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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 30, 2000
OR
[ ] 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 41-1454591
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7400 EXCELSIOR BOULEVARD, MINNEAPOLIS, MINNESOTA 55426-4517
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 952-930-9000
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK,
WITHOUT PAR VALUE
(Title of class)
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. Yes _X_ No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 9, 2001, the aggregate market value of the voting stock held by
nonaffiliates of the registrant, computed by reference to the average of the
high and low prices on such date as reported by the OTC Bulletin Board, was
$1,851,458.
As of March 9, 2001, there were outstanding 2,287,369 shares of the registrant's
Common Stock, without par value.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement dated March 23, 2001,
are incorporated by reference into Part III hereof.
TABLE OF CONTENTS
PAGE
----
PART I
Item 1. Business........................................................ 3
General.................................................. 3
Industry Background...................................... 3
Company Background....................................... 4
Customers and Source of Supply........................... 6
Company Operations....................................... 7
Principal Product and Services........................... 7
Sales and Marketing...................................... 8
Seasonality.............................................. 8
Competition.............................................. 8
Government Regulation.................................... 9
Employees................................................ 9
Item 2. Properties...................................................... 10
Item 3. Legal Proceedings............................................... 10
Item 4. Submission of Matters to a Vote of Security Holders............. 10
PART II
Item 5. Market for the Company's Common Equity and Related
Shareholder Matters............................................. 11
Item 6. Selected Financial Data......................................... 13
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................... 14
Item 7A. Quantitative and Qualitative Disclosure About Market Risk....... 18
Item 8. Financial Statements and Supplementary Data..................... 19
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure........................................ 31
PART III
Item 10. Directors and Executive Officers of the Company................... 31
Item 11. Executive Compensation............................................ 31
Item 12. Security Ownership of Certain Beneficial Owners and Management.... 31
Item 13. Certain Relationships and Related Transactions.................... 31
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K... 32
SIGNATURES ................................................................ 34
INDEX TO EXHIBITS ......................................................... 35
2
PART I
ITEM 1. BUSINESS
GENERAL
Appliance Recycling Centers of America, Inc., together with its
operating subsidiaries ("ARCA" or the "Company"), is a leading provider of
reverse logistics, energy efficiency and appliance recycling services for
appliance manufacturers and retailers, utility companies, waste management
businesses, vending machine companies, property managers, local governments and
the general public. The Company generates revenues from the sale of appliances
through a chain of Company-owned retail stores under the name ApplianceSmart(R),
fees charged for the collection and environmentally sound recycling of unwanted
appliances, and sales of materials generated from processed appliances.
The Company was incorporated in Minnesota in 1983, although through its
predecessors it commenced the appliance retail and recycling business in 1976.
The Company's principal office is located at 7400 Excelsior Boulevard,
Minneapolis, Minnesota 55426-4517. References herein to the Company include its
operating subsidiaries. (See Exhibit 21.1.)
INDUSTRY BACKGROUND
There are more than 500 million major household appliances, such as
refrigerators, freezers, ranges, dishwashers, microwaves, washers, dryers, room
air conditioners, water heaters and dehumidifiers, currently in use in the
United States. It is estimated by the Steel Recycling Institute that in 1997, 46
million major household appliances were taken out of use in the United States.
The disposal of these appliances is a serious problem as a result of a number of
factors including: (i) decreasing landfill capacity in many parts of the
country; (ii) the inability of incinerators, composting facilities and other
landfill alternatives to process appliances; and (iii) the presence in
appliances of certain hazardous and other environmentally harmful materials that
require special processing.
Legislation affecting appliance disposal has been adopted in more than
30 states. This legislation includes landfill restrictions, disposal bans,
advance disposal fees and other types of regulations. As a result, appliances
must be dealt with outside the ordinary municipal solid waste stream.
Landfill restrictions arise in part because some appliance components
contain certain hazardous and other environmentally harmful materials, including
polychlorinated biphenyls (PCBs), mercury, refrigerants such as
chlorofluorocarbons (CFCs) and sulfur dioxide, and oils. PCBs are suspected as
carcinogens, are resistant to degradation when deposited in landfills and can
cause groundwater contamination. The production of PCBs was banned by the EPA in
1979, although businesses were allowed to continue using remaining inventories
of components that contained PCBs. Mercury is toxic to humans and can enter the
body through inhalation, skin absorption or ingestion, and it vaporizes at high
temperatures, forming extremely toxic fumes. CFCs are believed to cause
long-term damage to the earth's stratospheric ozone layer and may contribute to
global warming when released into the atmosphere. The 1990 Amendments to the
Clean Air Act prohibit the venting of CFCs and since July 1, 1992 have required
the recovery of CFC refrigerants during the service, repair and disposal of
appliances. See "Government Regulation" below.
In addition to these solid waste management and environmental issues,
utility companies, motivated by economic and environmental factors to control
energy consumption, sponsor various programs to encourage and assist residential
consumers to conserve energy, including programs for turning in surplus,
energy-inefficient appliances. Many residential consumers own and operate room
air conditioners, freezers or more than one refrigerator, contributing
significantly to residential energy use and peak energy demand. In addition,
many of the refrigerators manufactured in the 1960s and early 1970s consume up
to 1,750 kilowatt-hours of electricity each year. The 1987 National Appliance
Energy Conservation Act requires that new refrigerators use less than half of
the energy as refrigerators built as recently as ten years ago. As more
efficient appliances become
3
available, utility companies have begun to encourage the use of newer models and
the disposal of older, less efficient models.
The Federal Energy Policy Act of 1992 gives individual states the
option of deregulating their electric utility industry. The potential of
deregulation has caused uncertainty about the future and form of energy
conservation programs sponsored by electric utilities. The Company believes,
however, that energy conservation and efficiency programs will remain a
long-term component of the nation's electric utility industry. See "Government
Regulation" below.
COMPANY BACKGROUND
The Company began business in 1976 as a retailer of reconditioned
appliances. Initially, the Company contracted with national and regional
retailers of appliances such as Sears, Roebuck & Company, Inc. ("Sears") and
Montgomery Ward & Co. ("Montgomery Ward") to collect major appliances in
Minneapolis/Saint Paul and two other metropolitan areas. As part of their new
appliance sales efforts, these retailers arrange for the removal of old
appliances from consumers' residences. The Company collects old appliances on
behalf of its customers, reconditions and sells suitable used appliances through
its own retail stores and sells the remaining appliances to scrap metal
processors.
In the late 1980s, in response to stricter environmental protection
laws, the Company developed and marketed programs to process and dispose of
appliances in an environmentally sound manner. These programs are offered to new
appliance manufacturers and retailers, waste management companies, property
management companies and the general public. See "Customers and Source of
Supply" below.
In 1989, the Company expanded its appliance recycling concept to the
electric utility industry when it established an appliance processing center in
Milwaukee, Wisconsin, pursuant to a contract with a utility company. From 1989
to 1994, the Company focused its resources on the expansion of its business with
electric utility companies. During this time period the Company opened nine
centers throughout the U.S. and Canada, primarily serving seventeen electric
utility customers. The Company's electric utility business has been negatively
impacted by the potential of electric utility industry deregulation. The
potential of deregulation has caused electric utilities to decrease their
sponsorship of energy conservation programs such as the one the Company offers.
Currently, the Company has only one major electric utility customer.
During fiscal year 2000, that customer, Southern California Edison Company
("Edison"), accounted for approximately 29.9% or $6.4 million of the Company's
total revenues. In June 2000, the Company signed a two-year contract with Edison
to continue its refrigerator recycling program through December 30, 2001. The
two-year contract does not provide for a minimum number of refrigerators to be
recycled in either 2000 or 2001. In 2000, the Company recycled approximately
36,000 units under this contract and expects recycling volumes for 2001 at
approximately the same level as 2000. The timing and amount of revenues will be
dependent on advertising by Edison.
In October 2000, the Company signed a contract with Edison to implement
a recycling program ("Summer Initiative") in the service areas of Pacific Gas &
Electric (the San Francisco Bay area) and San Diego Gas & Electric. This
contract is in accordance with a ruling issued by the California Public
Utilities Commission ("CPUC"). Under the Summer Initiative, the Company expects
to recycle approximately 30,000 to 40,000 units through the end of 2001 in
addition to the approximately 36,000 units from the original Edison contract. As
with its initial Edison program, there are no guaranteed minimum number of units
that must be recycled under the Summer Initiative. The Company began the Summer
Initiative in September of 2000 and was fully operational in the first quarter
of 2001. For the contract period, the CPUC has budgeted $8,500,000, which
includes a $75 per unit incentive payment to residential participants. The
Company is responsible for advertising for the Summer Initiative.
4
The recent energy crisis in California has not had a material adverse
effect on the Company's operations. However, there can be no guarantee that it
will not have an adverse effect in the future if Edison is unable to perform
under the terms of its contracts with the Company.
In response to the decrease in demand for services from electric
utilities, the Company has increased its marketing of services to appliance
manufacturers and retailers, waste management companies and property management
companies. The Company also has increased its focus on the sale of appliances.
In 1995, under the name Encore(R) Recycled Appliances, the Company began
operating a chain of Company-owned retail stores. In 1998, the Company began
using the name ApplianceSmart(R) for its retail stores. The retail stores offer
manufacturers' distressed appliances and reconditioned appliances to
value-conscious individuals and property managers.
A developing market for the Company is in providing fully integrated
reverse logistics services--the handling of product that does not fit into a
company's normal distribution channels--for appliance manufacturers and
retailers. Manufacturers traditionally disposed of these "special buy"
appliances, including manufacturer closeouts, factory over-runs, floor samples,
returned or exchanged items, and scratch and dent appliances, through their
small dealer network. Large retailers have not wanted to handle these types of
appliances because the merchandise is often out of carton, requiring special
handling and pricing. In addition, this product often requires some repair; a
function major retailers are unwilling or unable to perform. As small dealers
are struggling to compete with large appliance chains (the top 10 retailers
control 80 percent of the appliance sales market), manufacturers are seeing
their traditional channel for these distressed appliances shrink. It is
anticipated that small appliance retailers will also be negatively affected by
manufacturers' direct sale of appliances to consumers via the Internet.
In 1997, the Company entered into pilot program agreements with
Whirlpool Corporation, the nation's largest manufacturer of major household
appliances, to develop a program for handling Whirlpool's returned appliances
and new appliances that cannot be handled through the manufacturer's normal
distribution channels. Through a subsequent 1998 contract with Whirlpool, the
Company purchases these appliances from Whirlpool's distribution centers serving
the Midwest and certain western states. This merchandise, which includes
manufacturer closeouts, factory over-runs, floor samples, returned or exchanged
items, and scratch and dent appliances, is sold through the Company's network of
ApplianceSmart retail stores. ApplianceSmart is an authorized factory outlet for
Whirlpool, and specializes in the Whirlpool, KitchenAid and Roper brands. With
an increased supply of product, the Company began to focus on opening larger
factory outlet facilities to offer consumers a wider selection of appliances and
began to close its smaller stores. The Company has decided not to expand the
used appliance business.
In the latter part of 1998, the Company scaled back its agreement with
Whirlpool to a level consistent with its financial resources and now buys
inventory mainly from Whirlpool's Ohio distribution center. The Whirlpool
agreement does not provide for any required or minimum number of units to be
offered for sale to the Company. However, subject to certain exceptions, the
Company has the ability but is not required to purchase from Whirlpool up to
$3,000,000 of appliances in any three-month period. The Whirlpool agreement may
be terminated by either party upon six-month's notice, or earlier for certain
items. In addition, the Company has agreed to indemnify Whirlpool for certain
claims, allegations or losses with respect to Whirlpool appliances sold by the
Company.
Although the Whirlpool agreement does not provide for any set number of
units to be sold to the Company, based on prior performance under the agreement,
the Company believes this contract will provide an adequate supply of
high-quality appliances for its retail outlets.
In late 1998, the Company decided to close its St. Louis, Missouri,
operations and close one store in the Minneapolis/Saint Paul market. In 1999,
the Company closed one store in the Minneapolis/Saint Paul market and one store
in the California market. In 2000, the Company closed a smaller store in the
Minneapolis/Saint Paul market and opened a 30,000 square foot store in the
Dayton, Ohio market. In January 2001, the Company opened a 24,000 square foot
store in the Minneapolis/Saint Paul market. The Company
5
opened another 42,000 square foot store in the Dayton, Ohio market in March
2001. In addition, the Company anticipates closing a smaller store and opening a
32,000 square foot store in the Columbus, Ohio market around the end of April
2001. The Company currently has three recycling centers, located in Columbus,
Ohio; Minneapolis, Minnesota; and Los Angeles, California. Also, the Company
currently has eight retail stores: three in Minneapolis/Saint Paul, one in Los
Angeles, two in Columbus and two in Dayton.
CUSTOMERS AND SOURCE OF SUPPLY
The Company offers its services to entities that, as part of their
operations, become responsible for disposing of large quantities of new,
distressed and unwanted appliances. These entities include new appliance
manufacturers and retailers, waste management businesses, vending machine
companies, property management companies and utility companies.
NEW APPLIANCE MANUFACTURERS AND RETAILERS. The Company began its
business by offering appliance recycling programs to Sears, Montgomery Ward and
other new appliance retailers to collect appliances from either the retailers'
facilities or from their customers. Recently the Company has focused its
marketing efforts on new appliance manufacturers, including Whirlpool
Corporation, a primary source of products sold in the Company's stores.
The Company believes its current sources for appliances are adequate to
supply its retail stores and allow the Company to grow its retail sales.
WASTE MANAGEMENT COMPANIES. The Company provides services to waste
management companies and the general public for the collection and recycling of
appliances for specified fees.
VENDING MACHINE COMPANIES. The Company provides services to vending
machine companies for the recycling of vending machines for specified fees.
PROPERTY MANAGEMENT COMPANIES. The Company provides comprehensive
appliance exchange and recycling services for property managers of apartment
complexes as well as local housing authorities.
UTILITY COMPANIES. The Company contracts with utility companies to
provide comprehensive appliance recycling services tailored to the needs of the
particular utility. The contracts historically have had terms of one to four
years, with provisions for renewal at the option of the utility company. Under
some contracts the utility retains the Company to manage all aspects of its
appliance recycling program, while under other contracts the Company provides
only specified services. Pricing for the Company's services is on a
per-appliance basis and depends upon several factors, including the total number
of appliances processed, the length of the contract term and the specific
services selected by the utility. Contracts with electric utility customers
require that the Company does not recondition for resale appliances received
from utility company energy conservation programs. Currently, the Company
expects to have two contracts with a major electric utility customer in 2001.
6
COMPANY OPERATIONS
The Company provides an integrated range of reverse logistics, energy
efficiency and appliance recycling services. Appliances are acquired from a wide
range of sources, including appliance manufacturers and retailers, utility
companies, waste management businesses, vending machine companies, property
managers, local governments and the general public.
Appliances deemed suitable for sale are repaired or reconditioned, if
necessary, before being tested and distributed to the Company's ApplianceSmart
retail outlets. Every appliance is under warranty and carries a 100 percent
money-back guarantee. The Company also offers consumers extended warranties,
delivery, factory-trained technician service and recycling of old appliances.
Appliances that do not meet quality standards for the Company's retail
operations and appliances collected through utility customers' energy
conservation programs are processed and recycled in an environmentally sound
manner. Appliances are inspected and categorized according to the types of
hazardous materials they may contain, and processed according to all applicable
federal, state and local regulations by company-trained technicians. When
processing at the Company's recycling center is complete and the appliances are
free of all environmentally hazardous substances, the appliances are delivered
to a local metal processing facility for shredding. The shredded materials are
then sold to steel mini-mills or other metal recovery facilities for reuse.
Management believes that the uncertainties in the electric utility
industry regarding deregulation will persist at least through 2001. The reaction
to deregulation among states and utilities has been varied. The Company
believes, however, that energy conservation and efficiency programs will remain
a long-term component of the nation's electric utility industry.
The recent energy crisis in California has not had a material adverse
effect on the Company's operation. However, there can be no guarantee that it
will not have an adverse effect in the future if Edison is unable to perform
under the terms of its contracts with the Company.
In 2000, the Company focused on a carefully managed growth plan of
opening showroom outlet stores, located in heavily trafficked, conveniently
located retail malls. The Company believes that the growth of its retail
business in the near future will likely occur primarily through the expansion of
revenues from the Company's current and proposed retail stores.
PRINCIPAL PRODUCT AND SERVICES
The Company generates revenues from two sources: retailing and
recycling. The table below reflects the percentage of total revenues from each
source. See also "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
2000 1999 1998
---- ---- ----
Retail revenues 57.6% 51.1% 57.6%
Recycling revenues 42.4% 48.9% 42.4%
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
Although the Company has two main sources of revenues, management
believes that the Company has one operating segment. That is, even though
certain separate financial information by retail store or retail store and
recycling center is available to management, the Company is managed as a single
unit. Specifically, the Company does not measure profit or loss or maintain
asset information separately for its revenue sources.
7
SALES AND MARKETING
The Company uses various means to promote awareness of its products and
services and believes it is recognized as a leader in the retailing of
appliances from reverse logistics services and the recycling industry.
ApplianceSmart's outlet store concept includes establishing large
factory showrooms in convenient metropolitan locations to offer consumers a
selection of hundreds of appliances. In keeping with ApplianceSmart's branding,
both the exterior and interior of ApplianceSmart's stores display Whirlpool
signage along with custom-designed ApplianceSmart materials. In every market,
the Company actively promotes its stores through various forms of print
advertising, including daily classified ads in major newspapers, telephone
yellow pages ads and direct mail. In addition, the Company uses radio and
television advertisements in some markets, along with other types of promotions.
Through the Company's website at www.ApplianceSmart.com, consumers can also
access appliance-specific and general Company information.
SEASONALITY
The Company experiences seasonal fluctuations in operating results,
with revenues generally higher during the second and third calendar quarters
than in the first and fourth calendar quarters. The lower levels in the first
and fourth quarters reflect consumer purchasing cycles, which result in lower
sales of major household appliances during such quarters and corresponding
reductions in the demand for appliance recycling services. Furthermore, utility
companies that sponsor appliance turn-in programs generally reduce their
promotional efforts for such programs during the first and fourth calendar
quarters. The Company expects that it will continue to experience lower revenues
in the first and fourth quarters of future years as compared to the second and
third quarters of such years.
COMPETITION
Competition for the Company's retail stores comes from new appliance
manufacturers and retailers and other reconditioned and used appliance
retailers. Each retail location will compete not only with local and national
chains of new appliance retailers, many of whom have been in business longer
than the Company and may have significantly greater assets than the Company, but
will also compete with numerous independently owned retailers of new and
reconditioned appliances.
Many factors, including existing and proposed governmental regulation,
may affect competition in the waste management and environmental services
industry. The Company generally competes with two or three other companies which
are based in the geographic area to be served under the contract and which
generally offer only some of the services provided by the Company.
The Company expects its primary competition for contracts with existing
or new customers to come from entrepreneurs entering the appliance recycling
business, energy management consultants, current recycling companies, major
waste hauling companies and scrap metal processors. In addition, customers such
as utility companies and local governments may operate appliance recycling
programs internally rather than contracting with the Company or other third
parties. There can be no assurance that the Company will be able to compete
profitably in any of its chosen markets.
8
GOVERNMENT REGULATION
The business of recycling major appliances is subject to certain
governmental laws and regulations. These laws and regulations include landfill
disposal restrictions, hazardous waste management requirements and air quality
standards, as well as special permit and license conditions for the recycling of
appliances. In some instances, there are bonding, insurance and other conditions
for bidding on appliance recycling contracts.
The Company's appliance recycling centers are subject to various
federal, state and local laws, regulations and licensing requirements relating
to the collection, processing and recycling of household appliances.
Requirements for registrations, permits and licenses vary among the Company's
market areas. The Company's centers are registered with the EPA as hazardous
waste generators and are licensed, where required, by appropriate state and
local authorities. The Company has agreements with approved and licensed
hazardous waste companies for transportation and disposal of PCBs from its
centers.
The 1990 Amendments to the Clean Air Act provide for the phaseout of
the production of CFCs over a period of years. Effective July 1, 1992, the act
prohibited the venting of CFCs in the course of maintaining, servicing,
repairing or disposing of an appliance. The act also requires the recovery of
CFC refrigerants from appliances prior to their disposal or delivery for
recycling. In 1995, the venting of CFC substitute refrigerants was also
prohibited.
In 1992, Congress adopted the Energy Policy Act of 1992 to encourage
energy efficiency. Requirements under this act establish, among other things,
mandatory energy performance standards that affect the manufacture and sale of
major household appliances. Another component of this act allows for
deregulation of the nation's energy providers, including the electric utility
industry. The ultimate impact of deregulation on the electric utility industry
is yet unknown; therefore, there can be no assurance that the Company will be
able to continue certain of its current operations in a deregulated environment.
Company management believes that further government regulation of the
appliance recycling industry could have a positive effect on the Company's
business; however, there can be no assurance what course future regulation may
have. Under some circumstances, further regulation could materially increase the
costs of the Company's operations and have an adverse effect on the Company's
business. In addition, as is the case with all companies handling hazardous
materials, under some circumstances the Company may be subject to contingent
liability.
EMPLOYEES
At March 1, 2001, the Company had 179 full-time employees,
approximately 59% of whom were involved in the collection, transportation and
processing of appliances at the Company's centers and approximately 41% of whom
were in sales, administration and management. The Company has not experienced
any work stoppages and believes its employee relations are good.
9
ITEM 2. PROPERTIES
The Company's executive offices are located in Minneapolis, Minnesota,
in a Company-owned facility that includes approximately 11 acres of land. The
building contains approximately 122,000 square feet, including 27,000 square
feet of office space, 24,000 square feet of retail space and 71,000 square feet
of operations and processing space. The Southern California center building,
which also is owned by the Company, is located in Compton, California, and
consists of 46,000 square feet: 6,000 square feet of office space and 40,000
square feet of warehouse space. All properties and equipment owned by the
Company currently secure outstanding loans of the Company.
The Company generally leases the other facilities it operates. The
Company usually attempts to negotiate lease terms for a recycling center that
correspond to the term of the principal contract or contracts in connection with
which the center is to be operated. The Company's recycling centers typically
range in size from 25,000 to 40,000 square feet. The Company usually attempts to
negotiate lease terms of two to five years for its retail stores, which
typically have been 25,000 to 35,000 square feet.
The Company believes that the facilities and equipment at each of its
centers are adequate to meet its anticipated needs for the near term and that
alternate facilities will readily be available to the Company to meet its future
needs.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are involved in various legal
proceedings arising in the normal course of business, none of which is expected
to result in any material loss to the Company or any of its subsidiaries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to a vote of security holders
during the last quarter of the fiscal year covered by this report.
10
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
MARKET FOR COMMON STOCK
The Common Stock trades under the symbol "ARCI." The Company's Common
Stock began trading on the OTC Bulletin Board on September 8, 1998. Prior to
that time, the Common Stock traded as follows: on the Nasdaq SmallCap Market
from February 26, 1997 to September 7, 1998; on the Nasdaq National Market from
January 8, 1993 to February 25, 1997; on the Nasdaq SmallCap Market from January
7, 1991 to January 7, 1993; and on the local over-the-counter market prior
thereto. The following table sets forth, for the periods indicated, the high and
low closing bid quotations for the Common Stock, as reported by the OTC Bulletin
Board.
High Low
---- ---
1999
First Quarter................... $ 1 $ 5/8
Second Quarter.................. 13/16 1/2
Third Quarter................... 7/8 1/2
Fourth Quarter.................. 1 1/2 11/16
2000
First Quarter................... $ 2 1/2 $ 19/25
Second Quarter.................. 3 1/8 19/16
Third Quarter................... 3 1 5/8
Fourth Quarter.................. 2 1/2 1 3/16
On March 9, 2001, the last reported sale price of the Common Stock on
the OTC Bulletin Board was $1.50 per share. As of March 9, 2001, there were
approximately 1,009 beneficial holders of the Company's Common Stock.
The Company's line of credit limits the Company's ability to pay
dividends.
During 1998 and 1999, the Company privately placed 1,150,000
unregistered shares and 1,031,750 warrants to purchase shares. In 2000, the
Company registered 1,130,000 shares of such shares for resale by the holders.
In May 1998, the Company sold in a private placement 100,000 shares of
Common Stock at a price of $2.00 per share. The sale was made to an
institutional investor and the proceeds used for additional working capital.
In July 1998, the Company issued a promissory note in the principal
amount of $275,000, plus an aggregate of 68,750 warrants to purchase the
Company's Common Stock at $2.25 per share, subject to adjustment. The notes were
repaid in September 1998 from new financing.
In September 1998, the Company entered into a loan agreement for gross
proceeds of $3.5 million. The loan also provides for non-voting attendance at
board meetings and the issuance to the lender of a warrant to purchase 700,000
shares of Common Stock at $2.50 per share, which price was adjustable under
certain circumstances. The current exercise price of this warrant is $0.60 per
share. If exercised in full, this warrant would represent approximately 27% of
the Company's Common Stock after such exercise. The Company also issued to an
investment banker associated with this transaction a warrant to purchase 125,000
shares of Common
11
Stock at $2.50 per share, subject to adjustment. The portion of the gross loan
proceeds ascribed to the aforementioned warrants in conjunction with debt was
$307,000.
In February 1999, the Company sold in a private placement 1,030,000
shares of Common Stock at a price of $0.50 per share. The sale represented
approximately 45% of the Common Stock outstanding after such sale. The Company
paid $31,500 of the proceeds and issued warrants to purchase 83,000 shares of
Common Stock at $0.50 per share, subject to adjustment, to an investment banker
as a placement fee. The remaining proceeds were used to repay certain
indebtedness, to purchase inventory and for other general corporate purposes.
In March 1999, the Company issued to a board member as payment for
certain consulting services, 5,000 warrants to purchase the Company's Common
Stock at $0.625 per share, the market value of the Company's stock at the date
of grant. The warrants are currently exercisable and expire March 1, 2009.
In April 1999, the Company issued to a vendor 50,000 warrants to
purchase the Company's Common Stock at $0.625 per share. The contract provides
that 37,500 of these warrants are currently exercisable and the balance is
exercisable based on a certain target. The warrants expire March 31, 2004.
In August 1999, the Company settled a lawsuit with a former employee.
The settlement included a cash payment of $105,000 and the issuance of 20,000
shares of the Company's common stock valued at $12,500.
12
ITEM 6. SELECTED FINANCIAL DATA
The selected financial information set forth below should be read in
conjunction with "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Item 8. Financial Statements and
Supplementary Data."
Fiscal Years Ended 2000 1999 1998 1997 1996
- -------------------------------------------------------------------------------------------------
(In thousands, except
per share data)
STATEMENTS OF OPERATIONS
Total revenues $ 21,479 $ 15,582 $ 13,612 $ 11,979 $ 14,030
- -------------------------------------------------------------------------------------------------
Gross profit $ 8,921 $ 6,666 $ 3,981 $ 4,990 $ 2,744
- -------------------------------------------------------------------------------------------------
Operating income (loss) $ 1,963 $ 1,139 $ (2,744) $ (489) $ (6,899)
- -------------------------------------------------------------------------------------------------
Net income (loss) $ 927 $ 505 $ (3,056) $ (748) $ (7,269)
- -------------------------------------------------------------------------------------------------
Basic earnings (loss)
per common share $ 0.41 $ 0.24 $ (2.55) $ (0.66) $ (6.53)
- -------------------------------------------------------------------------------------------------
Diluted earnings (loss)
per common share $ 0.32 $ 0.22 $ (2.55) $ (0.66) $ (6.53)
- -------------------------------------------------------------------------------------------------
Basic weighted average
number of common
shares outstanding 2,287 2,142 1,200 1,137 1,114
- -------------------------------------------------------------------------------------------------
Diluted weighted average
number of common
shares outstanding 2,889 2,274 1,200 1,137 1,114
- -------------------------------------------------------------------------------------------------
BALANCE SHEETS
Working capital (deficit) $ 1,183 $ 545 $ (471) $ (1,959) $ (1,671)
- -------------------------------------------------------------------------------------------------
Total assets $ 12,651 $ 9,517 $ 8,843 $ 8,569 $ 9,992
- -------------------------------------------------------------------------------------------------
Long-term liabilities $ 4,431 $ 4,831 $ 4,965 $ 1,633 $ 1,711
- -------------------------------------------------------------------------------------------------
Shareholders' equity $ 2,751 $ 1,809 $ 816 $ 3,365 $ 4,113
- -------------------------------------------------------------------------------------------------
QUARTERLY FINANCIAL DATA
The following table sets forth certain unaudited quarterly financial
data for the eight quarters ended December 30, 2000. In our opinion, the
unaudited information set forth below has been prepared on the same basis as the
audited information and includes all adjustments necessary to present fairly the
information set forth herein. The operating results for any quarter are not
indicative of results for any future period. All data is in thousands except per
common share data.
Fiscal 2000
- -------------------------------------------------------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
- -------------------------------------------------------------------------------------------------
Total revenues $ 4,174 $ 5,819 $ 6,188 $ 5,298
- -------------------------------------------------------------------------------------------------
Net income $ 290 $ 341 $ 257 $ 39
- -------------------------------------------------------------------------------------------------
Basic income per
common share $ 0.13 $ 0.15 $ 0.11 $ 0.02
- -------------------------------------------------------------------------------------------------
Diluted income per
common share $ 0.10 $ 0.12 $ 0.09 $ 0.01
- -------------------------------------------------------------------------------------------------
Basic weighted average number of
common shares outstanding 2,287 2,287 2,287 2,287
- -------------------------------------------------------------------------------------------------
Diluted weighted average number of
common shares outstanding 2,812 2,920 2,948 2,889
- -------------------------------------------------------------------------------------------------
13
Fiscal 1999
- -------------------------------------------------------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
- -------------------------------------------------------------------------------------------------
Total revenues $ 2,817 $ 4,053 $ 4,689 $ 4,023
- -------------------------------------------------------------------------------------------------
Net income(loss) $ (399) $ 251 $ 532 $ 121
- -------------------------------------------------------------------------------------------------
Basic income (loss) per
common share $ (0.23) $ 0.11 $ 0.23 $ 0.05
- -------------------------------------------------------------------------------------------------
Diluted income (loss) per
common share $ (0.23) $ 0.11 $ 0.22 $ 0.04
- -------------------------------------------------------------------------------------------------
Basic weighted average number of
common shares outstanding 1,769 2,267 2,271 2,287
- -------------------------------------------------------------------------------------------------
Diluted weighted average number of
common shares outstanding 1,769 2,267 2,371 2,681
- -------------------------------------------------------------------------------------------------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE FISCAL YEARS 2000, 1999 AND 1998
OVERVIEW
The Company's 2000 fiscal year (2000) ended December 30, 2000, its 1999
fiscal year (1999) ended January 1, 2000 and its 1998 fiscal year (1998) ended
January 2, 1999.
The Company generates revenues from two sources: retail and recycling
activities. Retail revenues are sales of appliances, warranty and service
revenue and delivery fees. Recycling revenues are fees charged for the disposal
of appliances and sales of scrap metal and reclaimed chlorofluorocarbons
("CFCs") generated from processed appliances. The Company experiences seasonal
fluctuations in operating results, with revenues generally higher during the
second and third calendar quarters than in the first and fourth quarters. The
lower levels in the first and fourth quarters reflect consumer purchasing
cycles, which result in lower demand for appliances and recycling services.
In 2000, the Company focused on a carefully managed growth plan of
opening large showroom outlet stores, located in heavily trafficked,
conveniently located retail malls. During 2000, the Company closed a smaller
retail store in the Minneapolis/Saint Paul market, and in January 2001, opened
an ApplianceSmart outlet in that market. In 2000, same-store sales for five
stores open the full years of 2000 and 1999 increased by 53%. Retail revenues
accounted for 57.6% of total revenues in 2000.
REVENUES
The Company's total revenues for 2000 were $21,479,000 compared to
$15,582,000 in 1999.
Retail revenues increased to $12,379,000 in 2000 from $7,956,000 in
1999, an increase of 55.6%. Same-store sales for 2000 (a sales comparison of
five stores open the full year in both 2000 and 1999) increased 53%. The
increase in retail revenues was primarily due to an increase in scratch and dent
appliance sales offset by a decrease in reconditioned appliance sales. The
increase in scratch and dent appliance sales was primarily due to increased
advertising and a 30,000 square foot store being opened, offset by a smaller
store being closed in the second quarter of 2000. The Company purchases a
majority of the scratch and dent appliances sold from Whirlpool Corporation. The
Whirlpool agreement does not provide for any required or minimum number of units
to be sold to the Company. The Company believes this agreement will provide an
adequate supply for its retail stores.
The Company operated six retail stores at both the end of the current
fiscal year and the previous fiscal year. However, during the second quarter of
the current fiscal year, the Company closed a smaller store in the
Minneapolis/Saint Paul market and opened a 30,000 square foot store in the
Dayton, Ohio market. In January 2001, the Company opened a 24,000 square foot
store in the Minneapolis/Saint Paul market. The Company opened another 42,000
square foot store in the Dayton, Ohio market in March 2001.
14
In addition, the Company anticipates closing a smaller store and opening a
32,000 square foot store in the Columbus, Ohio market around the end of April
2001.
Recycling revenues increased to $9,100,000 in 2000 from $7,626,000 in
1999. The increase was primarily due to an increase in refrigerator recycling
volumes related to the contract with Southern California Edison Company
("Edison") and higher sales of reclaimed chlorofluorocarbons offset slightly by
lower scrap revenue due to a decrease in scrap prices. Edison accounted for
approximately 30% of the Company's total revenues for 2000 and 33% for 1999. In
June 2000, the Company signed a two-year contract with Edison to continue its
refrigerator recycling program through December 30, 2001. The two-year contract
does not provide for a minimum number of refrigerators to be recycled in either
2000 or 2001. The Company recycled approximately 36,000 units in 2000 and
expects recycling volumes for 2001 at approximately the same level as 2000. The
timing and amount of revenues will be dependent on advertising by Edison.
In October 2000, the Company signed a contract with Edison to implement
a recycling program ("Summer Initiative") in the service areas of Pacific Gas &
Electric (the San Francisco Bay area) and San Diego Gas & Electric. This
contract is in accordance with a ruling issued by the California Public
Utilities Commission ("CPUC"). Under the Summer Initiative, the Company expects
to recycle approximately 30,000 to 40,000 units through the end of 2001 in
addition to the approximately 36,000 units from the original Edison contract. As
with its initial Edison program, there are no guaranteed minimum number of units
that must be recycled under the Summer Initiative. The Company began the Summer
Initiative in September of 2000 and was fully operational in the first quarter
of 2001. For the contract period, the CPUC has budgeted $8,500,000, which
includes a $75 per unit incentive payment to residential participants. The
Company is responsible for advertising for the Summer Initiative.
The recent energy crisis in California has not had a material adverse
effect on the Company's operations. However, there can be no guarantee that it
will not have an adverse effect in the future if Edison is unable to perform
under the terms of its contracts with the Company.
The Company's total revenues for 1999 were $15,582,000 compared to
$13,612,000 in 1998.
Retail revenues increased to $7,956,000 in 1999 from $7,835,000 in
1998. The increase was primarily due to an increase in same-store sales offset
by operating fewer stores in 1999 compared to 1998. In 1998, the Company entered
into a contract with Whirlpool Corporation to acquire its distressed appliances
(including discontinued models, factory over-runs, floor samples and scratch and
dent appliances) from distribution centers serving the Midwest and certain
western states. Same-store retail sales for 1999 increased 57% (a sales
comparison of six stores open for full years in both 1999 and 1998). As of
January 1, 2000, the Company operated six retail stores.
Recycling revenues increased to $7,626,000 in 1999 from $5,777,000 in
1998. The increase was primarily due to an increase in refrigerator recycling
volumes related to the contract with Edison offset slightly by lower sales of
reclaimed chlorofluorocarbons and lower scrap revenue due to a decrease in scrap
prices. Edison accounted for approximately 33% of the Company's total revenues
for 1999 and 29% for 1998.
GROSS PROFIT
The Company's overall gross profit decreased slightly to 41.5% in 2000
from 42.8% in 1999. The decrease was primarily due to higher sales of scratch
and dent appliances that have a lower margin than reconditioned appliances,
offset by higher recycling revenues from the initial Edison contract without a
corresponding increase in expenses. Gross profit as a percentage of total
revenues for future periods can be affected favorably or unfavorably by numerous
factors included the mix of retail products sold, the volume of appliances
recycled from the Edison contracts and the price and volume of byproduct
revenues. The
15
Company expects gross profit percentages to decrease slightly as retail revenues
continue to become a higher percentage of total revenues.
The Company's overall gross profit increased to 42.8% in 1999 from
29.2% in 1998. The increase was primarily due to higher recycling revenues from
the Edison contract without a corresponding increase in expenses, improved
purchase price and mix of inventory for retail sales and discontinuing
unprofitable programs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were 32.4% of total
revenues in 2000 compared to 35.5% in 1999. Selling, general and administrative
expenses increased to $6,958,000 in 2000 from $5,527,000 in 1999, a 25.9%
increase. Selling expenses increased to $2,858,000 in 2000 from $1,900,000 in
1999. The increase was primarily due to opening a new 30,000 square foot retail
store in the second quarter of 2000 and a corresponding increase in advertising
and commissions. General and administrative expenses increased to $4,100,000 in
2000 from $3,627,000 in 1999. The increase was primarily due to an increase in
personnel costs and non-capitalized consultant fees for the Company's computer
systems.
Selling, general and administrative expenses were 35.5% of total
revenues in 1999 compared to 45.2% in 1998. Selling, general and administrative
expenses decreased to $5,527,000 in 1999 from $6,152,000 in 1998, a 10.2%
decrease. Selling expenses decreased to $1,900,000 in 1999 from $2,028,000 in
1998. The decrease was primarily due to operating fewer stores in 1999 compared
to 1998 offset by an increase in advertising expense and sales commissions.
General and administrative expenses decreased to $3,627,000 in 1999 from
$4,124,000 in 1998. The decrease was primarily due to a decrease in personnel
costs as a result of an aggressive overhead reduction program in the first
quarter of 1999 offset by an increase in consultant fees for the Company's
computer systems.
In June 1998, the Company took a one-time charge of $518,000 related to
a loss on impaired equipment associated with the Company's decision to curtail
the appliance shredding operation of its recycling business located primarily at
the Company's Minneapolis center.
INTEREST EXPENSE
Interest expense increased to $841,000 in 2000 from $780,000 in 1999.
The increase was primarily due to a higher average borrowed amount in 2000
compared to 1999 offset by a decrease in the effective interest rate on the line
of credit.
Interest expense increased to $780,000 in 1999 from $601,000 in 1998.
The increase was primarily due to a higher average borrowed amount outstanding
in 1999 compared to 1998.
INCOME TAXES AND NET OPERATING LOSSES
The Company recorded a provision for income taxes of $580,000 for 2000.
The Company has net operating loss carryovers of approximately $8,514,000 at
December 30, 2000, which may be available to reduce taxable income and in turn
income taxes payable in future years. However, future utilization of these loss
and credit carryforwards is subject to certain limitations under provisions of
the Internal Revenue Code including limitations subject to Section 382, which
relates to a 50 percent change in control over a three-year period, and are
further dependent upon the Company maintaining profitable operations. The
Company believes that the issuance of Common Stock during 1999 resulted in an
"ownership change" under Section 382. Accordingly, the Company's ability to use
net operating loss carryforwards generated prior to February 1999 may be limited
to approximately $46,000 per year.
As of its 2000 and 1999 year-ends, the Company had recorded cumulative
valuation allowances of $4,022,000 and $4,085,000, respectively, against its net
deferred tax assets due to the uncertainty of their
16
realization. The realization of deferred tax assets is dependent upon sufficient
future taxable income during the periods when deductible temporary differences
and carryforwards are expected to be available to reduce taxable income.
LIQUIDITY AND CAPITAL RESOURCES
At December 30, 2000, the Company had working capital of $1,183,000
compared to $545,000 at January 1, 2000. Cash and cash equivalents increased to
$302,000 at December 30, 2000 from $220,000 at January 1, 2000. Net cash used in
operating activities was $1,190,000 in 2000 compared to net cash provided by
operating activities of $201,000 in 1999. The cash used in operating activities
was primarily due to increases in inventories and receivables offset by net
income and an increase in payables and accrued expenses. During 2000,
inventories increased by $2,647,000 principally due to more and larger stores.
Net cash provided by investing activities was $58,000 in 2000 compared
to net cash used in investing activities of $164,000 in 1999. The increase in
net cash provided by investing activities in 2000 was due to proceeds from the
disposal of property and equipment net of purchases of equipment.
Net cash provided by financing activities was $1,214,000 in 2000
compared to $169,000 in 1999. The increase in cash provided by financing
activities was primarily due to increased borrowings from the line of credit in
2000 net of payments on long-term liabilities.
The Company's capital expenditures were approximately $609,000 in 2000
and $252,000 in 1999. The 2000 capital expenditures were related to the
continued upgrade of computer systems and communications equipment. The 1999
capital expenditures were primarily related to building improvements and the
purchase of computer equipment. The Company did not have any material purchase
commitments for assets as of December 30, 2000.
As of December 30, 2000, the Company had a $5,000,000 line of credit
with a lender. The interest rate as of December 30, 2000 was 11.25%. The amount
of borrowings available under the line of credit is based on a formula using
receivables and inventories. The line of credit has a stated maturity date of
August 30, 2001 and provides that the lender may demand payment in full of the
entire outstanding balance of the loan at any time. The line of credit is
secured by substantially all the Company's assets and requires minimum monthly
interest payments of $14,000 regardless of the outstanding principal balance.
The lender also has an inventory repurchase agreement with Whirlpool Corporation
that secures the line of credit. The line also requires that the Company meet
certain financial covenants, provides payment penalties for noncompliance,
limits the amount of other debt the Company can incur, limits the amount of
spending on fixed assets and limits payments of dividends. The Company's unused
borrowing capacity was $331,000 at December 30, 2000 and $802,000 at March 1,
2001.
During 2000, the Company recognized a gain of $275,000 from the sale of
the ApplianceSmart outlet property in Saint Paul, Minnesota. The Company is
still operating this outlet under an operating lease until September 30, 2001.
Therefore, at December 30, 2000, the Company had an unrecognized gain of
$60,000, which will be recognized as income on a straight-line basis over the
remaining term of the lease.
In September 1998, the Company entered into a loan agreement with a
lender resulting in gross proceeds of $3.5 million. The maturity date for the
loan is September 30, 2005 and the annual interest rate is 13%. The loan is
secured by all of the Company's personal property and all of its real estate,
and provides for a non-voting attendance at board meetings. The loan provided
for monthly interest payments of $37,917 to September 2000. Beginning in
September 2000, monthly principal and interest payments of $52,259 began.
The recent energy crisis in California has not had a material adverse
effect on the Company's operations. However, there can be no guarantee that it
will not have an adverse effect in the future if Edison is unable to perform
under the terms of its contracts with the Company.
17
The Company believes, based on the anticipated revenues from the Edison
contract and the Summer Initiative contract, the anticipated sales per retail
store and anticipated gross profit, that its cash balance, anticipated funds
generated from operations and its current line of credit, if renewed in August
2001, will be sufficient to finance its operations and capital expenditures
through December 2001. The Company's total capital requirements for 2001 will
depend upon, among other things as discussed herein, the recycling volumes
generated from the Edison program and Summer Initiative program in 2001 and the
number and size of retail stores operating during the fiscal year. Currently,
the Company has three centers and eight stores in operation. If revenues are
lower than anticipated or expenses are higher than anticipated or the line of
credit cannot be maintained after August 2001, the Company may require
additional capital to finance operations. Sources of additional financing, if
needed in the future, may include further debt financing or the sale of equity
(common or preferred stock) or other securities. There can be no assurance that
such additional sources of financing will be available on terms satisfactory to
the Company or permitted by the Company's current lender.
FORWARD-LOOKING STATEMENTS
Statements contained in this annual report regarding the Company's
future operations, performance and results, and anticipated liquidity discussed
herein are forward-looking and therefore are subject to certain risks and
uncertainties, including those discussed herein. Any forward-looking information
regarding the operations of the Company will be affected primarily by the
Company's continued ability to purchase product from Whirlpool at acceptable
prices and the ability and timing of Edison to deliver units under both its
contracts with the Company. In addition, any forward-looking information will
also be affected by the ability of individual retail stores to meet planned
revenue levels, the rate of sustainable growth in the number of retail stores,
the speed at which individual retail stores reach profitability, costs and
expenses being realized at higher than expected levels, the Company's ability to
secure an adequate supply of used appliances for resale and the continued
availability of the Company's current line of credit.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
MARKET RISK AND IMPACT OF INFLATION
The Company does not believe there is any significant risk related to
interest rate fluctuations on its long-term debt since it all has fixed rates.
However, there is interest rate risk on the line of credit since its interest is
based on the prime rate. Also, the Company believes that inflation has not had a
material impact on the results of operations for each of the fiscal years in the
three-year period ended December 30, 2000. However, there can be no assurances
that future inflation will not have an adverse impact on the Company's operating
results and financial conditions.
18
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Description Page
----------- ----
Independent Auditor's Report........................................20
Consolidated Balance Sheets as of December 30, 2000
and January 1, 2000............................................21
Consolidated Statements of Operations for the three
years ended December 30, 2000..................................22
Consolidated Statements of Shareholders' Equity for
the three years ended December 30, 2000........................23
Consolidated Statements of Cash Flows for the three
years ended December 30, 2000..................................24
Notes to Consolidated Financial Statements..........................25
19
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders
Appliance Recycling Centers of America, Inc.
Minneapolis, Minnesota
We have audited the accompanying consolidated balance sheets of Appliance
Recycling Centers of America, Inc. and subsidiaries as of December 30, 2000 and
January 1, 2000, and the related consolidated statements of operations,
shareholders' equity, and cash flows for each of the years in the three year
period ended December 30, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Appliance Recycling
Centers of America, Inc. and subsidiaries as of December 30, 2000 and January 1,
2000, and the results of their operations and their cash flows for each of the
years in the three year period ended December 30, 2000, in conformity with
generally accepted accounting principles.
McGLADREY & PULLEN, LLP
Minneapolis, Minnesota
February 16, 2001
20
APPLIANCE RECYCLING CENTERS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 30, January 1,
2000 2000
- ----------------------------------------------------------------------------------------
ASSETS (NOTE 3)
CURRENT ASSETS
Cash and cash equivalents $ 302,000 $ 220,000
Accounts receivable, net of allowance of
$20,000 and $25,000, respectively
(Note 9) 1,731,000 1,452,000
Inventories, net of reserves of $375,000
and $275,000, respectively 4,233,000 1,586,000
Deferred income taxes and other
current assets (Note 7) 386,000 164,000
------------ ------------
Total current assets 6,652,000 3,422,000
------------ ------------
PROPERTY AND EQUIPMENT, at cost (Notes 2 and 4)
Land 2,050,000 2,103,000
Buildings and improvements 3,550,000 4,028,000
Equipment 4,046,000 3,542,000
------------ ------------
9,646,000 9,673,000
Less accumulated depreciation 3,930,000 3,950,000
------------ ------------
Net property and equipment 5,716,000 5,723,000
------------ ------------
OTHER ASSETS 207,000 258,000
------------ ------------
GOODWILL, net of amortization of $114,000 and
$76,000, respectively 76,000 114,000
------------ ------------
Total assets $ 12,651,000 $ 9,517,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Line of credit (Note 3) $ 2,402,000 $ 888,000
Current maturities of long-term obligations 275,000 135,000
Accounts payable 1,279,000 1,037,000
Accrued expenses (Note 5) 936,000 742,000
Deferred gain on building sale 60,000 --
Income taxes payable 517,000 75,000
------------ ------------
Total current liabilities 5,469,000 2,877,000
LONG-TERM OBLIGATIONS, less current maturities (Note 4) 4,431,000 4,831,000
------------ ------------
Total liabilities 9,900,000 7,708,000
------------ ------------
COMMITMENTS (Note 6)
SHAREHOLDERS' EQUITY (Notes 3 and 8)
Common Stock, no par value; authorized 10,000,000
shares; issued and outstanding 2,287,000 shares 11,360,000 11,345,000
Accumulated deficit (8,609,000) (9,536,000)
------------ ------------
Total shareholders' equity 2,751,000 1,809,000
------------ ------------
Total liabilities and shareholders' equity $ 12,651,000 $ 9,517,000
============ ============
See Notes to Consolidated Financial Statements.
21
APPLIANCE RECYCLING CENTERS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the fiscal year ended
- -------------------------------------------------------------------------------------------------------
DECEMBER 30, January 1, January 2,
2000 2000 1999
----------------------------------------------
REVENUES (Note 9)
Retail $ 12,379,000 $ 7,956,000 $ 7,835,000
Recycling 9,100,000 7,626,000 5,777,000
------------ ------------ ------------
Total revenues 21,479,000 15,582,000 13,612,000
COST OF REVENUES (Note 9) 12,558,000 8,916,000 9,631,000
------------ ------------ ------------
Gross profit 8,921,000 6,666,000 3,981,000
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (Note 2) 6,958,000 5,527,000 6,152,000
LOSS ON IMPAIRED ASSETS (Note 2) -- -- 573,000
------------ ------------ ------------
Operating income (loss) 1,963,000 1,139,000 (2,744,000)
OTHER INCOME (EXPENSE)
Other income 385,000 146,000 320,000
Interest expense (841,000) (780,000) (601,000)
------------ ------------ ------------
Income (loss) before provision for
income taxes 1,507,000 505,000 (3,025,000)
PROVISION FOR INCOME TAXES (Note 7) 580,000 -- 31,000
------------ ------------ ------------
Net income (loss) $ 927,000 $ 505,000 $ (3,056,000)
============ ============ ============
BASIC EARNINGS (LOSS) PER COMMON SHARE $ 0.41 $ 0.24 $ (2.55)
============ ============ ============
DILUTED EARNINGS (LOSS) PER COMMON SHARE $ 0.32 $ 0.22 $ (2.55)
============ ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING:
Basic 2,287,000 2,142,000 1,200,000
============ ============ ============
Diluted 2,889,000 2,274,000 1,200,000
============ ============ ============
See Notes to Consolidated Financial Statements.
22
APPLIANCE RECYCLING CENTERS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common Stock
--------------------- Accumulated
Shares Amount Deficit Total
------ ------ ------- -----
BALANCE, JANUARY 3, 1998 1,137,000 $ 10,350,000 $ (6,985,000) $ 3,365,000
Issuance of Common Stock
(Note 8) 100,000 200,000 -- 200,000
Proceeds ascribed to warrants issued
in conjunction with long-term debt
(Note 8) -- 307,000 -- 307,000
Net loss -- -- (3,056,000) (3,056,000)
- -------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 2, 1999 1,237,000 10,857,000 (10,041,000) 816,000
Sales of Common Stock, net
of fees and expenses of $40,000
(Note 8) 1,030,000 475,000 -- 475,000
Issuance of Common Stock
in settlement (Note 8) 20,000 13,000 -- 13,000
Net income -- -- 505,000 505,000
- -------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 1, 2000 2,287,000 11,345,000 (9,536,000) 1,809,000
Warrants issued to vendor (Note 8) -- 15,000 -- 15,000
Net income -- -- 927,000 927,000
- -------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 30, 2000 2,287,000 $ 11,360,000 $ (8,609,000) $ 2,751,000
=======================================================================================================
See Notes to Consolidated Financial Statements.
23
APPLIANCE RECYCLING CENTERS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the fiscal year ended
- -------------------------------------------------------------------------------------------------------------
December 30, January 1, January 2,
2000 2000 1999
----------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 927,000 $ 505,000 $ (3,056,000)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 385,000 395,000 704,000
Gain on sale of property and equipment (271,000) (74,000) (266,000)
Accretion of long-term debt discount 39,000 35,000 --
Common stock issued for settlement -- 13,000 --
Loss on impaired assets -- -- 573,000
Deferred income taxes (33,000) (75,000) --
Change in current assets and liabilities:
Receivables (279,000) (954,000) 238,000
Inventories (2,647,000) 393,000 (1,285,000)
Other current assets (189,000) 11,000 40,000
Refundable income taxes -- -- 29,000
Accounts payable and accrued expenses 436,000 (123,000) (55,000)
Income taxes payable 442,000 75,000 --
------------ ------------ ------------
Net cash provided by (used in) operating activities (1,190,000) 201,000 (3,078,000)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (609,000) (252,000) (289,000)
Proceeds from disposals of property and equipment 667,000 88,000 271,000
------------ ------------ ------------
Net cash provided by (used in) investing activities 58,000 (164,000) (18,000)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (payments) under line of credit 1,514,000 (193,000) (432,000)
Payments on long-term obligations (377,000) (113,000) (408,000)
Proceeds from long-term obligations 77,000 -- 3,718,000
Proceeds ascribed to warrants issued in conjunction
with long-term debt obligations -- -- 307,000
Deferred financing costs -- -- (288,000)
Proceeds from issuance of common stock -- 475,000 200,000
------------ ------------ ------------
Net cash provided by financing activities 1,214,000 169,000 3,097,000
------------ ------------ ------------
Increase in cash and cash equivalents 82,000 206,000 1,000
CASH AND CASH EQUIVALENTS
Beginning 220,000 14,000 13,000
------------ ------------ ------------
Ending $ 302,000 $ 220,000 $ 14,000
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest $ 802,000 $ 668,000 $ 562,000
Income taxes 177,000 -- 2,000
============ ============ ============
See Notes to Consolidated Financial Statements.
24
APPLIANCE RECYCLING CENTERS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS: Appliance Recycling Centers of America, Inc. and
subsidiaries (the "Company") are in the business of providing reverse logistics,
energy conservation and recycling services for major household appliances. The
Company sells appliances through a chain of Company-owned factory outlet stores
under the name ApplianceSmart(R). The Company provides recycling services on a
credit basis to appliance retailers, electric utilities, waste management
companies and local governments.
A SUMMARY OF THE COMPANY'S SIGNIFICANT ACCOUNTING POLICIES IS AS FOLLOWS:
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the
accounts of Appliance Recycling Centers of America, Inc. and its subsidiaries.
All significant intercompany accounts and transactions have been eliminated in
consolidation.
FAIR VALUE OF FINANCIAL INSTRUMENTS: The following methods and assumptions are
used to estimate the fair value of each class of financial instrument:
CASH EQUIVALENTS, ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE: Due to their
nature and short-term maturities, the carrying amounts approximate fair
value.
SHORT- AND LONG-TERM DEBT: The fair value of short- and long-term debt
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 the Company.
FISCAL YEAR: The Company uses a 52-53 week fiscal year. The Company's 2000
fiscal year (2000) ended December 30, 2000, its 1999 fiscal year (1999) ended
January 1, 2000 and its 1998 fiscal year (1998) ended January 1, 1999. All such
fiscal years include 52 weeks.
REVENUE RECOGNITION: The Company recognizes revenue from appliance sales in the
period the appliances are sold. Revenue from appliance recycling is recognized
when a unit is collected and processed. Byproduct revenue is recognized upon
shipment and is included in recycling revenues.
The staff of the Securities and Exchange Commission has issued Staff Accounting
Bulletin No. 101 (SAB No. 101), "Revenue Recognition in Financial Statements."
SAB No. 101 summarizes some of the staff's interpretations on the application of
generally accepted accounting principles related to revenue recognition. The
Company began following the interpretations in SAB No. 101 during the year ended
December 30, 2000, and they had no effect on its financial statements.
The Company provides allowances for uncollectable receivables based on
management's assessment of the need for such allowances.
The Company defers revenue under appliance extended warranty arrangements and
recognizes it over the terms of the warranty contracts. The Company accrues the
estimated cost of initial warranty arrangements at the time of the appliance
sale.
Shipping and handling charges to customers are included in the revenues.
Shipping and handling costs incurred by the Company are included in cost of
revenues.
CASH AND CASH EQUIVALENTS: For purposes of reporting cash flows, the Company
considers all cash and any treasury bills, commercial paper and money-market
funds with an initial maturity of three months or less to be cash equivalents.
The Company maintains its cash in bank deposit and money-market accounts which,
at times, exceed federally insured limits. The Company has not experienced any
losses in such accounts.
INVENTORIES: Inventories are stated at the lower of cost, first-in, first-out
(FIFO), or market.
Inventories consisted of the following:
25
2000 1999
- --------------------------------------------------------------------------------
Finished goods $ 4,472,000 $ 1,698,000
Work-in-process-
unrefurbished units 136,000 163,000
Less reserves (375,000) (275,000)
------------ ------------
$ 4,233,000 $ 1,586,000
============ ============
DEFERRED FINANCING COSTS: In connection with financing transactions in 1998
under notes payable arrangements, the Company incurred $288,000 of costs that
have been recorded in other assets and are being amortized using the
straight-line method over the terms of the related debt.
DEFERRED GAIN: In the third quarter of 2000, the Company sold its
ApplianceSmart(R) outlet property in Saint Paul, Minnesota. The Company is still
operating this outlet and has an operating lease on this outlet until September
30, 2001. The Company recognized $275,000 of gain on this transaction in 2000
and will recognize the remaining $60,000 deferred gain over the remaining term
of the lease.
PROPERTY AND EQUIPMENT: Depreciation is computed using straight-line and
accelerated methods over the following estimated useful lives:
Years
-----
Buildings and improvements 18 - 30
Equipment 3 - 8
ACCOUNTING FOR LONG-LIVED ASSETS: The Company reviews its property, equipment
and goodwill periodically to determine potential impairment by comparing the
carrying value of the long-lived assets with the estimated future net
undiscounted cash flows expected to result from the use of the assets, including
cash flows from disposition. Should the sum of the expected future net cash
flows be less than the carrying value, the Company recognizes an impairment loss
at that date. An impairment loss is measured by comparing the amount by which
the carrying value exceeds the fair value (estimated discounted future cash
flows or appraisal of assets) of the long-lived assets. In 1998, the Company
recorded a loss on impairment of certain assets (See Note 2).
ADVERTISING EXPENSE: Advertising is expensed as incurred, and was $884,000,
$532,000 and $448,000 for the fiscal years ended December 30, 2000, January 1,
2000 and January 2, 1999.
INCOME TAXES: Deferred taxes are provided on an asset and liability method
whereby deferred tax assets are recognized for deductible temporary differences
and operating loss and tax credit carryforwards, and deferred tax liabilities
are recognized for taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and liabilities and their tax
basis. Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or all of
the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates on the
date of enactment.
BASIC AND DILUTED NET LOSS PER SHARE: Basic per-share amounts are computed,
generally, by dividing net income or loss by the weighted-average number of
common shares outstanding. Diluted per-share amounts assume the conversion,
exercise or issuance of all potential common stock instruments unless their
effect is antidilutive, thereby reducing the loss or increasing the income per
common share.
In arriving at diluted weighted-average shares and per share amounts for the
fiscal years ended December 30, 2000 and January 1, 2000, options and warrants
(see Note 8) with exercise prices below average market prices for the respective
fiscal quarters in which they were dilutive were included using the treasury
stock method. Since the Company had incurred loss in the fiscal year ended
January 2, 1999, the inclusion of potential option and warrant common shares in
the calculation of diluted loss per common share would have been antidilutive.
Therefore, basic and diluted weighted-average shares and per share amounts for
that year are the same.
COMPREHENSIVE INCOME: Comprehensive income is equivalent to net income in the
statement of operations.
SEGMENT INFORMATION: The Company believes that it has one operating segment.
Although certain separate financial information by retail store, or retail store
and recycling center, is available to management, the Company is managed as a
unit. Specifically, it does not measure profit or loss or maintain assets
separately for its products/revenue sources (appliance sales and appliance
recycling, including recycling services for utilities).
ESTIMATES: The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
26
NOTE 2. MARKET CLOSINGS AND LOSS ON IMPAIRED ASSETS
In December 1998, the Company decided to withdraw from the under-performing St.
Louis, Missouri market. The Company closed its recycling center and two retail
stores in February 1999. For the year ended January 2, 1999, the Company
incurred expenses of approximately $130,000 which included the write-off of
leasehold improvements of approximately $55,000 and the accrual of remaining
lease payments and other costs of approximately $75,000.
In 1998, the Company elected to curtail its appliance shredding operations and
intensify its strategic focus on appliance retailing. As a result, the Company
recorded a $518,000 loss on impaired equipment for the year ended January 2,
1999.
During the year ended January 1, 2000, the Company closed a retail store in the
Minneapolis market and incurred expenses of $22,000 for the remaining lease
payments and write off of leasehold improvements. The Company also closed a
retail store in the California market in June 1999, which resulted in no closing
costs.
In April 2000, the Company closed a retail store in the Minneapolis market. In
connection therewith, the Company wrote off leasehold improvements of
approximately $71,000.
NOTE 3. LINE OF CREDIT
At December 30, 2000, the Company had a $5.0 million line of credit with a
lender. The interest rate as of December 30, 2000 was 11.25%. The amount of
borrowings available under the line of credit is based on a formula using
receivables and inventories. The line of credit has a stated maturity date of
August 30, 2001 unless renewed and provides that the lender may demand payment
in full of the entire outstanding balance of the loan at any time. The line of
credit is secured by substantially all the Company's assets, and requires
minimum monthly interest payments of $14,000 regardless of the outstanding
principal balance. The lender is also secured by an inventory repurchase
agreement with Whirlpool Corporation. The loan requires that the Company meet
certain covenants, provides payment penalties for noncompliance, limits the
amount of other debt the Company can incur, limits the amount of spending on
fixed assets and limits payments of dividends. At December 30, 2000 the
Company's unused borrowing capacity under this line was $331,000.
NOTE 4. LONG-TERM OBLIGATIONS
Long-term obligations consisted of the following:
2000 1999
- --------------------------------------------------------------------------------
9.00% mortgage, due in
monthly installments of
$11,411, including interest,
balance due February 2004,
secured by land
and building $ 791,000 $ 854,000
8.75% mortgage, due in
monthly installments of
$7,027, including interest,
balance due January 2003,
secured by land
and building 625,000 652,000
13.00% note payable,
monthly interest payments of
$37,917 until September 2000,
monthly principal and interest
payments of $52,259 beginning
September 2000, balance due
September 2005, secured by
equipment, land and building 3,219,000 3,237,000
9.88% mortgage, due in
monthly installments of
$3,286, including interest,
balance due September
2008, secured by land
and building -- 211,000
Other 71,000 12,000
---------- ----------
4,706,000 4,966,000
Less current maturities 275,000 135,000
---------- ----------
$4,431,000 $4,831,000
========== ==========
The future annual maturities of long-term obligations are as follows:
Fiscal year
- -----------
2001 $ 275,000
2002 309,000
2003 857,000
2004 322,000
2005 2,566,000
Thereafter 377,000
----------
$4,706,000
NOTE 5. ACCRUED EXPENSES
Accrued expenses were as follows:
2000 1999
- --------------------------------------------------------------------------------
Compensation $ 330,000 $ 178,000
Warranty 188,000 182,000
Other 418,000 382,000
---------- ---------
$ 936,000 $ 742,000
========== =========
NOTE 6. COMMITMENTS
OPERATING LEASES: The Company leases certain of its retail stores and recycling
center facilities and equipment under
27
noncancelable operating leases. The leases require the payment of taxes,
maintenance, utilities and insurance.
Minimum rental commitments under noncancelable operating leases as of December
30, 2000 were as follows:
Fiscal Year
- -----------
2001 $1,173,000
2002 1,170,000
2003 1,183,000
2004 997,000
2005 863,000
----------
$5,386,000
==========
Rent expense for the fiscal years ended December 30, 2000, January 1, 2000 and
January 2, 1999 was $420,000, $370,000 and $482,000, respectively.
NOTE 7. INCOME TAXES
The provision for income taxes consisted of the following:
2000 1999 1998
- --------------------------------------------------------------------------------
Current:
Federal $ 496,000 $ 75,000 $ --
State 117,000 -- 31,000
Deferred (33,000) (75,000) --
---------- ---------- ----------
$ 580,000 $ -- $ 31,000
========== ========== ==========
A reconciliation of the Company's income tax expense with the federal statutory
tax rate is shown below:
2000 1999 1998
- --------------------------------------------------------------------------------
Income tax
expense (benefit)
at statutory rate $ 511,000 $ 172,000 $(1,049,000)
State taxes
(benefit), net of
federal tax
effect 99,000 18,000 (192,000)
Permanent
differences
and other 33,000 (85,000) 34,000
Change in
valuation
allowance (63,000) (105,000) 257,000
Effect of NOL
with no current
tax benefit -- -- 981,000
----------- ----------- -----------
$ 580,000 $ -- $ 31,000
=========== =========== ===========
The components of net deferred tax assets are as follows:
2000 1999
- --------------------------------------------------------------------------------
Deferred tax assets:
Net operating loss
carryforwards $ 3,405,000 $ 3,421,000
Fixed asset differences 130,000 295,000
Federal and state tax credits 199,000 199,000
Inventory reserve 150,000 110,000
Accrued expenses 246,000 135,000
----------- -----------
Gross deferred tax assets $ 4,130,000 $ 4,160,000
Valuation allowance (4,022,000) (4,085,000)
----------- -----------
Net deferred tax assets $ 108,000 $ 75,000
=========== ===========
At December 30, 2000, the Company had a valuation allowance against deferred tax
assets to reduce the total to an amount management believes is appropriate.
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.
At December 30, 2000, the Company had net operating loss ("NOL") carryforwards
expiring as follows:
Expiration Amount
- ---------- ------
2011 $4,725,000
2012 $1,144,000
2018 $2,645,000
Future utilization of NOL and tax credit carryforwards is subject to certain
limitations under provisions of Section 382 of the Internal Revenue Code. This
Section relates to a 50 percent change in control over a three-year period. The
Company believes that the issuance of common stock during 1999 resulted in an
"ownership change" under Section 382. Accordingly, the Company's ability to use
NOL and tax credit carryforwards generated prior to February 1999 may be limited
to approximately $46,000 per year.
NOTE 8. SHAREHOLDERS' EQUITY
STOCK OPTIONS: The Company has two Stock Option Plans (the "Plans") that permit
the granting of "incentive stock
28
options" meeting the requirements of Section 422 of the Internal Revenue Code of
1986, as amended, and nonqualified options that do not meet the requirements of
Section 422. The Plans have 150,000 and 400,000 shares, respectively, available
for grant. The options that have been granted under the Plans are exercisable
for a period of five to ten years from the date of grant and vest over a period
of six months to five years from the date of grant.
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation."
Accordingly, no compensation cost has been recognized for the Plans. Had
compensation cost for the Plans been determined based on the fair value at the
grant date consistent with the provisions of SFAS No. 123, the Company's net
earnings (loss) and basic and diluted earnings (loss) per share amounts would
have been changed to the pro forma amounts indicated below:
2000 1999 1998
- --------------------------------------------------------------------------------
Net income (loss):
As reported $ 927,000 $ 505,000 $(3,056,000)
Pro forma $ 859,000 $ 460,000 $(3,136,000)
Basic earnings
(loss) per share:
As reported $ 0.41 $ 0.24 $ (2.55)
Pro forma $ 0.38 $ 0.21 $ (2.61)
Diluted earnings
(loss) per share:
As reported $ 0.32 $ 0.22 $ (2.55)
Pro forma $ 0.30 $ 0.20 $ (2.61)
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions:
2000 1999 1998
- --------------------------------------------------------------------------------
Expected dividend yield -- -- --
Expected stock price volatility 79.7% 81.3% 83.2%
Risk-free interest rate 6.0% 5.5% 5.5%
Expected life of options (years) 3 3 3
- --------------------------------------------------------------------------------
Additional information relating to all outstanding options is as follows:
Weighted Average
Shares Exercise Price
- --------------------------------------------------------------------------------
Outstanding at
January 3, 1998 93,000 $10.93
Granted 78,000 $ 1.50
Cancelled (27,000) $13.22
- --------------------------------------------------------------------------------
Outstanding at
January 2, 1999 144,000 $ 5.37
Granted 97,000 $ 0.61
Cancelled (4,000) $ 8.95
- --------------------------------------------------------------------------------
Outstanding at
January 1, 2000 237,000 $ 3.36
Granted 180,000 $ 2.22
Cancelled (44,000) $ 5.20
- --------------------------------------------------------------------------------
Outstanding at
December 30, 2000 373,000 $ 2.59
- --------------------------------------------------------------------------------
The weighted average fair value per option of options granted during fiscal
2000, 1999 and 1998 was $0.90, $0.28 and $0.85, respectively.
The following tables summarize information about stock options outstanding as of
December 30, 2000:
OPTIONS OUTSTANDING
Weighted
Average
Remaining Weighted
Range of Number Contractual Average
Exercise Options Life in Exercise
Prices Outstanding Years Price
- --------------------------------------------------------------------------------
$17.50 16,000 0.5 $ 17.50
$10.52 8,000 2.5 $ 10.52
$2.38 to $3.00 48,000 6.1 $ 2.55
$0.75 to $2.20 212,000 4.6 $ 2.09
$0.59 to $0.63 89,000 5.4 $ 0.61
-------
373,000
=======
OPTIONS EXERCISABLE
Range of Number Weighted
Exercise Options Average
Prices Exercisable Exercise Price
- --------------------------------------------------------------------------------
$17.50 16,000 $17.50
$10.52 8,000 $10.52
$2.38 to $3.00 48,000 $ 2.55
$0.75 to $2.20 61,000 $ 1.52
$0.59 to $0.63 55,000 $ 0.61
-------
188,000 $ 3.34
=======
The following table summarizes options exercisable for stock options outstanding
as of January 1, 2000 and January 2, 1999:
1999 1998
- --------------------------------------------------------------------------------
Number of options
exercisable 141,000 49,000
Weighted average
exercise price $5.11 $12.37
WARRANTS: In July 1998, the Company issued 12% subordinated promissory notes in
the principal amount of
29
$275,000 plus an aggregate of 68,750 warrants to purchase the Company's Common
Stock at $2.25 per share.
In September 1998, the Company entered into a loan agreement with a lender
resulting in gross proceeds to the Company of $3.5 million. In connection with
this loan, the Company issued the lender a warrant to purchase 700,000 shares of
Common Stock at an adjustable exercise price, which is currently $0.60 per
share. The Company also issued to an investment banker associated with this
transaction a warrant to purchase 125,000 shares of Common Stock at $2.50 per
share. The portion of the gross loan proceeds ascribed to the aforementioned
warrants issued in conjunction with debt was $307,000 as determined using the
Black-Scholes method.
In February 1999, in connection with a private placement, the Company issued
warrants to purchase 83,000 shares of Common stock at $0.50 per share, subject
to adjustment.
In March 1999, the Company issued to a board member 5,000 warrants to purchase
the Company's Common Stock at $0.625 per share, the market value of the
Company's stock at the date of grant.
In April 1999, the Company issued to a vendor 50,000 warrants to purchase common
stock at $0.625 per share. The contract provides that 37,500 of these warrants
are currently exercisable and the balance is exercisable based on a certain
target.
All issued warrants are exercisable and expire as follows: 68,750 in 2001;
125,000 in 2003; 133,000 in 2004; 700,000 in 2007 and 5,000 in 2009.
COMMON STOCK ISSUED IN SETTLEMENT: In August 1999, the Company settled a lawsuit
with a former employee. The settlement included a cash payment of $105,000 and
the issuance of 20,000 shares of the Company's Common Stock valued at $12,500.
The previously unaccrued portion of this settlement, $74,000, is included in
selling, general and administrative expenses for fiscal 1999.
PREFERRED STOCK: In April 1998, the Company's shareholders approved an amendment
to the Company's Articles of Incorporation authorizing two million shares of
Preferred Stock of the Company ("Preferred Stock") which 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.
PRIVATE PLACEMENT: In February 1999, the Company sold in a private placement
1,030,000 shares of Common Stock at a price of $0.50 per share. The Company paid
$31,500 of the proceeds and issued warrants to an investment banker as a
placement fee.
In May 1998, the Company sold in a private placement 100,000 shares of Common
Stock at a price of $2.00 per share to an institutional investor.
NOTE 9. MAJOR CUSTOMER AND SUPPLIER
MAJOR CUSTOMER: Total revenues include sales to one major recycling customer as
follows:
2000 1999 1998
- --------------------------------------------------------------------------------
Revenue percentage: 29.9% 33.1% 28.8%
As of December 30, 2000, the Company had a receivable from this customer of
$505,000.
MAJOR SUPPLIER: The Company purchases substantially all of its distressed
appliances from one original equipment manufacturer under a contractual
arrangement. Management believes that should this arrangement be terminated
other original equipment manufacturers would be available as alternate sources
of supply.
30
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
No changes in or disagreements with accountants have occurred within
the two-year period ended December 30, 2000 that required reporting on Form 8-K.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Information regarding directors and executive officers of the Company
is set forth under the headings "Nominees and Information Concerning Officers
and Key Employees who are not Directors" and "Section 16 (a) Beneficial
Ownership Reporting Compliance" in the Company's definitive Proxy Statement for
its 2001 Annual Meeting of Shareholders to be held April 26, 2001, and is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding Executive Compensation is set forth under the
heading "Executive Compensation and Stock Options Granted and Exercised in Last
Fiscal Year" in the Company's definitive Proxy Statement for its 2001 Annual
Meeting of Shareholders to be held April 26, 2001, and is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners
and management is set forth under the heading "Common Stock Ownership" in the
Company's definitive Proxy Statement for its 2001 Annual Meeting of Shareholders
to be held April 26, 2001, and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions is
set forth under the heading "Nominees and Information Concerning Officers and
Key Employees who are not Directors" in the Company's definitive Proxy Statement
for its 2001 Annual Meeting of Shareholders to be held April 26, 2001, and is
incorporated herein by reference.
31
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND EXHIBITS
1. FINANCIAL STATEMENTS
See Index to Financial Statements under Item 8 of this report.
2. FINANCIAL STATEMENT SCHEDULE
To the Board of Directors
Appliance Recycling Centers of America, Inc.
Minneapolis, Minnesota
Our audits were made for the purpose of forming an
opinion on the basic consolidated financial statements of
Appliance Recycling Centers of America, Inc. and subsidiaries
taken as a whole. The supplemental Schedule II is presented
for purposes of complying with the Securities and Exchange
Commission's rules and is not a part of the basic consolidated
financial statements. This schedule has been subjected to the
auditing procedures applied in our audits of the basic
consolidated financial statements and in our opinion, is
fairly stated in all material respects in relation to the
basic consolidated financial statements taken as a whole.
McGLADREY & PULLEN, LLP
Minneapolis, Minnesota
February 16, 2001
Schedule II - Valuation and Qualifying Accounts
Accounts Receivable Inventory
Allowance Allowance
--------------------------------------------------------------
Balance, January 3, 1998 $ 35,000 $ 20,000
Additional allowance 50,000 20,000
Write-offs (67,000) --
--------------------------------------------------------------
Balance, January 2, 1999 $ 18,000 $ 40,000
Additional allowance 23,000 235,000
Write-offs (16,000) --
--------------------------------------------------------------
Balance, January 1, 2000 $ 25,000 $ 275,000
Additional allowance/adjustments (5,000) 205,000
Write-offs -- (105,000
--------------------------------------------------------------
Balance, December 30, 2000 $ 20,000 $ 375,000
--------------------------------------------------------------
32
3. EXHIBITS
See Index to Exhibits on page 35 of this report.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the last quarter of the fiscal
year covered by this report.
33
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 its behalf by the undersigned, thereunto duly authorized.
Dated: March 19, 2001 APPLIANCE RECYCLING CENTERS OF
AMERICA, INC.
(Registrant)
By /s/ Edward R. Cameron
-------------------------------------
Edward R. Cameron
President and Chief Executive Officer
By /s/ Linda A. Koenig
-------------------------------------
Linda A. Koenig
Controller
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ Edward R. Cameron Chairman of the Board, President March 19, 2001
- ----------------------- and Chief Executive Officer
Edward R. Cameron
/s/ Linda A. Koenig Controller March 19, 2001
- -----------------------
Linda A. Koenig
/s/ George B. Bonniwell Director March 19, 2001
- -----------------------
George B. Bonniwell
/s/ Duane S. Carlson Director March 19, 2001
- -----------------------
Duane S. Carlson
/s/ Marvin Goldstein Director March 19, 2001
- -----------------------
Marvin Goldstein
/s/ Harry W. Spell Director March 19, 2001
- -----------------------
Harry W. Spell
34
INDEX TO EXHIBITS
Exhibit
No. Description
- ------- -----------
3.1 Restated Articles of Incorporation of Appliance Recycling Centers
of America, Inc. [filed as Exhibit 3.1 to the Company's Form 10-K
for the year ended January 2, 1999 (File No. 0-19621) and
incorporated herein by reference].
3.2 Amended and Restated Bylaws of Appliance Recycling Centers of
America, Inc. [filed as Exhibit 3.2 to the Company's Form 10-K for
the year ended January 2, 1999 (File No. 0-19621) and incorporated
herein by reference].
*10.1 Amended Appliance Recycling Centers of America, Inc. Restated 1989
Stock Option Plan [filed as Exhibit 19.3 to the Company's Form 10-Q
for the quarter ended June 30, 1993 (File No. 0-19621) and
incorporated herein by reference].
10.2 Agreement dated December 17, 1992, between Appliance Recycling
Centers of America, Inc. and TCF Savings Bank [filed with the
Company's Form 8-K, dated December 17, 1992 (File No. 0-19621) and
incorporated herein by reference].
10.3 Agreement dated January 19, 1994, between Appliance Recycling
Centers of America, Inc. and Standard Insurance Corporation [filed
as Exhibit 10.29 to the Company's Form 10-K for the year ended
December 31, 1993 (File No.0-19621) and incorporated herein by
reference].
10.4 Line of credit dated August 30, 1996, between Appliance Recycling
Centers of America, Inc. and Spectrum Commercial Services, a
division of Lyons Financial Services, Inc. [filed as exhibit 10.15
to the Company's Form 10-Q for the quarter ended September 28, 1996
(File No. 0-19621) and incorporated herein by reference].
10.5 Amended line of credit dated November 8, 1996, between Appliance
Recycling Centers of America, Inc. and Spectrum Commercial
Services, a division of Lyons Financial Services, Inc. [filed as
exhibit 10.16 to the Company's Form 10-Q for the quarter ended
September 28, 1996 (File No. 0-19621) and incorporated herein by
reference].
*10.6 1997 Stock Option Plan and Amendment [filed as Exhibits 28.1 and
28.2 to the Company's Registration Statement on Form S-8
(Registration No. 333-28571) and incorporated herein by reference].
10.7 Amended line of credit dated February 12, 1998 between Appliance
Recycling Centers of America, Inc. and Spectrum Commercial
Services, a division of Lyons Financial Services, Inc., Amended
Revolving Note and Amended Guarantor Acknowledgments [filed as
Exhibit 10.10 to the Company's Form 10-K for year ended January 3,
1998 (File No. 0-19621) and incorporated herein by reference].
10.8 Agreement dated February 13, 1998 between Western Bank and
Appliance Recycling Centers of America, Inc. [filed as Exhibit
10.11 to the Company's Form 10-K for the year ended January 3, 1998
(File No 0-19621) and incorporated herein by reference].
35
*10.9 Amendment, effective April 24, 1997, to 1989 Stock Option Plan
[filed as Exhibit 28.2 to the Company's Post-Effective Amendment
No. 1 (June 5, 1997) to Registration Statement on Form S-8
(Registration No. 33-68890) and incorporated herein by reference].
10.10 Reverse Logistics Master Service Agreement between Whirlpool
Corporation and Appliance Recycling Centers of America, Inc. [filed
as Exhibit 10 to the Company's Form 10-Q for the quarter ended July
4, 1998 (File No. 0-19621) and incorporated herein by reference].
10.11 Loan Agreement between Medallion Capital, Inc. and Appliance
Recycling Centers of America, Inc. dated September 10, 1998 [filed
as Exhibit 10.1 to the Company's Form 10-Q for the quarter ended
October 3, 1998 (File No. 0-19621) and incorporated herein by
reference].
10.12 Promissory note of the Company to Medallion Capital, Inc. in the
principal amount of $3,500,000 due September 30, 2005 [filed as
Exhibit 10.2 to the Company's Form 10-Q for the quarter ended
October 3, 1998 (File No. 0-19621) and incorporated herein by
reference].
10.13 Security Agreement of the Company [filed as Exhibit 10.3 to the
Company's Form 10-Q for the quarter ended October 3, 1998 (File No.
0-19621) and incorporated herein by reference].
10.14 Warrant of the Company in favor of Medallion Capital, Inc. for
700,000 shares of the Company's Stock [corrected copy]. [filed as
Exhibit 10.14 to the Company's Form 10-K for the year ended January
2, 1999 (File No. 0-19621) and incorporated herein by reference].
10.15 Amendment to the line of credit dated September 10, 1998 between
Appliance Recycling Centers of America, Inc. and Spectrum
Commercial Services, a division of Lyons Financial Services, Inc.,
Amendment to General Credit and Security Agreement and Amended
Guarantor Acknowledgement. [filed as Exhibit 10.15 to the Company's
Form 10-K for the year ended January 2, 1999 (File No. 0-19621) and
incorporated herein by reference].
10.16 Amendment to the line of credit dated September 17, 1998 between
Appliance Recycling Centers of America, Inc. and Spectrum
Commercial Services, a division of Lyons Financial Services, Inc.,
Amendment to General Credit and Security Agreement, Amended
Guarantor Acknowledgement and Amended and Restated Revolving Note.
[filed as Exhibit 10.16 to the Company's Form 10-K for the year
ended January 2, 1999 (File No. 0-19621) and incorporated herein by
reference].
10.17 Agreement dated March 19, 1999 between Southern California Edison
Company and Appliance Recycling Centers of America, Inc. [filed as
Exhibit 10.17 to the Company's Form 10-Q for the quarter ended
April 3, 1999 (File No. 0-19621) and incorporated herein by
reference].
10.18 Amendment effective April 29, 1999 to 1997 Stock Option Plan [filed
as Exhibit 10 to the Company's Form 10-Q for the quarter ended July
3, 1999 (File No. 0-19621) and incorporated herein by reference].
10.19 Agreement dated June 12, 2000 between Southern California Edison
Company and Appliance Recycling Centers of America, Inc. [filed as
Exhibit 10 to the Company's Form 10-Q for the quarter ended July 1,
2000 (File No. 0-19621) and incorporated herein by reference].
10.20 Agreement dated August 21, 2000 between Southern California Edison
Company and Appliance Recycling Centers of America, Inc. [filed as
Exhibit 10.2 to the Company's Form 10-Q for the quarter ended
September 30, 2000 (File No. 0-19621) and incorporated herein by
reference].
36
10.21 Amendment to the line of credit dated August 30, 2000 between
Appliance Recycling Centers of America, Inc. and Spectrum
Commercial Services, a division of Lyons Financial Services, Inc.,
Amendment to General Credit and Security Agreement and Amended and
Restated Revolving Note. [filed as Exhibit 10.1 to the Company's
Form 10-Q for the quarter ended September 30, 2000 (File No.
0-19621) and incorporated herein by reference].
+21.1 Subsidiaries of Appliance Recycling Centers of America, Inc.
+23.1 Consent of McGladrey & Pullen, LLP, Independent Public Accountants.
* Items that are management contracts or compensatory plans or arrangements
required to be filed as an exhibit pursuant to Item 14(a)3 of this Form 10-K.
+ Filed herewith.
37