $5.4 million in the same period of 2011.  General and administrative expenses for the six month period ended June 30, 2012 included over $250,000 in expenses related to opening a new recycling center in Louisville for GE business, a new retail store in Minnesota and additional call center expenses related to implementing new programs and technology.

 

Interest Expense.  Our interest expense decreased $0.1 million to $0.5 million for the six months ended June 30, 2012 compared to $0.6 million for the six months ended July 2, 2011.  The decrease is related primarily to a lower weighted-average balance outstanding on our debt obligations.

 

Provision for Income Taxes.  We recorded a $23,000 benefit of income taxes for the six months ended June 30, 2012 compared to a provision for income taxes of $0.3 million for the six months ended July 2, 2011.  The benefit recorded for the six months ended June 30, 2012 is related to our Canadian operations.  We are not projecting a taxable loss in 2012 due to expatriating foreign earnings, however, as a result of limitations on the ability to utilize foreign tax credits expected to be generated in 2012, we have not recorded a tax benefit for U.S. losses incurred for the six months ended June 30, 2012.  As a result of generating taxable income for the six months ended July 2, 2011, we recorded a provision for income taxes of $1.2 million.  The provision for income taxes was partially offset by recording a $0.9 million discrete item related to the reversal of a portion of our deferred tax asset valuation allowance during the second quarter of 2011.  During first quarter of 2011, we recognized $36,000 related to windfall tax benefits from share-based compensation, which were recorded to Common Stock on the consolidated balance sheets.

 

Noncontrolling Interest.  Noncontrolling interest represents 4301’s share of AAP’s net (income) loss.  Under the AAP joint venture agreement, ARCA and 4301 each have a 50% interest in AAP.  AAP reported net income of $158,000 for the six months ended June 30, 2012, of which $79,000 represented the income attributable to noncontrolling interest.  AAP

 

20



Table of Contents

 

reported a net income of $222,000 for the six months ended July 2, 2011, of which $111,000 represented the income attributable to noncontrolling interest.

 

Liquidity and Capital Resources

 

Summary.  Cash and cash equivalents as of June 30, 2012 were $3.7 million compared to $4.4 million as of December 31, 2011.  Working capital, the excess of current assets over current liabilities, decreased to $10.3 million as of June 30, 2012 compared to $11.4 million as of December 31, 2011.  The decrease is primarily related to carrying more inventories in our ApplianceSmart stores.

 

The following table summarizes our cash flows for the six months ended June 30, 2012 and July 2, 2011 (in millions):

 

 

 

Six months Ended

 

 

 

June 30,
2012

 

July 2,
2011

 

Total cash and cash equivalents provided by (used in):

 

 

 

 

 

Operating activities

 

$

(0.8

)

$

0.3

 

Investing activities

 

(0.7

)

(0.6

)

Financing activities

 

0.8

 

1.6

 

Effect of exchange rates on cash and cash equivalents

 

(0.0

)

0.1

 

Increase (decrease) in cash and cash equivalents

 

$

(0.7

)

$

1.4

 

 

Operating Activities.  Our net cash used in operating activities was $0.8 million for the six months ended June 30, 2012 compared to cash provided by operating activities of $0.3 million for the six months ended July 2, 2011.  The change in operating cash was primarily the result of carrying higher inventories at our ApplianceSmart stores and the year-to-date net loss.

 

Investing Activities.  Our net cash used in investing activities was $0.7 million for the six months ended June 30, 2012 compared to $0.6 million for the six months ended July 2, 2011.  Net cash used in investing activities for the six months ended June 30, 2012 was related entirely to purchases of property and equipment.  The net cash used in investing activities for the six months ended July 2, 2011 was primarily due to capital expenditures to complete the URT installation at AAP, which was partially offset by the release of a $0.7 million deposit required by our credit card processor in 2009.

 

Financing Activities.  Our net cash provided financing activities was $0.8 million for the six months ended June 30, 2012 compared to $1.6 million for the six months ended July 2, 2011.  Net cash provided financing activities for the six months ended June 30, 2012 was related primarily to borrowings under our line of credit offset by the repayment of long-term debt obligations.  Net cash provided by financing activities for the six months ended July 2, 2011 was related primarily to cash proceeds from refinancing short-term debt obligations net of $0.7 million in debt issuance costs and borrowings under our line of credit.

 

Sources of Liquidity.  Our principal sources of liquidity are cash from operations and borrowings under our revolving line of credit. Our principal liquidity requirements consist of long-term debt obligations, capital expenditures and working capital.  We believe, based on the anticipated sales per retail store, the anticipated revenues from our recycling contracts and our anticipated gross profit, that our cash balance, anticipated funds generated from operations and our revolving line of credit will be sufficient to finance our operations, long-term debt obligations and capital expenditures through at least the next twelve months.  Our total capital requirements for the next twelve months will depend upon, among other things the number and size of retail stores operating during the period, the recycling volumes generated from recycling contracts during the period and our needs related to AAP.  Currently, we have 21 retail stores and 12 recycling centers, including AAP, in operation.  We may need additional capital to finance our operations if our revenues are lower than anticipated, our expenses are higher than anticipated or we pursue new opportunities.  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 financing opportunities.  There can be no assurance that such additional sources of financing will be available on terms satisfactory to us or permitted by our credit agreement.

 

Outstanding Indebtedness.  On January 24, 2011, we entered into a Revolving Credit, Term Loan and Security Agreement (“Revolving Credit Agreement”) with PNC Bank, National Association (“PNC”) that provides us with a $15.0 million revolving line of credit and a $2.55 million Term Loan.  The Term Loan is described later in this section.  The Revolving Credit Agreement has a stated maturity date of January 24, 2014, if not renewed.  The Revolving Credit Agreement is

 

21



Table of Contents

 

collateralized by a security interest in substantially all of our assets, and PNC is also secured by an inventory repurchase agreement with Whirlpool Corporation for Whirlpool purchases only.  We also issued a $750,000 letter of credit in favor of Whirlpool Corporation.  The interest rate on the revolving line of credit is PNC Base Rate plus 1.75%, or 1-, 2- or 3-month PNC LIBOR Rate plus 2.75%.  The PNC Base Rate shall mean, for any day, a fluctuating per annum rate of interest equal to the highest of (i) the interest rate per annum announced from time to time by PNC at its prime rate, (ii) the Federal Funds Open Rate plus ½ of 1%, and (iii) the one month LIBOR rate plus 100 basis points (1%).  As of June 30, 2012, the outstanding balance under the Revolving Credit Agreement was $11.9 million with a weighted average interest rate of 3.73%, which included both PNC LIBOR Rate and PNC Base Rate loans.  As of December 31, 2011, the outstanding balance under the Revolving Credit Agreement was $10.7 million with a weighted average interest rate of 3.72%, which included both PNC LIBOR Rate and PNC Base Rate loans.  The amount of revolving borrowings under the Revolving Credit Agreement is based on a formula using accounts receivable and inventories.  We may not have access to the full $15.0 million revolving line of credit due to the formula using accounts receivable and inventories, the amount of the letter of credit issued in favor of Whirlpool Corporation and the amount of outstanding loans between PNC and our AAP joint venture.  As of June 30, 2012 and December 31, 2011, our available borrowing capacity under the Revolving Credit Agreement was $2.2 million and $3.5 million, respectively.  The Revolving Credit Agreement requires, starting with the fiscal quarter ending April 2, 2011 and continuing at the end of each quarter thereafter, that we meet a minimum fixed charge coverage ratio of 1.10 to 1.00, measured on a trailing twelve-month basis.  The fixed charge coverage ratio for the quarter ended June 30, 2012 was 2.12 to 1.00.  The fixed charge coverage ratio for the fiscal year ended December 31, 2011 was 10.10 to 1.00.  The Revolving Credit Agreement limits investments we can purchase, the amount of other debt and leases we can incur, the amount of loans we can issue to our affiliates and the amount we can spend on fixed assets along with prohibiting the payment of dividends.  As of June 30, 2012 and December 31, 2011, we were in compliance with all the covenants of the Revolving Credit Agreement.

 

On January 24, 2011, we entered into a $2.55 million term loan with PNC Bank to refinance the existing mortgage on our California facility.  The term loan is payable as follows, subject to acceleration upon the occurrence of an event of default or termination of the Revolving Credit Agreement: 119 consecutive monthly principal payments of $21,000 plus interest commencing on February 1, 2011 and continuing on the first day of each month thereafter followed by a 120th payment of all unpaid principal, interest and fees on February 1, 2021. The term loan is collateralized with our California facility located in Compton, California. The term loan bears interest at PNC Base Rate plus 2.25%, or 1-, 2- or 3-month PNC LIBOR Rate plus 3.25%.  As of June 30, 2012 and December 31, 2011, the interest rate was 5.50% for both periods.

 

On March 10, 2011, ARCA Advanced Processing, LLC entered into three separate commercial term loans (“Term Loans”) with Susquehanna Bank, pursuant to the guidelines of the U.S. Small Business Administration 7(a) Loan Program.  The total amount of the Term Loans is $4.75 million, split into three separate loans for $2.1 million; $1.4 million; and $1.25 million.  The Term Loan matures in ten years and bears an interest rate of Prime plus 2.75%.  As of June 30, 2012 and December 31, 2011, the interest rate was 6.00% for both periods.  Borrowings under the Term Loans are secured by substantially all of the assets of AAP along with liens on the business assets and certain personal assets of the owners of 4301 Operations, LLC. We are a guarantor of the Term Loans along with 4301 Operations, LLC and its owners.

 

The following table summarizes our borrowings as of June 30, 2012 and December 31, 2011 (in millions):

 

 

 

June 30,

 

December 31,

 

 

 

2012

 

2011

 

Line of credit

 

$

11.9

 

$

10.7

 

PNC term loan

 

2.2

 

2.3

 

Susquehanna bank term loans (1)

 

4.3

 

4.5

 

Other financing obligations and loans (1)

 

1.0

 

1.1

 

Capital leases and other financing obligations

 

0.3

 

0.3

 

 

 

19.7

 

18.9

 

Less: current portion of debt

 

12.9

 

11.7

 

 

 

$

6.8

 

$

7.2

 

 


(1) Represents notes from consolidating AAP.

 

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Table of Contents

 

Item 3.            Quantitative and Qualitative Disclosures About Market Risk

 

Market Risk and Impact of Inflation

 

Interest Rate Risk.  We do not believe there is any significant risk related to interest rate fluctuations on our long-term fixed-rate debt.  There is interest rate risk on the line of credit, PNC term loan and Susquehanna Bank term loans, since our interest rate floats.  The outstanding balance on our floating rate loans as of June 30, 2012 was approximately $18.4 million.  Based on average floating rate borrowings of $18.0 million, a hypothetical 100 basis point change in the applicable interest rate would have caused our interest expense to change by approximately $45,000 and $90,000 for the three and six months ended June 30, 2012, respectively.

 

Foreign Currency Exchange Rate Risk.  We currently generate revenues in Canada.  The reporting currency for our consolidated financial statements is U.S. dollars.  It is not possible to determine the exact impact of foreign currency exchange rate changes; however, the effect on reported revenue and net earnings can be estimated.  We estimate that the overall strength of the U.S. dollar against the Canadian dollar had an immaterial impact on the revenues and net income for the three and six months ended June 30, 2012.  We do not currently hedge foreign currency fluctuations and do not intend to do so for the foreseeable future.

 

We do not hold any derivative financial instruments nor do we hold any securities for trading or speculative purposes.

 

Item 4.            Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

We have established disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer (principal executive officer and acting principal financial officer), to allow timely decisions regarding required disclosure.

 

Our management, including our Chief Executive Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act), at June 30, 2012. Based on that evaluation, our Chief Executive Officer concluded that, at June 30, 2012, our disclosure controls and procedures were effective at the reasonable assurance level.

 

Changes in Internal Control Over Financial Reporting

 

During the second quarter of fiscal 2012, there was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

 

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PART II.        Other Information

 

Item 1.            Legal Proceedings

 

In February 2012, various individuals commenced a class action lawsuit against Whirlpool Corporation (“Whirlpool”) and various distributors of Whirlpool products, including Sears, The Home Depot, Lowe’s and us, alleging certain appliances sold by Whirlpool through its distribution chain, which includes us, were improperly designated with the ENERGY STAR® qualification rating established by the U.S. Department of Energy and the Environmental Protection Agency.  The claims against us include breach of warranty claims, as well as various State Consumer Protection claims.  The amount of the claim is, as yet, undetermined.  Whirlpool has offered to fully indemnify and defend its distributors in this lawsuit including us, and is in the process of engaging defense counsel to defend itself and the distributors.  We intend to monitor Whirlpool’s defense of the claims.

 

In 2007, we entered into an agreement with AMTIM Capital, Inc. (“AMTIM”) to act as our representative to market our recycling services in Canada under an arrangement which pays AMTIM for revenues generated by recycling services in Canada as set forth in the agreement between the parties.  A dispute has arisen between AMTIM and us with respect to the calculation of amounts due to AMTIM pursuant the agreement.  AMTIM claims a discrepancy in the calculation of fees due to AMTIM by us of more than $600,000 as of mid-2010.  We commenced an action in the U.S. District Court for a determination of the parties’ rights under the agreement.  AMTIM started its own action, in Ontario, Canada, against us for amounts it claims it is due pursuant to the agreement.  We moved the Canadian Court for a stay of that action pending the U.S. action.  AMTIM requested the U.S. District Court to stay the U.S. action pending resolution of the Canadian Court action.  AMTIM’s motion was denied by the U.S. District Court and as a result we obtained a default judgment against AMTIM approving the manner in which we have historically calculated fees due to AMTIM.  Shortly thereafter, the Canadian Court dismissed our motion to stay the Canadian action.  We are currently pursuing an appeal of the Court’s ruling in the Canadian action, the outcome of which is uncertain.  However, we believe that the possibility of a material loss is remote.

 

We are party from time to time to other ordinary course disputes that we do not believe to be material.

 

Item 2.            Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

 

Item 3.            Defaults Upon Senior Securities

 

None.

 

Item 5.            Other Information

 

None.

 

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Item 6.            Exhibits

 

Exhibit
Number

 

Description

31.1+

 

Certification by Chief Executive Officer and Acting Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.1†

 

Certification by Chief Executive Officer and Acting Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

101**

 

The following materials from our Quarterly Report on Form 10-Q for the quarter ended June 30, 2012 formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Balance Sheets, (ii) the Unaudited Consolidated Statements of Comprehensive Income (Loss), (iii) the Unaudited Consolidated Statements of Cash Flows, (iv) the Notes to Unaudited Consolidated Financial Statements, and (v) document and entity information.

 


              Filed herewith.

 

†                Furnished herewith.

 

**          Pursuant to Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be deemed part of a registration statement, prospectus or other document filed under the Securities Act or the Exchange Act, except as shall be expressly set forth by specific reference in such filings.

 

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SIGNATURES

 

Pursuant to the requirements of Section 13 or Section 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on our behalf by the undersigned, thereunto duly authorized.

 

Dated: August 10, 2012

APPLIANCE RECYCLING CENTERS OF AMERICA, INC.

 

(Registrant)

 

 

 

 

By

/s/ Edward R. Cameron

 

 

Edward R. Cameron

 

 

President, Chief Executive Officer and Acting
Principal Financial Officer

 

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