FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 29, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-19621
APPLIANCE RECYCLING CENTERS OF AMERICA, INC.
MINNESOTA 41-1454591
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7400 Excelsior Blvd.
Minneapolis, Minnesota 55426-4517
(Address of principal executive
offices)
(952) 930-9000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
YES __X__ NO _____
As of August 9, 2002, the number of shares outstanding of the registrant's no
par value common stock was 2,321,890 shares.
APPLIANCE RECYCLING CENTERS OF AMERICA, INC.
INDEX
PART I. FINANCIAL INFORMATION Page No.
--------
Item 1: Financial Statements:
Consolidated Balance Sheets as of
June 29, 2002 and December 29, 2001..............................3
Consolidated Statements of Operations for the
Three and Six Months Ended June 29, 2002 and June 30, 2001.......4
Consolidated Statements of Cash Flows for the
Six Months Ended June 29, 2002 and June 30, 2001.................5
Notes to Consolidated Financial Statements.......................6
Item 2: Management's Discussion and Analysis
of Financial Condition and Results of Operations.................8
Item 3: Quantitative and Qualitative Disclosure about Market Risk ......14
PART II. OTHER INFORMATION ..............................................14
2
Appliance Recycling Centers of America, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
June 29, December 29,
2002 2001
(Unaudited)
- ------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents $ 782,000 $ 506,000
Accounts receivable, net of allowance of $27,000 and $100,000,
respectively 5,134,000 4,375,000
Inventories, net of reserves of $680,000 and $464,000, respectively 7,183,000 6,748,000
Deferred income taxes 576,000 576,000
Other current assets 359,000 174,000
- ------------------------------------------------------------------------------------------------------------
Total current assets 14,034,000 12,379,000
- ------------------------------------------------------------------------------------------------------------
Property and Equipment, at cost
Land 2,050,000 2,050,000
Buildings and improvements 3,875,000 3,779,000
Equipment 4,807,000 4,689,000
- ------------------------------------------------------------------------------------------------------------
10,732,000 10,518,000
Less accumulated depreciation 4,538,000 4,291,000
- ------------------------------------------------------------------------------------------------------------
Net property and equipment 6,194,000 6,227,000
- ------------------------------------------------------------------------------------------------------------
Other Assets 258,000 292,000
Goodwill, net of amortization of $152,000 (Note 4) 38,000 38,000
- ------------------------------------------------------------------------------------------------------------
Total assets $ 20,524,000 $ 18,936,000
============================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Line of credit $ 4,573,000 $ 4,708,000
Current maturities of long-term obligations 964,000 401,000
Accounts payable 2,999,000 1,960,000
Accrued expenses (Note 2) 1,014,000 1,365,000
Income taxes payable 1,204,000 757,000
- ------------------------------------------------------------------------------------------------------------
Total current liabilities 10,754,000 9,191,000
Long-Term Obligations, less current maturities 3,527,000 4,280,000
Deferred income tax liabilities 68,000 68,000
- ------------------------------------------------------------------------------------------------------------
Total liabilities 14,349,000 13,539,000
- ------------------------------------------------------------------------------------------------------------
Shareholders' Equity
Common stock, no par value; authorized 10,000,000
shares; issued and outstanding 2,322,000 and 2,297,000
shares, respectively 11,364,000 11,360,000
Accumulated deficit (5,189,000) (5,963,000)
- ------------------------------------------------------------------------------------------------------------
Total shareholders' equity 6,175,000 5,397,000
- ------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 20,524,000 $ 18,936,000
============================================================================================================
See Notes to Consolidated Financial Statements
3
Appliance Recycling Centers of America, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
June 29, June 30, June 29, June 30,
2002 2001 2002 2001
- --------------------------------------------------------------------------------------------------------------------
Revenues
Retail $ 7,145,000 $ 4,940,000 $ 14,482,000 $ 9,668,000
Recycling 4,204,000 4,885,000 8,304,000 7,751,000
Byproduct 385,000 270,000 647,000 440,000
- --------------------------------------------------------------------------------------------------------------------
Total revenues 11,734,000 10,095,000 23,433,000 17,859,000
Cost of Revenues 7,245,000 6,164,000 14,970,000 10,774,000
- --------------------------------------------------------------------------------------------------------------------
Gross profit 4,489,000 3,931,000 8,463,000 7,085,000
Selling, General and Administrative Expenses 3,339,000 3,009,000 6,658,000 5,399,000
- --------------------------------------------------------------------------------------------------------------------
Operating income 1,150,000 922,000 1,805,000 1,686,000
Other Income (Expense)
Other income 10,000 26,000 17,000 47,000
Interest expense (263,000) (270,000) (528,000) (510,000)
- --------------------------------------------------------------------------------------------------------------------
Income before provision for income taxes 897,000 678,000 1,294,000 1,223,000
Provision for Income Taxes 360,000 285,000 519,000 514,000
- --------------------------------------------------------------------------------------------------------------------
Net income $ 537,000 $ 393,000 $ 775,000 $ 709,000
====================================================================================================================
Basic Earnings per Common Share $ 0.23 $ 0.17 $ 0.33 $ 0.31
Diluted Earnings per Common Share $ 0.16 $ 0.13 $ 0.23 $ 0.24
====================================================================================================================
Weighted Average Number of Common Shares
Outstanding:
Basic 2,320,000 2,287,000 2,316,000 2,287,000
Diluted 3,291,000 2,957,000 3,303,000 2,910,000
====================================================================================================================
See Notes to Consolidated Financial Statements.
4
Appliance Recycling Centers of America, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 29, June 30,
2002 2001
- ------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
Net income $ 775,000 $ 709,000
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 269,000 215,000
Accretion of long-term debt discount 22,000 22,000
Deferred gain on building sale recognized -- (36,000)
Changes in assets and liabilities:
Receivables (759,000) (2,881,000)
Inventories (435,000) (794,000)
Other assets (174,000) (201,000)
Accounts payable 1,039,000 1,511,000
Accrued expenses (351,000) (65,000)
Income taxes payable 447,000 (295,000)
- ------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 833,000 (1,815,000)
- ------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Purchase of property and equipment (214,000) (515,000)
- ------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Net borrowings (payments) under line of credit (135,000) 2,597,000
Proceeds from long-term obligations -- 142,000
Proceeds from issuance of common stock 4,000 --
Payments on long-term obligations (212,000) (165,000)
- ------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (343,000) 2,574,000
- ------------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents 276,000 244,000
Cash and Cash Equivalents
Beginning 506,000 302,000
======================================================================================================
Ending $ 782,000 $ 546,000
======================================================================================================
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest $ 505,000 $ 489,000
Income taxes $ 194,000 $ 808,000
======================================================================================================
See Notes to Consolidated Financial Statements.
5
Appliance Recycling Centers of America, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
1. Financial Statements
--------------------
In the opinion of management of the Company, the accompanying unaudited
consolidated financial statements contain all adjustments (consisting of
only normal, recurring accruals) necessary to present fairly the
financial position of the Company and its subsidiaries as of June 29,
2002, and the results of operations for the three-month and six-month
periods ended June 29, 2002 and June 30, 2001 and its cash flows for the
six-month periods ended June 29, 2002 and June 30, 2001. The results of
operations for any interim period are not necessarily indicative of the
results for the year. These interim consolidated financial statements
should be read in conjunction with the Company's annual consolidated
financial statements and related notes in the Company's Annual Report on
Form 10-K for the year ended December 29, 2001.
Certain information and footnote disclosures included in the annual
consolidated financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
therefore condensed or omitted.
2. Accrued Expenses
----------------
Accrued expenses were as follows:
June 29, December 29,
2002 2001
---------- ------------
Compensation $ 384,000 $ 493,000
Warranty 132,000 225,000
Other 498,000 647,000
---------- ----------
$1,014,000 $1,365,000
========== ==========
3. Earnings per Share
------------------
Basic per share amounts are computed, generally, by dividing net income
or loss by the weighted-average number of common shares outstanding.
Diluted per share amounts assume the conversion, exercise, or issuance
of all potential common stock instruments unless their effect is
antidilutive, thereby reducing the loss or increasing the income per
common share.
In arriving at diluted weighted-average shares and per share amounts for
the three and six months ended June 29, 2002 and June 30, 2001, options
and warrants with exercise prices below average market prices for the
respective fiscal quarters in which they were dilutive were included
using the treasury stock method.
4. Accounting Standards Recently Adopted and Not Yet Adopted
---------------------------------------------------------
Recently Adopted:
Effective December 30, 2001, the Company adopted FASB Statement No. 141,
Business Combinations which eliminates the pooling method of accounting
for business combinations and Statement No. 142, Goodwill and Other
6
Intangible Assets which eliminates the amortization of goodwill and
other intangibles that are determined to have an indefinite life and
requires, at a minimum, annual impairment tests of goodwill and other
intangible assets that are determined to have an indefinite life. The
adoption of these new standards resulted in no amortization of the
Company's goodwill ($38,000) for the six months ended June 29, 2002.
Effective December 30, 2001, the Company adopted Statement 144,
Accounting for Impairment or Disposal of Long-Lived Assets. This
Statement addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. The adoption of this
statement had no impact on the Company's financial statements.
Not Yet Adopted:
In September 2001, the FASB issued Statement 143, Asset Retirement
Obligations. This Statement addresses financial accounting and reporting
for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. The Statement will be
effective for the Company's fiscal year ending December 2003. The
Company does not believe that the adoption of this pronouncement will
have a material effect on its financial statements.
5. Critical Accounting Policies
----------------------------
As a matter of policy, the Company reviews its major assets for
impairment. The Company's major operating assets are accounts
receivable, inventories, and property and equipment. The reserve for
doubtful accounts of $27,000 should be adequate for any exposure to loss
in the Company's June 29, 2002 accounts receivable. The Company has also
established reserves for slow moving and obsolete inventories and
believes the reserve of $680,000 is adequate. The Company depreciates
its property and equipment over their estimated useful lives and has not
identified any items that are impaired as of June 29, 2002. The Company
has established an accrual for warranty expense for future service
expense and believes that the accrual of $132,000 is adequate. The
Company evaluated the realizability of its deferred tax assets and tax
attributes and has provided a valuation allowance primarily for net
operating loss and tax credit carryovers for which the use is subject to
limitation. The Company has significant options and warrants outstanding
and utilizes relevant market and other valuation information relative to
accounting for and reporting equity transactions.
7
PART I: ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
The following discussion and analysis provides information that
management believes is relevant to an assessment and understanding of
the Company's level of operations and financial condition. This
discussion should be read with the consolidated financial statements
appearing in Item 1.
RESULTS OF OPERATIONS
- ---------------------
The Company generates revenues from three sources: retail, recycling and
byproduct. Retail revenues are sales of appliances, warranty and service
revenue and delivery fees. Recycling revenues are fees charged for the
disposal of appliances. Byproduct revenues are sales of scrap metal and
reclaimed chlorofluorocarbons ("CFCs") generated from processed
appliances. The Company is managed as a unit and does not measure profit
or loss separately for its three primary revenue sources. Therefore, the
Company believes that it has one operating segment.
Total revenues for the three and six months ended June 29, 2002 were
$11,734,000 and $23,433,000, respectively, compared to $10,095,000 and
$17,859,000 for the same periods in the prior year, increases of 16% and
31%, respectively.
Retail sales accounted for approximately 61% of revenues in the second
quarter of 2002. Retail revenues for the three and six months ended June
29, 2002 increased by $2,205,000 or 45% and $4,814,000 or 50%,
respectively, from the same periods in the prior year. Second quarter
same-store retail sales increased 10% (a sales comparison of seven
stores that were open the entire second quarters of both 2002 and 2001).
The increase in retail sales was primarily due to an increase in sales
of new in the box product due to additional purchases of new product and
an increase in special buy sales as a result of operating two additional
stores during the three and six months ended June 29, 2002 compared to
the same periods in the previous year. Special buy appliances include
manufacturer closeouts, factory over-runs, floor samples, returned or
exchanged items and scratch and dent appliances. The Company continues
to purchase appliances from three manufacturers, Whirlpool Corporation,
Maytag Corporation and Frigidaire. There are no minimum purchase
requirements with any of these manufacturers. The Company believes
purchases from these three manufacturers will provide an adequate supply
of high-quality appliances for its retail outlets; however, there is a
risk that one or more of these sources could be lost.
In July 2002, the Company signed an agreement with Whirlpool
Corporation. The terms of the agreement are basically unchanged from the
previous agreement.
8
RESULTS OF OPERATIONS - continued
- ---------------------------------
Currently, the Company has ten retail locations. The Company plans to
open one or two additional stores later this year in existing markets.
The Company experiences seasonal fluctuations and expects retail sales
to be higher in the second and third calendar quarters than in the first
and fourth calendar quarters, reflecting consumer purchasing cycles.
Recycling revenues for the three and six months ended June 29, 2002
decreased by $681,000 or 14% and increased by $553,000 or 7%,
respectively, from the same periods in the prior year. The decrease in
the second quarter of 2002 in recycling revenues was primarily due to a
decrease in refrigerator recycling volumes related to the contract with
Southern California Edison Company ("Edison") offset by an increase in
the recycling volume related to the Company's contract ("the Appliance
Early Retirement and Recycling Program") with the California Public
Utilities Commission ("CPUC"). The slight increase in the six months
ended June 29, 2002 in recycling revenues was primarily due to an
increase in total recycling volumes from all the various recycling
contracts in California. The Company had been recycling appliances for
Edison under an extension of Edison's 2001 Residential Recycling
Program. In July 2002, the Company signed a contract in support of
California's Statewide Residential Recycling Program for 2002 to be
administered by Edison. This contract was effective April 1, 2002 and
continues to December 31, 2002. Recycling services for this statewide
program include customers of Edison, Pacific Gas and Electric ("PG&E")
and San Diego Gas and Electric ("SDG&E"). The Company is responsible for
advertising in the PG&E and SDG&E areas only. Edison is responsible for
advertising in the Edison area.
The Appliance Early Retirement and Recycling Program is a
refrigerator/freezer/room air conditioner recycling program that
operates in San Diego and surrounding areas, a six county region in
California's Central Valley, including the cities of Fresno and Stockton
and the seven county Bay Area, including San Francisco. The program
began in June 2001 and will be completed in August 2002. The Company is
responsible for advertising the program.
The energy crisis in California has not had a material adverse effect on
the Company's operations. However, there can be no assurance that it
will not have an adverse effect in the future if Edison or the CPUC is
unable to perform under the terms of its contracts with the Company.
Byproduct revenues for the three and six months ended June 29, 2002
increased to $385,000 and $647,000 from $270,000 and $440,000,
respectively, from the same periods of 2001. The increases were
primarily due to an increase in the volume of CFCs and an increase in
scrap metal prices offset by a decrease in CFC prices.
9
RESULTS OF OPERATIONS - continued
- ---------------------------------
Gross profit as a percentage of total revenues for the three and six
months ended June 29, 2002 decreased slightly to 38% and 36%,
respectively, from 39% and 40%, respectively, for the three and six
months ended June 30, 2001. The slight decreases were primarily due to
higher recycling costs related to the recycling programs offset by
higher gross margin in sales of special buy appliances. Gross profit as
a percentage of total revenues for future periods can be affected
favorably or unfavorably by numerous factors, including the volume of
appliances recycled from the Edison contracts and the CPUC contract, the
mix of retail product sold during the period and the price and volume of
byproduct revenues. The Company believes that gross profit as a
percentage of total revenues for the year will be slightly less than the
gross profit as a percentage of total revenues for the first six months
of this year.
Selling, general and administrative expenses for the three and six
months ended June 29, 2002 increased by $330,000 or 11% and $1,259,000
or 23%, respectively, from the same periods in 2001. Selling expenses
for the three and six months ended June 29, 2002 increased by $479,000
or 34% and $1,074,000 or 40%, respectively, from the same periods in
2001. The increases in selling expenses were primarily due to the
expenses of opening one store during the first quarter of 2002 and
operating two additional stores in 2002 as compared to the same periods
in the previous year. General and administrative expenses for the three
and six months ended June 29, 2002 decreased by $149,000 or 9% and
increased by $185,000 or 7%, respectively, from the same periods in
2001. The decrease in general and administrative expenses for the second
quarter of 2002 was primarily due to a decrease in customer service
related costs related to the recycling programs. The increase in general
and administrative expenses for the six months ended June 29, 2002 was
primarily due to personnel costs related to the Company's retail growth.
Interest expense was $263,000 for the three months and $528,000 for the
six months ended June 29, 2002 compared to $270,000 and $510,000 for the
same periods in 2001. The decrease in interest expense for the second
quarter of 2002 compared to the same period in the prior year was due to
a lower average borrowed amount and a lower effective interest rate on
the line of credit offset by a higher minimum interest amount. The
increase in interest expense for the six months ended June 29, 2002
compared to the prior year was due to higher minimum interest amount.
The Company recorded a provision for income taxes for the three and six
months ended June 29, 2002 of $360,000 and $519,000, respectively,
compared to $285,000 and $514,000 in same periods in 2001. The increase
was due to greater pre-tax income partially offset by a lower effective
tax rate for the three and six months ended June 29, 2002 compared to
the same periods in the prior year.
10
RESULTS OF OPERATIONS - continued
- ---------------------------------
The Company has net operating loss carryovers and credit carryforwards
of approximately $7 million at June 29, 2002, 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 significant limitations under provisions of the
Internal Revenue Code including limitations subject to Section 382,
which relate to a 50 percent change in control over a three-year period,
and are further dependent upon the Company maintaining profitable
operations. The Company believes that the issuance of Common Stock
during 1999 resulted in an "ownership change" under Section 382.
Accordingly, the Company's ability to use net operating loss
carryforwards generated prior to February 1999 is limited to
approximately $56,000 per year or less than $1 million through 2018.
At June 29, 2002, the Company had recorded cumulative valuation
allowances of approximately $2,998,000 against its net deferred tax
assets due to the uncertainty of their realization. The realization of
deferred tax assets is dependent upon sufficient future taxable income
during the periods when deductible temporary differences and
carryforwards are expected to become available to reduce taxable income.
The Company recorded net income of $537,000 or $.16 per diluted share
and $775,000 or $.23 per diluted share for the three months and six
months ended June 29, 2002, respectively, compared to net income of
$393,000 or $.13 per diluted share and $709,000 or $.24 per diluted
share in the same periods of 2001. The increases in net income for the
three and six months ended June 29, 2002 compared to the same periods in
the previous year were primarily due to higher revenues and gross profit
percentage decreasing slightly offset by selling, general and
administrative expenses as a percentage of revenues decreasing slightly
for the three and six months ended June 29, 2002 compared to the same
periods in the previous year.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
At June 29, 2002, the Company had working capital of $3,280,000 compared
to $3,188,000 at December 29, 2001. Cash and cash equivalents increased
to $782,000 at June 29, 2002 from $506,000 at December 29, 2001. Net
cash provided by operating activities was $833,000 for the six months
ended June 29, 2002 compared to net cash used in operating activities of
$1,815,000 in the same period of 2001. The cash provided by operating
activities was primarily due to a decrease in accounts receivable and an
increase in accounts payable for the period.
The Company's capital expenditures for the six months ended June 29,
2002 and June 30, 2001 were approximately $214,000 and $515,000,
respectively. The 2002 capital expenditures were primarily related to
leasehold improvements for the retail store opened in March 2002. The
2001 capital expenditures were primarily related to the continued
11
LIQUIDITY AND CAPITAL RESOURCES - continued
- -------------------------------------------
upgrade of computer systems and the purchase of equipment related to the
refrigerator recycling operation.
As of June 29, 2002, the Company had a $10.0 million line of credit with
a lender. The interest rate on the line as of June 29, 2002 was 5.75%.
The amount of borrowings available under the line of credit is based on
a formula using receivables and inventories. The line of credit has a
stated maturity date of August 30, 2004 and provides that the lender may
demand payment in full of the entire outstanding balance of the loan at
any time. The line of credit is secured by substantially all the
Company's assets and requires minimum monthly interest payments of
$37,500 regardless of the outstanding principal balance. The lender also
has an inventory repurchase agreement with Whirlpool Corporation that
secures the line of credit. The line requires that the Company meet
certain financial covenants, provides payment penalties for
noncompliance and prepayment, limits the amount of other debt the
Company can incur, limits the amount of spending on fixed assets and
limits payments of dividends. At June 29, 2002, the Company had unused
borrowing capacity of $697,000.
A summary of our contractual cash obligations at June 29, 2002 is as
follows:
--------------------------------------------------------------------------------------
(in thousands) PAYMENTS DUE BY PERIOD
----------------------- --------------------------------------------------------------------------------------
CONTRACTUAL TOTAL 2002 2003 2004 2005 2006 2007
OBLIGATIONS 3RD & 4TH QTR
----------------------- ------------ ---------------- ------------ ----------- ----------- --------- ---------
Long-term debt,
including interest $ 6,043 $ 546 $1,460 $1,250 $2,784 $ 3 $ --
----------------------- ------------ ---------------- ------------ ----------- ----------- --------- ---------
Operating leases $ 5,938 $1,039 $1,510 $1,309 $1,317 $585 $178
----------------------- ------------ ---------------- ------------ ----------- ----------- --------- ---------
Total contractual Cash
obligations $11,981 $1,585 $2,970 $2,559 $4,101 $588 $178
----------------------- ------------ ---------------- ------------ ----------- ----------- --------- ---------
We also have a commercial commitment as described below:
---------------------------- --------------------------- -------------------------- --------------------------
OTHER COMMERCIAL COMMITMENT TOTAL AMOUNT COMMITTED OUTSTANDING AT 6/29/02 DATE OF EXPIRATION
---------------------------- --------------------------- -------------------------- --------------------------
Line of credit $10,000,000 $4,573,000 August 30,2004
---------------------------- --------------------------- -------------------------- --------------------------
We believe that our cash balance, availability under our line of credit,
if needed, and anticipated cash flows from operations will be adequate
to fund our cash requirements for fiscal 2002.
12
LIQUIDITY AND CAPITAL RESOURCES - continued
- -------------------------------------------
In July 2002, the Company signed a contract in support of California's
Statewide Residential Recycling Program for 2002 to be administered by
Edison. This contract is effective April 1, 2002 and continues to
December 31, 2002. Recycling services for this statewide program include
customers of Edison, Pacific Gas and Electric ("PG&E") and San Diego Gas
and Electric ("SDG&E"). The Company is responsible for advertising in
the PG&E and SDG&E areas only. Edison is responsible for advertising in
the Edison area.
The energy crisis in California has not had a material adverse affect on
the Company's operations. However there can be no assurance that it will
not have had adverse effect in the future if Edison or the CPUC is
unable to perform under the terms of its contracts with the Company.
The Company believes, based on the anticipated revenues from the
Statewide Residential Recycling Program contract and the current CPUC
contract, anticipated sales per retail store and anticipated gross
profit, that its cash balance, anticipated funds generated from
operations and its current line of credit, will be sufficient to finance
its operations and capital expenditures through December 2002. The
Company's total capital requirements for 2002 will depend on, among
other things as discussed below, the recycling volumes generated from
the Statewide Residential Recycling Program and the current CPUC program
in 2002 and the number and size of retail stores operating during the
fiscal year. Currently, the Company has three recycling centers and ten
retail stores in operation. If revenues are lower than anticipated or
expenses are higher than anticipated, the Company may require additional
capital to finance operations. Sources of additional financing, if
needed in the future, may include further debt financing or the sale of
equity (common or preferred stock) or other securities. There can be no
assurance that such additional sources of financing will be available or
available on terms satisfactory to the Company or permitted by the
Company's current lenders.
FORWARD-LOOKING STATEMENTS
- --------------------------
Statements contained in this quarterly report regarding the Company's
future operations, performance and results, and anticipated liquidity
are forward-looking and therefore are subject to certain risks and
uncertainties, including, but not limited to, those discussed herein.
Any forward-looking information regarding the operations of the Company
will be affected primarily by the Company's continued ability to
purchase product from Whirlpool, Maytag and Frigidaire at acceptable
prices and the ability and timing of Edison to deliver units under the
Statewide Residential Recycling Program contract with the Company and
the ability and timing of the CPUC to deliver units under its contract
with the Company. In addition, any forward-looking information will also
be affected by the ability of individual retail stores to meet planned
revenue levels, the 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 special buy and used
appliances for resale and the continued availability of the Company's
current line of credit.
13
PART I: ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
- --------------------------------------------------------------------------------
MARKET RISK AND IMPACT OF INFLATION
- -----------------------------------
The Company does not believe there is any significant risk related to
interest rate fluctuations on its long-term debt since it has fixed
rates. However, there is interest rate risk on the line of credit since
its interest rate is based on the prime rate. Also, the Company believes
that inflation has not had a material impact on the results of
operations for the three and six-month periods ended June 29, 2002.
However, there can be no assurance that future inflation will not have
an adverse impact on the Company's operating results and financial
condition.
PART II. OTHER INFORMATION
- --------------------------------------------------------------------------------
ITEM 1 - LEGAL PROCEEDINGS
-----------------
The Company and its subsidiaries are involved in various legal
proceedings arising in the normal course of business, none of which is
expected to result in any material loss to the Company or any of its
subsidiaries.
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS - None
-----------------------------------------
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES - None
-------------------------------
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
On April 25, 2002 the Annual Meeting of Shareholders of Appliance
Recycling Centers of America, Inc. was held to obtain the approval of
shareholders of record as of March 15, 2002 in connection with the
three matters indicated below. Proxies were mailed to the holders of
2,316,971 shares. Following is a brief description of each matter voted
on at the meeting and the number of votes cast for, against or
withheld, as well as the number of abstentions and broker nonvotes, as
to each matter:
14
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - continued
- ---------------------------------------------------------------
Vote
----------------------------------
Matter For Withhold Authority
------ --- ------------------
1. Election of Directors:
Edward R. Cameron 2,160,580 8,578
George B. Bonniwell 2,133,520 35,638
Duane S. Carlson 2,133,345 35,813
Harry W. Spell 2,133,195 35,963
Marvin Goldstein 2,160,063 9,095
2. Approval and adoption of the Amendment to the 1997 Stock Option
Plan.
Vote
----------------------------------------------------
For Against Abstain Not Voted
--- ------- ------- ---------
1,518,732 74,915 3,775 571,736
3. Ratification of McGladrey & Pullen, LLP as independent public
accountants for fiscal year ending December 28, 2002.
Vote
----------------------------------------------------
For Against Abstain Not Voted
--- ------- ------- ---------
2,159,463 7,075 2,620 0
ITEM 5 - EXHIBITS AND REPORTS ON FORM 8-K
(a)(i) Exhibit 10.1 - Agreement dated June 18, 2002 between Southern
California Edison Company and Appliance Recycling Centers of
America, Inc.
(ii) Exhibit 99.1 - Certification pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
(iii) Exhibit 99.2 - Certification pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
(b)(i) The Company filed a Form 8-K on April 10, 2002 announcing the
its ApplianceSmart operation has joined the MARTA Cooperative,
a national purchasing cooperative servicing 110 household
appliance retailers.
(ii) The Company filed a Form 8-K on April 24, 2002 announcing it
1st Quarter 2002 operating results.
ITEM 6 - OTHER INFORMATION - None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Appliance Recycling Centers of America, Inc.
--------------------------------------------
Registrant
Date: August 9, 2002 /s/ Edward R. Cameron
----------------------------------------
Edward R. Cameron
President
Date: August 9, 2002 /s/ Linda Koenig
----------------------------------------
Linda Koenig
Controller
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