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 October 3, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-19621
APPLIANCE RECYCLING CENTERS OF AMERICA, INC.
MINNESOTA
(State or other jurisdiction of 41-1454591
incorporation or organization) (I.R.S. Employer
7400 Excelsior Blvd. Identification No.)
Minneapolis, Minnesota 55426-4517
(Address of principal executive offices)
(612) 930-9000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
YES __X__ NO _____
As of November 13, 1998, the number of shares outstanding of the registrant's no
par value common stock was 1,236,744 shares.
<PAGE>
APPLIANCE RECYCLING CENTERS of AMERICA, INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1: Financial Statements:
Consolidated Balance Sheets as of
October 3, 1998 and January 3, 1998
Consolidated Statements of Operations for the
Three and Nine Months Ended October 3, 1998
and September 27, 1997
Consolidated Statements of Cash Flows for the
Nine Months Ended October 3, 1998
and September 27, 1997
Notes to Consolidated Financial Statements
Item 2: Management's Discussion and Analysis
of Financial Condition and Results of Operations
PART II. OTHER INFORMATION
<PAGE>
Appliance Recycling Centers of America, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
October 3, January 3,
1998 1998
- - -------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 696,000 $ 13,000
Accounts receivable, net of allowance of $75,000
and $35,000, respectively 1,170,000 736,000
Inventories 1,937,000 694,000
Other current assets 135,000 140,000
Refundable income taxes -- 29,000
- - -------------------------------------------------------------------------------------------------------
Total current assets $ 3,938,000 $ 1,612,000
- - -------------------------------------------------------------------------------------------------------
Property and Equipment, at cost
Land $ 2,103,000 $ 2,103,000
Buildings and improvements 4,156,000 3,955,000
Equipment 3,718,000 5,461,000
- - -------------------------------------------------------------------------------------------------------
$ 9,977,000 $ 11,519,000
Less accumulated depreciation 4,070,000 4,807,000
- - -------------------------------------------------------------------------------------------------------
Net property and equipment $ 5,907,000 $ 6,712,000
- - -------------------------------------------------------------------------------------------------------
Other Assets $ 335,000 $ 55,000
Goodwill, net 162,000 190,000
- - -------------------------------------------------------------------------------------------------------
Total assets $ 10,342,000 $ 8,569,000
=======================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Line of credit $ 526,000 $ 1,513,000
Current maturities of long-term obligations 107,000 101,000
Accounts payable 1,808,000 1,136,000
Accrued expenses 789,000 821,000
- - -------------------------------------------------------------------------------------------------------
Total current liabilities $ 3,230,000 $ 3,571,000
Long-Term Obligations, less current maturities 4,955,000 1,633,000
- - -------------------------------------------------------------------------------------------------------
Total liabilities $ 8,185,000 $ 5,204,000
- - -------------------------------------------------------------------------------------------------------
Shareholders' Equity
Common stock, no par value; authorized 10,000,000
shares; issued and outstanding 1,237,000 shares as of
October 3, 1998 and 1,137,000 shares as of January 3, 1998 $ 10,857,000 $ 10,350,000
Accumulated deficit (8,700,000) (6,985,000)
- - -------------------------------------------------------------------------------------------------------
Total shareholders' equity $ 2,157,000 $ 3,365,000
- - -------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 10,342,000 $ 8,569,000
=======================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
Appliance Recycling Centers of America, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------------------------------------------------------
October 3, September 27, October 3, September 27,
1998 1997 1998 1997
- - ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues
Retail revenues $ 2,170,000 $ 1,047,000 $ 5,638,000 $ 3,013,000
Recycling revenues 1,846,000 1,411,000 4,013,000 4,881,000
Byproduct revenues 238,000 331,000 828,000 1,134,000
- - ----------------------------------------------------------------------------------------------------------------------------
Total revenues $ 4,254,000 $ 2,789,000 $ 10,479,000 $ 9,028,000
Cost of Revenues 2,529,000 1,716,000 6,944,000 5,077,000
- - ----------------------------------------------------------------------------------------------------------------------------
Gross profit $ 1,725,000 $ 1,073,000 $ 3,535,000 $ 3,951,000
Selling, General and Administrative Expenses 1,602,000 1,175,000 4,567,000 3,842,000
Loss on Impaired Assets -- -- 518,000 --
- - ----------------------------------------------------------------------------------------------------------------------------
Operating income (loss) $ 123,000 $ (102,000) $ (1,550,000) $ 109,000
Other Income (Expense)
Other income 8,000 (1,000) 277,000 118,000
Interest income -- 4,000 1,000 8,000
Interest expense (182,000) (82,000) (412,000) (255,000)
- - ----------------------------------------------------------------------------------------------------------------------------
Income (loss) before provision for income taxes
and minority interest $ (51,000) $ (181,000) $ (1,684,000) $ (20,000)
Provision for (Benefit of) Income Taxes 30,000 (2,000) 31,000 (31,000)
- - ----------------------------------------------------------------------------------------------------------------------------
Income (loss) before minority interest $ (81,000) $ (179,000) $ (1,715,000) $ 11,000
Minority Interest in Net Income of Subsidiary -- 31,000 -- 85,000
- - ----------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (81,000) $ (210,000) $ (1,715,000) $ (74,000)
============================================================================================================================
Basic and Diluted Earnings (Loss) per Common Share $ (0.07) $ (0.18) $ (1.44) $ (0.07)
============================================================================================================================
Weighted Average Number of Common Shares 1,237,000 1,137,000 1,187,000 1,137,000
============================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
Appliance Recycling Centers of America, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
-------------------------------
October 3, September 27,
1998 1997
- - -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows from Operating Activities
Net income (loss) $ (1,715,000) $ (74,000)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 587,000 814,000
Minority interest in subsidiary -- 85,000
Loss on impaired assets 518,000 --
(Gain) loss on sale of equipment (232,000) (66,000)
Change in assets and liabilities:
(Increase) decrease in:
Receivables (434,000) 129,000
Inventories (1,243,000) (16,000)
Other current assets 5,000 56,000
Refundable income taxes 29,000 371,000
Increase (decrease) in:
Accounts payable 672,000 (469,000)
Accrued expenses (32,000) (419,000)
- - -----------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities $ (1,845,000) $ 411,000
- - -----------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Purchase of property and equipment $ (270,000) $ (204,000)
Proceeds from disposal of property and equipment 237,000 86,000
- - -----------------------------------------------------------------------------------------------------
Net cash used in investing activities $ (33,000) $ (118,000)
- - -----------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Decrease in line of credit $ (987,000) $ (299,000)
Payments on long-term obligations (389,000) (172,000)
Proceeds from sale of common stock 200,000 --
Proceeds from long-term debt obligations 3,718,000 --
Proceeds ascribed to warrants issued in conjunction
with long-term debt 307,000 --
Fees from financing activities (288,000) --
- - -----------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities $ 2,561,000 $ (471,000)
- - -----------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents $ 683,000 $ (178,000)
Cash and Cash Equivalents
Beginning 13,000 280,000
- - -----------------------------------------------------------------------------------------------------
Ending $ 696,000 $ 102,000
- - -----------------------------------------------------------------------------------------------------
Supplemental Disclosures of Cash Flow Information
Cash payments (receipts) for:
Interest $ 414,000 $ 255,000
Income taxes net of refunds $ 1,000 $ (400,000)
=====================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
Appliance Recycling Centers of America, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
1. Financial Statements
In the opinion of management of the Company, the accompanying unaudited
consolidated financial statements contain all adjustments (consisting of
only normal, recurring accruals) necessary to present fairly the
financial position of the Company and its subsidiaries as of October 3,
1998, and the results of operations for the three-month and nine-month
periods and its cash flows for the nine-month periods ended October 3,
1998 and September 27, 1997. The results of operations for any interim
period are not necessarily indicative of the results for the year. These
interim consolidated financial statements should be read in conjunction
with the Company's annual financial statements and related notes in the
Company's Annual Report on Form 10-K for the year ended January 3, 1998.
2. Accrued Expenses Accrued expenses were as follows:
October 3, January 3,
1998 1998
--------- ---------
Compensation $220,000 $167,000
Lease contingencies
and closing costs 110,000 289,000
Other 459,000 365,000
--------- ---------
$789,000 $821,000
========= =========
3. 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.
4. Loss On Impaired Assets
During the three months ended July 4, 1998, the Company elected to
curtail its appliance shredding operation and intensify its strategic
focus on appliance retailing. As a result, the Company recorded $518,000
as a loss on impaired assets.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
5. Whirlpool Agreement
On July 8, 1998, the Company entered into an agreement with Whirlpool
Corporation for the acquisition of distressed appliances ("Whirlpool
Agreement"). Under the Whirlpool Agreement, the Company has the
exclusive right and has the obligation to purchase from Whirlpool all
Whirlpool distressed appliances in the Midwest and certain western
states. Under the Whirlpool Agreement, the Company must purchase up to
$3,000,000 of distressed appliances in any three-month period, with
certain exceptions. The Whirlpool Agreement may be terminated by either
party upon 180 days' written notice, however, it is not terminable by
Whirlpool before July 8, 1999 except for cause. Cause is defined in the
Whirlpool Agreement to include (i) the Company's breach of the Whirlpool
Agreement, (ii) the Company's misappropriation of Whirlpool funds, (iii)
the Company ceases to exist as a going concern, or (iv) the Company uses
Whirlpool trademarks without the written consent of Whirlpool. In
addition, the Company has agreed to indemnify Whirlpool for certain
claims, allegations or losses with respect to Whirlpool appliances sold
by the Company. The Agreement is expected to supply the Company's
Encore(R)and Appliance$mart(SM) retail outlets with a significant supply
of Whirlpool appliances.
<PAGE>
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 revenues,
recycling revenues and byproduct revenues. Retail revenues are sales of
appliances, extended warranty sales and delivery fees. Recycling
revenues are fees charged for the disposal of appliances. Byproduct
revenues are sales of materials generated from processed appliances.
Total revenues for the three and nine months ended October 3, 1998 were
$4,254,000 and $10,479,000, respectively, compared to $2,789,000 and
$9,028,000 for the same periods in the prior year.
Retail revenues for the three and nine months ended October 3, 1998
increased by $1,123,000 or 107.3% and $2,625,000 or 87.1%, respectively,
from the same periods in the prior year. Third quarter same-store retail
sales increased 138% (a sales comparison of 10 stores that were open the
entire third quarters of 1998 and 1997). Retail sales accounted for
approximately 51% of revenues in the third quarter of 1998. The increase
in retail sales was primarily due to increased sales of Whirlpool
product.
In July 1998, the Company announced that it had entered into a contract
with Whirlpool Corporation to acquire its distressed appliances
(including "scratch and dent" units with only cosmetic imperfections)
from distribution centers serving the Midwest and certain western
states.
Currently, the Company has 11 retail locations. The Company plans to
continue focusing on increasing sales in the geographic areas where it
is currently located. It plans to consolidate certain of its existing
stores and open an additional three to five new stores over the next 12
months. 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.
<PAGE>
RESULTS OF OPERATIONS - continued
Recycling revenues increased for the three months ended October 3, 1998
by $435,000 or 30.8% and decreased for the nine months ended October 3,
1998 by $868,000 or 17.8% as compared to the same periods in the prior
year. The increase in recycling revenues in the third quarter of 1998
was primarily due to the increase in refrigerator recycling volume
related to the contract with Southern California Edison Company
("Edison"). The decrease in recycling revenues for the nine months ended
October 3, 1998 was primarily due to lower contract volume of appliances
than in the previous year. The contract with Edison, which ended
September 30, 1998, has generated $3.0 million in revenues in 1998. At
this time, no definitive contract has been entered into for the fourth
quarter of 1998. However, Edison has indicated its intention to extend
its refrigerator recycling program through December 1998. Also, no
definitive contract has been entered into for 1999. Edison is expected
to file its proposed program for 1999 with the California Public
Utilities Commission in mid-November 1998.
Byproduct revenues for the three and nine months ended October 3, 1998
decreased by $93,000 or 28.1% and $306,000 or 27.0%, respectively, from
the same periods in the prior year. The decrease was primarily due to
lower sales of reclaimed chlorofluorocarbons due to fewer refrigerators
being recycled and lower scrap revenue due to a decrease in scrap
prices.
Gross profit as a percentage of total revenues for the three months
ended October 3, 1998 increased to 40.6% from 38.5% and decreased to
33.7% from 43.8% for the nine months ended October 3, 1998. The increase
in the third quarter of 1998 was primarily due to an increase in
recycling revenues related to the Edison contract. The decrease in gross
profit as a percentage of total revenues for the nine months ended
October 3, 1998 was primarily due to retail revenues, which have a lower
gross profit than recycling revenues, being a higher percentage of total
revenues. Gross profit as a percentage of total revenues for future
periods can be affected favorably or unfavorably by numerous factors,
including the volume of appliances recycled from the Edison contract,
the volume of Whirlpool product sold during the period and the price and
volume of byproduct revenues. The Company expects margins to continue to
decline as retail revenues become a higher percentage of total revenues.
<PAGE>
RESULTS OF OPERATIONS - continued
Selling, general and administrative expenses for the three and nine
months ended October 3, 1998 increased by $427,000 or 36.3% and $725,000
or 18.9%, respectively, from the same periods in 1997. Selling expenses
for the three and nine months ended October 3, 1998 increased by
$148,000 or 41.5% and $357,000 or 32.8%, respectively, from the same
periods in 1997. The increase in selling expenses for the third quarter
of 1998 compared to 1997 was primarily due to an increase in advertising
for the retail stores and an increase in sales commissions. The increase
in selling expenses for the nine months ended October 3, 1998 was
primarily due to an increase in costs associated with opening an
additional retail store during the first quarter of 1998, an increase in
sales commissions and an increase in advertising during the first nine
months of 1998. General and administrative expenses for the three and
nine months ended October 3, 1998 increased by $279,000 or 34.1% and
$368,000 or 13.4%, respectively, from the same periods in 1997. The
increase in general and administrative expenses was primarily due to
increased expenses related to personnel costs.
The Company took a one-time charge of $518,000 during the three months
ended July 4, 1998 related to a loss on impaired assets 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 for the three and nine months ended October 3, 1998
increased by $100,000 or 122.0% and $157,000 or 61.6%, respectively,
from the same periods in 1997. The increase in interest expense was due
to a higher average borrowed amount for the three and nine months ended
October 3, 1998 than in the same periods in 1997.
The Company recorded a provision for income taxes for the nine months
ended October 3, 1998 of $31,000. The Company recorded a benefit of
income taxes of $31,000 and a related receivable of $29,000 for the nine
months ended September 27, 1997 due to the liquidation of its Canadian
subsidiary. The income taxes receivable became unrealizable during the
third quarter of 1998 upon the liquidation of its Canadian subsidiary.
The Company also has available net operating loss carryforwards that
total approximately $7,344,000 which expire in the years 2011 through
2013. At October 3, 1998, the Company had a valuation allowance recorded
against its net deferred tax assets of approximately $3,632,000, due to
uncertainty of realization. Realization of deferred tax assets is
dependent upon the generation of sufficient future taxable income during
the period that deductible temporary differences and carryforwards are
expected to become available to reduce taxable income.
<PAGE>
RESULTS OF OPERATIONS - continued
During the fourth quarter of 1997, the Company purchased all the
minority shareholder's stock in ARCA California, Inc., a subsidiary of
the Company. Prior to that time, the California subsidiary was owned 80%
by the Company and 20% by a minority shareholder. Accordingly, a
minority interest was recorded for the three and nine months ended
September 27, 1997, of $31,000 and $85,000, respectively.
The Company recorded a net loss of $81,000 (or $.07 per share) for the
three months and $1,715,000 (or $1.44 per share) for the nine months
ended October 3, 1998, compared to a net loss of $210,000 (or $.18 per
share) and $74,000 (or $.07 per share) in the same periods of 1997. The
decrease in income was primarily due to the one-time charge and higher
operating and selling, general and administrative expenses offset by
higher retail sales, as discussed above.
LIQUIDITY AND CAPITAL RESOURCES
At October 3, 1998, the Company had a working capital surplus of
$708,000 compared to a working capital deficit of $1,959,000 at January
3, 1998. Cash and cash equivalents increased to $696,000 at October 3,
1998 from $13,000 at January 3, 1998. Net cash used in operating
activities was $1,845,000 for the nine months ended October 3, 1998
compared to net cash provided by operating activities of $411,000 in the
same period of 1997. The decrease in cash provided by operating
activities was primarily due to the net loss for the period plus an
increase in inventories, offset by an increase in accounts payable and
the loss on impaired assets.
The Company's capital expenditures for the nine months ended October 3,
1998 and September 27, 1997 were approximately $270,000 and $204,000,
respectively. The 1998 and 1997 capital expenditures were primarily
related to building improvements.
As of October 3, 1998, the Company had a $2.0 million line of credit
with a lender. The interest rate as of October 3, 1998 was 13-1/4%. 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, 1999 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 receivables and inventories
and is guaranteed by the President of the Company. The loan also
requires that the Company meet certain financial covenants, provides
payment penalties for noncompliance, limits the amount of other debt the
Company can incur, limits the amount of spending on fixed assets and
limits payments of dividends. At October 3, 1998, the Company's unused
borrowing capacity was $600,000.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES - continued
On May 19, 1998, the Company sold in a private placement, 100,000 shares
of Common Stock at a price of $2.00 per share. The sale, which
represents approximately 8% of the Common Stock outstanding after such
sale, was made to an institutional investor. The proceeds were used for
additional working capital.
In June 1998, the Company entered into a ten-year, 9.88% mortgage
loan for $250,000. The proceeds from the mortgage loan were used to
remodel one of its retail stores.
In July 1998, the Company issued 12% subordinate promissory notes in the
principal amount of $275,000, plus warrants to purchase Common Stock.
The notes were paid in September 1998 with proceeds of the September
1998 Loan (as defined below). The lenders also received an aggregate of
68,750 warrants to purchase the Company's Common Stock at $2.25 per
share. The loan proceeds were used to purchase inventory and provide
additional working capital.
In September 1998, the Company announced that it had entered into a loan
agreement with a lender resulting in gross proceeds of $3.5 million
("September 1998 Loan"). The maturity date for the loan is September 30,
2005 and the annual interest rate is 13%. The loan is secured by all the
Company's personal property and all of its real estate. The Company
issued to the lender, in connection with the loan, a warrant to purchase
700,000 shares of Common Stock at $2.50 per share, which price may be
adjusted in certain circumstances. The Company also issued to the
investment banker, in connection with the September 1998 Loan, a warrant
to purchase 125,000 shares of Common Stock at $2.50 per share and paid a
placement fee of $180,000. The Company used the proceeds to repay
certain indebtedness (including approximately $1,500,000 of outstanding
indebtedness), to finance inventory and for other general corporate
purposes.
The portion of the gross loan proceeds ascribed to the warrants issued
in conjunction with debt was $307,000.
The Company does not believe that it has any significant risk related to
interest rate fluctuation since it has only fixed rate debt, except the
line of credit.
As previously reported, effective September 8, 1998, the Company was
delisted from The Nasdaq SmallCap Market because it no longer complied
with The Nasdaq Stock Market's listing requirements.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES - continued
The Company believes, based on the anticipated revenues from the
expected Edison contract, the anticipated sales per retail store and the
anticipated gross profit, that its current cash balance, funds generated
from operations, the current loan and its current line of credit will be
sufficient to finance its operations and capital expenditures through
December 1998. In addition to the above, the Company is currently
investigating avenues to raise additional working capital and to secure
an increased line of credit to finance its operations and capital
expenditures through December 1999. However, if the Company is unable to
raise sufficient additional working capital or if it cannot secure an
increased line of credit, it may be unable to expand its retail
operations on the currently anticipated schedule, if at all. The
Company's total capital requirements will depend, among other things as
discussed below, on the number of recycling centers operating and the
number and size of retail stores operating during the fiscal year.
Currently, the Company has four centers and 11 stores in operation. If
revenues are lower than anticipated or expenses are higher than
anticipated or the line of credit cannot be increased, the Company may
require higher levels of additional capital than is currently expected
to finance operations. Sources of additional financing may include
further debt financing or the sale of equity or other securities. There
can be no assurance that such additional working capital or other
sources of financing will be available or available on terms
satisfactory to the Company or permitted by the Company's current
lender.
YEAR 2000
Based on a recent assessment, the Company determined that it will be
required to modify or replace significant portions of its software so
that its computer systems will properly utilize dates beyond December
31, 1999. The Company presently believes that with modifications to
existing software and conversions to new software, the Year 2000 Issue
can be mitigated. However, if such modifications and conversions are not
made, or are not completed in a timely manner, the Year 2000 Issue could
have a material impact on the operations of the Company.
The Company will utilize both internal and external resources to replace
and test computer software for Year 2000 modifications. The Company
plans to complete the Year 2000 project no later than June 30, 1999. The
costs of the project will be funded through operating cash flows. A
portion of the costs will be incurred to purchase new software, which
will be capitalized. The remaining portion of the cost will be expensed
as incurred over the next year. The overall cost of the project is not
expected to have a material effect on the results of operations.
<PAGE>
YEAR 2000 - continued
The costs of the project and the date on which the Company plans to
complete the Year 2000 modifications are based on management's best
estimates, which were derived utilizing numerous assumptions of future
events including the continued availability of certain resources, third
party modification plans and other factors. However, there can be no
guarantee that these estimates will be achieved and actual results could
differ materially from those plans. Specific factors that might cause
such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to
locate and correct all relevant computer codes, and similar
uncertainties.
FORWARD-LOOKING STATEMENTS
Statements regarding the Company's future operations, need for working
capital, performance and results, and anticipated liquidity discussed
herein are forward-looking and therefore are subject to certain risks
and uncertainties, including those discussed herein among others. In
addition, any forward-looking information regarding the operations of
the Company will be affected by the ability of individual stores to meet
planned revenue levels, the speed at which individual retail stores
reach profitability, costs and expenses being realized at higher than
expected levels, the continued ability to purchase product from
Whirlpool at acceptable prices, the Company's ability to secure an
adequate supply of used appliances for resale, the continued
availability of the Company's current line of credit, the raising of
additional working capital, the renewal of the contract with Edison for
the fourth quarter of 1998 and in 1999 and the ability and timing of
Edison to deliver units under its expected contract with the Company.
<PAGE>
PART II. OTHER INFORMATION
- - --------------------------------------------------------------------------------
ITEM 1 - LEGAL PROCEEDINGS
The Company was involved in certain legal proceedings arising from the
cancellation of leases in connection with the closing of certain
facilities. The Company has established a reserve for lease settlements
and closing costs. (See Note 2 to the Consolidated Financial
Statements.)
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
In July 1998, the Company issued 12% subordinated promissory notes in
the aggregate principal amount of $275,000, which notes were repaid
with the proceeds from the September 1998 Loan. The lenders under such
notes received an aggregate of 68,750 warrants to purchase the
Company's Common Stock at $2.25 per share. Such warrants are
exercisable for three years after July 1998. The securities were issued
pursuant to section 4(2) of the Securities Act of 1933.
The Company entered into a loan agreement with Medallion Capital, Inc.
("Medallion") in connection with the September 1998 Loan discussed
above. The Company issued to Medallion, in connection with the
September 1998 Loan, a warrant to purchase 700,000 shares of Common
Stock at $2.50 per share, which price may adjusted in certain
circumstances. Such warrants may be exercised by Medallion prior to the
latter of September 10, 1998 or two years after the repayment in full
of the September 1998 Loan. Dougherty Summit Securities LLC acted as
placement agent in relation to the September 1998 Loan. The Company
paid the agent compensation including a placement agent fee of $180,000
and warrants to purchase 125,000 shares of the Company's Common Stock
at an exercise price of $2.50 per share. In addition, the Company has
agreed that for an 18-month period commencing September 9, 1998 that
the Company may not complete any similar transaction or any equity
transaction without first offering the agent a first right of refusal
to participate in such transaction. The Company sold the securities
pursuant to section 4(2) of the Securities Act of 1933.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES - None
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - None
ITEM 5 - OTHER INFORMATION
<PAGE>
OTHER INFORMATION - continued
Shareholder Proposals:
Pursuant to the rules of the Securities and Exchange Commission
("SEC"), any shareholder wishing to have a proposal considered for
inclusion in the Company's proxy solicitation material for the 1999
Annual Meeting of Shareholders must set forth such proposal in writing
and file it with the Secretary of the Company no later than November
24, 1998. Pursuant to SEC Rule 14a-4(c)(1), any shareholder wishing to
have a proposal considered at the 1999 Annual Meeting of Shareholders,
but not submitted for inclusion in the Company's proxy solicitation
material, must set forth such proposal in writing and file it with the
Secretary of the Company no later than February 8, 1999 and failure to
notify the Company by such date would allow the Company's proxies to
use their discretionary voting authority when the proposal is raised at
the Annual Meeting (to vote for or against the proposal) without any
discussion of the matter in the proxy materials.
Other Events:
Effective September 8, 1998, the Company was delisted from The Nasdaq
SmallCap Market. The Company cited the fact that it no longer complied
with The Nasdaq Stock Market's continued listing requirements. In
addition, the Company announced that it is continuing to pursue
additional lines of credit.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) (i) Exhibit 10.1 - Loan Agreement between Medallion Capital,
Inc. and Appliance Recycling Centers of America, Inc. dated
September 10, 1998.
(ii) Exhibit 10.2 - Promissory note of the Company to Medallion
Capital, Inc. in the principal amount of $3,500,000 due
September 30, 2005.
(iii) Exhibit 10.3 - Security to agreement of the Company.
(iv) Exhibit 10.4 - Warrant of the Company in favor of Medallion
Capital, Inc. for 700,000 shares of the Company's Common
Stock.
(v) Exhibit No. 27 - Financial Data Schedule.
(b) The Company filed a report on Form 8-K in September 1998
announcing that the Company was delisted from The Nasdaq
SmallCap Market effective September 8, 1998.
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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: November 17, 1998 /s/Edward R. Cameron
----------------------------------------------
Edward R. Cameron
President
Date: November 17, 1998 /s/Kent S. McCoy
----------------------------------------------
Kent S. McCoy
Chief Financial Officer
EXHIBIT 10.1
LOAN AGREEMENT
BETWEEN
MEDALLION CAPITAL, INC.
AND
APPLIANCE RECYCLING CENTERS OF AMERICA, INC.
SEPTEMBER 10, 1998
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TABLE OF CONTENTS
ARTICLE ONE
THE INVESTMENT................................................................1
1.1 Loan.............................................................1
1.2 Security.........................................................1
1.3 Intercreditor Agreement..........................................1
1.4 Warrant..........................................................1
1.5 Securities.......................................................2
1.6 The "Investment".................................................2
1.7 Closing..........................................................2
1.8 Fees.............................................................2
ARTICLE TWO
REPRESENTATIONS AND WARRANTIES................................................2
2.1 Good Standing....................................................3
2.2 Capital Stock....................................................3
2.3 Subsidiaries.....................................................3
2.4 Financial Statements.............................................3
2.5 Use of Proceeds..................................................3
2.6 Absence of Material Changes......................................3
2.7 Shareholders, Officers and Directors.............................4
2.8 Property Ownership; Leases.......................................4
2.9 Ownership of Intellectual Property Rights........................4
2.10 Litigation.......................................................4
2.11 Taxes............................................................4
2.12 Absence of Prohibition or Liens..................................4
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2.13 Authorization....................................................5
2.14 Absence of Public Sales..........................................5
2.15 Finder's or Broker's Fees........................................5
2.16 Small Business Concern...........................................5
2.17 Criminal Offenses................................................5
ARTICLE THREE
AFFIRMATIVE COVENANTS OF THE COMPANY..........................................6
3.1 Prompt Payment of Taxes and Claims...............................6
3.2 Insurance........................................................6
3.3 Repairs..........................................................6
3.4 Board of Directors...............................................6
3.5 Delivery of Financial and Other Documents........................6
3.6 Form of Financial Documents......................................7
3.7 Budget...........................................................8
3.8 Information on Request; Disclosure...............................8
3.9 Corporate Existence..............................................8
3.10 Litigation.......................................................8
3.11 Inspections......................................................8
3.12 Corporate Funds..................................................9
3.13 Civil Rights.....................................................9
ARTICLE FOUR
NEGATIVE COVENANTS OF THE COMPANY.............................................9
4.1 Change of Operations.............................................9
4.2 Dividends........................................................9
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4.3 Expense Reimbursement............................................9
4.4 Transactions with Insiders.......................................9
4.5 Application of Funds.............................................10
4.6 Merger and Subsidiaries..........................................10
4.7 Guaranties.......................................................10
4.8 Indebtedness.....................................................10
4.9 Encumbrances; Conditional Sales..................................10
4.10 Acquisition of Fixed Assets......................................10
4.11 Business Relocation..............................................10
4.12 Change in Control................................................11
4.13 Amend Articles...................................................11
ARTICLE FIVE
SURVIVAL OF REPRESENTATIONS AND WARRANTIES....................................11
ARTICLE SIX
INVESTMENT REPRESENTATION: REGISTRATION AND
TRANSFER OF SECURITIES........................................................11
6.1 Investment Representation........................................11
6.2 Legend...........................................................11
6.3 Transfers........................................................12
6.4 Simultaneous Registration........................................12
6.5 Subsequent One-Time Registration.................................12
6.6 Alternative Subsequent Registration..............................13
6.7 Registration Procedure...........................................13
6.8 Costs of Registration............................................14
6.9 Indemnification of Lender........................................14
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6.10 Indemnification of the Company...................................15
6.11 Termination of Transfer Restrictions.............................15
6.12 Additional Registration Covenants................................15
ARTICLE SEVEN
PRIVATE, RULE 144 SALES.......................................................16
ARTICLE EIGHT
DEFAULT.......................................................................17
8.1 Failure to Pay Interest or Principal.............................17
8.2 Untrue Representation or Warranty................................17
8.3 Contractual Default..............................................17
8.4 Other Obligations................................................18
ARTICLE NINE
REMEDIES......................................................................18
9.1 Legal and Equitable Remedies.....................................18
9.2 Acceleration.....................................................18
ARTICLE TEN
ADDITIONAL ACTIONS TAKEN BY THE COMPANY.......................................18
10.1 Opinion of Counsel for the Company...............................18
10.2 Certified Articles and Certificate of Good Standing..............19
10.3 Certified By-Laws................................................19
10.4 Governmental Authorizations......................................19
10.5 Contracts........................................................19
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10.6 SBA Forms........................................................19
10.7 Security Agreements..............................................19
10.8 Insurance Certificate............................................19
ARTICLE ELEVEN
GENERAL PROVISIONS............................................................20
11.1 Exhibits.........................................................20
11.2 Applicable Law...................................................20
11.3 Assignment.......................................................20
11.4 Headings.........................................................21
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LOAN AGREEMENT
This Agreement is entered into September 10, 1998, between MEDALLION CAPITAL,
INC., a Minnesota corporation, 7831 Glenroy Road, Suite 480, Minneapolis,
Minnesota 55439-3132, a Licensee under the Small Business Investment Act of 1958
("Lender"),
AND
APPLIANCE RECYCLING CENTERS OF AMERICA, INC., a Minnesota corporation, 7400
Excelsior Boulevard, Minneapolis, Minnesota, 55426 (the "Company").
THE PARTIES AGREE AS FOLLOWS:
ARTICLE ONE
THE INVESTMENT
1.1 LOAN.
The Company shall borrow from Lender a total of $3,500,000 (the "Loan") under
the terms described in this Agreement and the Note issued by the Company in the
form attached as Exhibit 1.1.
1.2 SECURITY.
The Company's obligations under the Note, this Agreement, the Warrant and the
Mortgages and Deed of Trust are secured pursuant to the Security Agreement
attached as Exhibit 1.2. and the Mortgages and Deed of Trust attached as Exhibit
10.7
1.3 INTERCREDITOR AGREEMENT.
The Loan is also subject to the Intercreditor Agreement attached as Exhibit 1.3.
1.4 WARRANT.
Lender shall receive a Warrant (the "Warrant") to purchase 700,000 shares of the
Company's common stock. The Warrant shall be exercisable beginning any time
after the Loan closing at an exercise price of $2.50 per share and shall
terminate, if not exercised, upon the latter of the end of the seventh year or
two years after the Loan is paid in full, all as more fully set forth in the
Warrant attached as Exhibit 1.4.
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1.5 SECURITIES.
Unless specifically stated otherwise, any reference in this Agreement to
"Security" or "Securities" shall include any and all of the Note, the Warrant
and any security for which the foregoing are convertible, exchangeable or
otherwise exercisable.
1.6 THE "INVESTMENT."
Any reference in this Agreement to the "Investment" shall refer to the purchase
by Lender of Securities on the terms and conditions stated in this Agreement and
to the Company's agreement to all of the terms and conditions. The Company
acknowledges and agrees that if the Company is not as represented and warranted
or will not comply with all of the Company's agreements that the Lender would
not have made the Investment.
1.7 CLOSING.
This Agreement has been executed by the parties on September 10, 1998 (the
"Closing" or "Closing Date").
1.8 FEES.
The Company shall pay an origination fee in the amount of $70,000 and shall pay
the drafting and legal expenses of Lender not to exceed $5,000. The fees shall
be paid at closing or when billed by Lender.
ARTICLE TWO
REPRESENTATIONS AND WARRANTIES
To induce the Lender to make the Investment in the Company, the Company makes
the representations and warranties set forth below. The Company acknowledges
that these representations and warranties are a critical part of the Company
Profile and are intended to form one of the primary bases of Lender's decision
to make the Investment. Therefore, the Company has used great diligence to
insure that all of the representations and warranties (and the information
supplied pursuant thereto) are complete, accurate and not misleading in light of
the circumstances surrounding the Investment and can be relied on by Lender in
making the Investment. The parties agree that any representation or warranty
which proves to be untrue, incomplete, or misleading in light of the
circumstances, shall constitute a Default (as defined in Article Eight). The
Company further acknowledges and agrees that if the Company is not as
represented and warranted, the Lender would not make the Investment.
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The Company represents and warrants that:
2.1 GOOD STANDING.
The Company is a corporation duly organized, validly existing and in good
standing under the laws of Minnesota, is authorized to engage in the business
now carried on by it, and is qualified as a foreign corporation to do business
in each state where the nature of the business done by it requires
qualification, such states being those listed on 2.1 of the Disclosure Schedule
attached as Exhibit 2.1.
2.2 CAPITAL STOCK.
The Company's authorized and outstanding capital and all outstanding options,
warrants or other securities exercisable or exchangeable for capital stock are
as described in 2.2 of the Disclosure Schedule.
2.3 SUBSIDIARIES.
The Company has the subsidiaries listed in 2.3 of the Disclosure Schedule. As
used in this Agreement, "subsidiary" means any corporation, partnership, joint
venture, limited liability company or other business entity in which the Company
owns, directly or indirectly, shares of any class of equity or debt security.
2.4 FINANCIAL STATEMENTS.
The balance sheet and related statements of earnings and retained earnings for
the periods ending December 31, 1997 and July 4, 1998, (the "Financial
Statements") attached as Exhibit 2.4 present fairly the financial position of
the Company as of their respective dates and the results of its operations for
the periods indicated.
Except as otherwise disclosed in Exhibit 2.4, specifically included in the
Financial Statements are amounts due to or from any officer, director,
shareholder, or employee of the Company or any relative of the foregoing or any
guarantees, pledges or other financial obligations of the Company to or from any
officer, director, shareholder, or employee of the Company or any relative of
the foregoing.
2.5 USE OF PROCEEDS.
The proceeds from the Securities shall be used only as described in the Sources
and Uses Schedule attached as Exhibit 2.5.
2.6 ABSENCE OF MATERIAL CHANGES.
Since the date of the Financial Statements, except as described in 2.6 of the
Disclosure Schedule, there have been no material adverse changes in the
condition, financial or otherwise, of the Company or its business or properties,
nor does the Company know of any which may occur; and since the date of the
Financial Statements , except as described in 2.6 of the Disclosure Schedule,
the Company has not issued, sold or acquired any of the outstanding shares of
any class of its capital stock, nor are there any contingent obligations,
liability for taxes or commitments not disclosed or subject to
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reserve in the Financial Statements of the Company other than transactions
described in this Agreement.
2.7 SHAREHOLDERS, OFFICERS AND DIRECTORS.
Information furnished by the Company relative to the officers and directors of
the Company (including the number of shares of any class of stock held by each),
set forth in 2.7 of the Disclosure Schedule, is true and correct.
2.8 PROPERTY OWNERSHIP; LEASES.
The Company has good title, free and clear of all liens and encumbrances (other
than liens for taxes not delinquent), except as indicated in the Financial
Statements or Disclosure Schedule, to all real estate and assets reflected on
the Financial Statements other than as disposed of in the ordinary course of
business since the date of the Financial Statements. All property or assets not
owned by the Company and used in the operation of its business, if any, are
subject to valid leases held by the Company covering their use or occupancy
which leases are not in default. The Disclosure Schedule contains a list of all
real estate owned or leased by the Company and all liens or encumbrances on the
real estate or assets.
2.9 OWNERSHIP OF INTELLECTUAL PROPERTY RIGHTS.
The Company possesses all patents, licenses, trademarks, trademark rights, trade
names, trade name rights, trade secrets, copyrights and the like ("Intellectual
Property") necessary or appropriate to conduct its business as now conducted
without conflict with those of any other person. All of the foregoing are listed
in 2.9 of the Disclosure Schedule. Attached to the Disclosure Schedule is a
listing of all licenses and/or royalty agreements and/or patent abstracts
relating to any of the Intellectual Property held by the Company.
2.10 LITIGATION.
All of the litigation or proceedings pending, or to the knowledge of the Company
or its principal officers, threatened against it or any of its properties in any
court or by or before any governmental agency or arbitrator are listed in 2.10
of the Disclosure Schedule.
2.11 TAXES.
All Federal, State and other tax returns and reports of the Company required by
law to be filed have been filed and all Federal, State and other taxes,
assessments, fees and other governmental charges (other than those presently
payable without penalty) imposed upon the Company or the properties, assets or
payroll of the Company which are due and payable have been paid. All federal
income tax returns for the prior two tax years are attached as Exhibit 2.11.
2.12 ABSENCE OF PROHIBITION OR LIENS.
There is no provision in the Company's current Articles of Incorporation or
Bylaws, or, except as described in 2.12 of the Disclosure Schedule, in any
indenture or agreement to which the Company is a party, nor any law, rule,
regulations, contract, statute of any
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governmental authority, which limits or prohibits, or which may in the future
limit or prohibit, the execution, delivery or fulfillment by the Company of this
Agreement or its Exhibits or of any of the acts or agreements contemplated by
this Agreement or by the Securities or which results or which may in the future
result in the creation of a lien or encumbrance on any asset of the Company or
on the Securities.
2.13 AUTHORIZATION.
The execution and delivery of this Agreement and of the Securities have been
duly authorized by the Board of Directors of the Company and the officers of the
Company are authorized to enter into this Agreement and take all steps necessary
to carry out its terms. Certified copies of the authorizing resolutions are
attached as Exhibit 2.13.
2.14 ABSENCE OF PUBLIC SALES.
Neither the Company nor any agent acting on its behalf has offered the
Securities or any other security of the Company for sale, nor has it solicited
offers to buy the Securities from any person or persons so as to bring the
issuance or sale of the Securities within the provisions of Section 5 of the
Securities Act of 1933, as amended, or the registration or qualification
requirements of any state securities laws.
2.15 FINDER'S OR BROKER'S FEES.
All finder's fees, brokerage fees, or other expenses and fees due to any person
as a result of the transactions in or contemplated by this agreement shall be
paid solely by the Company.
2.16 SMALL BUSINESS CONCERN.
The Company is a "Small Business Concern" as that term is defined by the Small
Business Administration. No officer or director or stockholder of the Company
is, or has been within 6 months prior to the Closing Date, an officer, director,
agent or employee of Lender or an "Associate", as that term is defined in Part
107 of Title 13 of the Code of Federal Regulations, of Lender. No portion of the
proceeds derived from the sale of the Securities will be used for any purpose in
contravention of any of the provisions of Part 107 of Title 13 of the Code of
Federal Regulations. The Company has never been debarred from contracts with any
governmental unit and no debarment proceedings are currently underway or
threatened by any governmental unit.
2.17 CRIMINAL OFFENSES.
None of the officers or directors of the Company has been convicted of a felony
within the past 10 years.
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ARTICLE THREE
AFFIRMATIVE COVENANTS OF THE COMPANY
The Company acknowledges that the Lender would not have purchased the Securities
except for the Company's promise to take certain actions, which promises were
made to induce Lender to make the Investment. To the extent the Company fails to
fully perform each and every one of the actions described below, the Company
acknowledges that it increases Lender's risk beyond that contemplated or agreed
to by the parties and constitutes a Default. In the event the Company is in
Default on any of the Affirmative Covenants, it agrees to immediately notify
Lender. Failure to so notify Lender shall be considered a Default in its own
right.
3.1 PROMPT PAYMENT OF TAXES AND CLAIMS.
The Company shall pay when due all taxes, lawful claims for labor, materials,
supplies, rents, lease payments and other debts and liabilities which if unpaid
would by law be a lien or charge upon the property of the Company.
3.2 INSURANCE.
The Company shall maintain insurance policies in such types and amounts as are
appropriate for its business. The policies in force on the Closing Date are
listed in 3.2 of the Disclosure Schedule. In the event a policy lapses, is
modified or replaced, the Company shall immediately notify Lender and send
copies of the new policies.
3.3 REPAIRS.
The Company shall maintain in good repair and working order all assets used in
its business.
3.4 BOARD OF DIRECTORS.
The Company's Board of Directors shall meet at least quarterly and consist of at
least 3 people. The Company shall furnish Lender at least 15 days prior to any
Board meeting written notice and an agenda of the meeting and shall provide
Lender promptly a copy of the minutes of all meetings of the Board and all other
actions and other reports of or given to the Board or any committee thereof. A
representative of Lender shall have the right to attend all Board meetings and
have the full rights of a Board member at the meeting except the right to vote
on Board resolutions. The Company shall reimburse Lender (its employees or
representatives) its actual out-of-pocket expenses for meetings with the
Company.
3.5 DELIVERY OF FINANCIAL AND OTHER DOCUMENTS.
The Company shall deliver to Lender:
3.5.1 As soon as available and in any event within 120 days after the
close of each fiscal year (a) a balance sheet of the Company as of the
close of the fiscal year and consolidated statements of income and
retained earnings and changes in financial position for the year then
ended,
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accompanied by an unqualified opinion of the Company's independent
certified public accountants, acceptable to the Lender, and (b) a
letter from such accountants stating whether the Company is in
compliance with the provisions of Sections 4.2, 4.3, 4.4, 4.5, 4.10 and
4.11.
3.5.2 Within 10 days after the Company's issuance or receipt, copies of
all reports submitted to the Company by its certified public
accountants that contain an opinion rendered in connection with an
examination of any financial statements of the Company; the preliminary
prospectus and the effective prospectus contained in any registration
statements filed with the Securities and Exchange Commission; any
annual or periodic reports filed with the Commission; any listing
application filed with any stock exchange; and each annual report and
all other reports, including proxy solicitations, which the Company
shall send to its shareholders.
3.5.3. Within 30 days after each monthly accounting period separate
balance sheets of the Company and each of its subsidiaries as of the
close of each month and statements of income and retained earnings for
the portion of the fiscal year-to-date then ended, prepared in
conformity with paragraph 3.6 and Lender's informational requirements.
Upon request by Lender, a monthly aging report of the Company's
accounts receivable and accounts payable, a copy of the reconciliation
of the Financial Statements to the cash accounts, any off balance sheet
liabilities assumed by the Company, any capital expenditures in excess
of $10,000.
3.6 FORM OF FINANCIAL DOCUMENTS.
For purposes of this Agreement:
3.6.1 Except as provided in subsection 3.6.2, all financial statements
of the Company provided under this Agreement shall be prepared in
conformity with generally accepted accounting principles applied on a
consistent basis.
3.6.2 If any accounting principle, method of valuation or governmental
regulations followed in the preparation of financial statements is
required to be modified by the Financial Accounting Standards Board,
the Company shall so notify Lender, and the financial statements may be
modified to such extent.
3.6.3 All fiscal year-end financial statements delivered to Lender
shall be accompanied by a letter from the certified public accountant
who prepared them stating that such statements have been prepared in
compliance with the provisions of Section 3.6. All other financial
statements and reports delivered to Lender pursuant to this Agreement
shall be accompanied by a certificate signed by the Company's
President, Treasurer or Chief Financial Officer, certifying that they
have been prepared in compliance with the provisions of Section 3.6,
that they fairly and accurately state the current financial condition
of the Company, that the financial statements have been reconciled with
the
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cash accounts, and that all payroll withholding taxes were paid when
due, and that no event of Default existed during the accounting period
covered by the financial statements. (A copy of the form of the
certification is attached as Exhibit 3.6.3.) In the event the
President, Treasurer or Chief Financial Officer cannot certify the
above, a detailed disclosure of those items which cannot be certified
together with a detailed explanation for each item shall be given to
Lender, together with the financial statements. Disclosure of
non-certified matters shall not cure any Default.
3.7 BUDGET.
At least 90 days prior to the Company's fiscal year end it shall begin
developing a budget for the following fiscal year. At least 30 days prior to the
close of each fiscal year, the Company's Board of Directors shall review the
budget and the Board shall adopt an operating and capital expenditures budget
for the next succeeding fiscal year. A copy of the budget with underlying
assumptions shall be delivered to Lender not later than 10 days after approval
by the Board.
3.8 INFORMATION ON REQUEST; DISCLOSURE.
The Company shall furnish promptly, at Lender's request, such information as may
be reasonably necessary to determine whether the Company is in compliance with
the terms of this Agreement or as may be needed by such Lender to prepare any
required reports to shareholders or appropriate federal and state regulatory
authorities. Lender shall keep the information confidential except that the
Company consents to reasonable disclosure by Lender of the Company's
information, including financial information, to the shareholders of Lender and
appropriate federal and state regulatory authorities.
3.9 CORPORATE EXISTENCE.
The Company shall maintain its corporate existence and conduct its business in
an orderly and regular manner.
3.10 LITIGATION.
The Company shall immediately notify Lender of all actual or threatened
litigation and of all actual of threatened proceedings before any governmental
or regulatory body to which it is a party and which may affect its business.
3.11 INSPECTIONS.
The Company shall permit, at such times as will not unreasonably interfere with
the conduct of its business, Lender's representatives to visit and inspect any
property of the Company and shall make available to the representatives for
inspection or copying any of the Company's books and records. Each officer of
the Company and the Company's independent accountants will discuss with any
Lender's representatives any of the Company's affairs, finances and accounts at
such times and as often as Lender may reasonably request.
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3.12 CORPORATE FUNDS.
Cash funds of the Company in excess of needs reasonably necessary for its
day-to-day operations shall be used to purchase U.S. Treasury Bills or U.S.
guaranteed securities or be deposited in bank or savings and loan association
accounts or certificates of deposit.
3.13 CIVIL RIGHTS.
The Company shall comply with the provisions of the Civil Rights Acts of 1964
and file with or make available to Lender such information as may be necessary
to enable Lender to meet its reporting requirements to the Small Business
Administration.
ARTICLE FOUR
NEGATIVE COVENANTS OF THE COMPANY
The Company understands and agrees that there are certain business practices
which increase the risk to Lender's investment. Therefore, to induce the Lender
to make the investment, the Company agrees not to take certain actions. In the
event the Company does take any of the actions forbidden below, the Company
agrees that this materially changes the nature of Lender's investment and
increases Lender's risk beyond that contemplated or agreed to by the parties and
constitutes a substantial and major Default. In the event the Company violates
any of the Negative Covenants, it agrees to notify Lender immediately. Failure
to so notify Lender shall be considered a major Default in and of itself.
Therefore, so long as Lender holds any of the Securities, the Company shall not:
4.1 CHANGE OF OPERATIONS.
Substantially change the present nature of its business operations.
4.2 DIVIDENDS.
Directly or indirectly purchase, acquire, redeem or retire any shares of its
capital stock outstanding nor pay any dividends except dividends paid by a
subsidiary to the Company.
4.3 EXPENSE REIMBURSEMENT.
Cause or permit out-of-pocket expenses reimbursed to fail to meet the Internal
Revenue Service test as a business expense deduction and will be reimbursed only
upon submission of an expense report meeting the business expense documentation
requirements of the Internal Revenue Service.
4.4 TRANSACTIONS WITH INSIDERS.
Purchase or sell any asset or service to or from a Company director or officer,
or any person who owns or controls, directly or indirectly, 5% or more of the
voting capital
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stock of the Company, or any relative of any of the foregoing, or
any organization in which any one or more of the foregoing, together, hold,
directly or indirectly, an ownership interest of 5% or more ("Affiliate"), or
rent or lease property to or from an Affiliate, except with the prior written
approval of Lender or except as set forth in 4.4 of the Disclosure Schedule.
4.5 APPLICATION OF FUNDS.
Invest in or otherwise divert any of its funds to an individual, other
corporation or business entity, except to the Company or to a wholly-owned
subsidiary of the Company, it being the intent of this Agreement that the
Company and its subsidiaries will apply their full capital and resources to
their own corporate business and purposes.
4.6 MERGER AND SUBSIDIARIES.
Except as set forth in 4.6 of the Disclosure Schedule, consolidate or merge with
or purchase all or a substantial part of the assets of any other business or
sell, lease or otherwise transfer any assets other than in the normal course of
its present business or enter into any franchising agreements or create any
subsidiaries.
4.7 GUARANTIES.
Guarantee or endorse any obligation of others, except obligations of its
subsidiaries as may be appropriate for purposes of their obtaining usual and
normal open account and short-term credit of the type normally and necessarily
outstanding in the operation of the business, or otherwise assume any contingent
liability.
4.8 INDEBTEDNESS.
Incur any indebtedness in addition to that existing or committed at the Closing
Date except for usual and normal unsecured open account and short-term credit of
the type normally and necessarily outstanding in the operation of the business,
other than as provided in Section 4.9.
4.9 ENCUMBRANCES; CONDITIONAL SALES.
Except for those encumbrances and liens disclosed in 4.9 of the Disclosure
Schedule, create, incur, assume or suffer to exist any mortgage, pledge, lien or
other encumbrance of any kind on any of its properties now owned or hereafter
acquired, nor acquire or agree to acquire property under any conditional sales
agreement or title retention contract, nor engage in any sale-and-leaseback
transaction.
4.10 ACQUISITION OF FIXED ASSETS.
A summary of all purchases of fixed assets shall be presented to the Lender in
conjunction with the monthly financial statements.
4.11 BUSINESS RELOCATION.
Move its corporate or business offices or make any other substantial change in
the nature of the Company's business.
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4.12 CHANGE IN CONTROL.
Sell, lease, transfer or dispose of any of the Company's assets outside the
ordinary course of business nor transfer any assets necessary for the
continuation of the Company's business except as disclosed in 4.12 of the
Disclosure Schedule.
4.13 AMEND ARTICLES.
Amend or change its Articles of Incorporation or By-Laws, or violate or breach
any provisions thereof.
ARTICLE FIVE
SURVIVAL OF REPRESENTATIONS AND WARRANTIES
The Company understands and agrees that all its representations, warranties,
covenants and agreements shall survive the execution and delivery of this
Agreement and the Securities.
ARTICLE SIX
INVESTMENT REPRESENTATION: REGISTRATION AND
TRANSFER OF SECURITIES
6.1 INVESTMENT REPRESENTATION.
Lender represents that it is purchasing the Securities for the purpose of
investment and not with a view to or for sale in connection with any
distribution. Lender may sell the Securities only pursuant to the provisions of
this Agreement and subject to applicable federal and state securities laws.
6.2 LEGEND.
Until the occurrence of one of the events specified in Section 6.11, the
certificates representing the Securities shall bear the following legend:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 (THE "1933 ACT") OR UNDER THE
SECURITIES LAWS OF ANY STATE. THEY MAY NOT BE SOLD, TRANSFERRED OR
OTHERWISE DISPOSED OF FOR VALUE EXCEPT PURSUANT TO REGISTRATION OR
OPERATION OF LAW WITHOUT THE OPINION OF COUNSEL SATISFACTORY TO THE
COMPANY THAT SUCH TRANSFER MAY LAWFULLY BE MADE WITHOUT REGISTRATION
UNDER THE MINNESOTA SECURITIES
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<PAGE>
LAWS, THE SECURITIES LAWS OF ANY OTHER STATE AND/OR THE 1933 ACT.
6.3 TRANSFERS.
Prior to any transfer of the Securities, Lender shall give the Company written
notice of its intention to make the transfer, describing briefly the manner of
the intended transfer. Promptly after receiving written notice, the Company
shall present copies of the notice to counsel acceptable to Lender and the
Company. If in the opinion of counsel the proposed transfer may be effected
without registration of the Securities, the Company shall promptly notify
Lender, and the Securities may be transferred in accordance with the terms of
the notice. The Company shall not be required to effect any transfer prior to
the receipt of a favorable opinion.
6.4 SIMULTANEOUS REGISTRATION.
If the Company takes action to register any of its securities under the
Securities Act of 1933 or its successor ("1933 Act") other than any registration
on Form S-4 or S-8 or any similar form that does not allow a registration of the
type contemplated hereby, the Company shall give Lender written notice of its
intention and use its best efforts to register the Common Stock issued or
issuable upon exercise of the Warrant as Lender may specify by written notice to
the Company within 20 days after Lender's receipt of the Company's notice. If,
however, the offering to which the proposed registration statement relates is to
be distributed by or through an underwriter selected by the Company, Lender
shall agree either to sell its Common Stock issued or issuable upon exercise of
the Warrant through the underwriter on the same terms and conditions as the
Company or to withhold such Securities from the market for a period of 120 days
(or such period as the underwriter requires) after the effective date of the
registration statement. If the underwriter determines that the total number of
the Company's securities and other securities proposed to be registered is more
than can be accommodated without adversely affecting the offering, then the
number of shares of Common Stock and other securities registered pursuant to
this Section 6.4 on behalf of the Lender shall be reduced pro rata (by number of
shares) to the number of shares offered by the Company such that the aggregate
number is acceptable to the underwriter. As used in this Section and Section
6.5, the number of securities shall mean in the case of a convertible Note, the
number of shares of Common Stock into which they may be converted. As used in
this Article and Article Seven, registration under the 1933 Act shall include
offerings made pursuant to the provisions of Regulation A under the 1933 Act.
6.5 SUBSEQUENT ONE-TIME REGISTRATION.
If after the initial registered public offering of any of the Company's
securities, Lender requests the registration of its Common Stock issued or
issuable upon exercise of the Warrant (other than those times specified in
Section 6.4 but on not more than one occasion), the Company shall promptly
thereafter (and consistent with the provisions of Section 6.4) use its best
efforts to register all the Securities under the 1933 Act and in a manner
corresponding to the methods of distribution described in Lender's request. If
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<PAGE>
other of the Company's securities are to be included in any registration, the
other securities shall be offered through underwriters selected by Lender, and
acceptable to the Company. The Company shall not, however, without Lender's
written consent, include under the registration statement or any other
registration statement filed within 180 days after the effective date of the
registration statement filed under this Section 6.5 any number of the shares of
the Company's securities and other securities greater than the number the
underwriter determines in its sole discretion will not adversely affect the
offering. If the underwriter determines that the total number of Securities and
other securities proposed to be registered is more than can be accommodated
without adversely affecting the offering, then the number of other securities
registered pursuant to this Section 6.5 shall be reduced pro rata (by number of
shares) to the number of shares offered such that the aggregate number is
acceptable to the underwriter.
6.6 ALTERNATIVE SUBSEQUENT REGISTRATION.
If at any time after 36 months from the Closing the Company has made any
registered public offering of any of its securities, Lender requests the Company
to register its Securities, other than as provided in Sections 6.4 and 6.5, the
Company shall, as expeditiously as possible, and consistent with Sections 6.4
and 6.5, use its best efforts to register those Securities under the 1933 Act,
in accordance with the methods of disposition described in the request.
All expenses incurred in effecting any registration under this Section shall be
paid by the Company.
6.7 REGISTRATION PROCEDURE.
When the Company is required by the provisions of this Article to use its best
efforts to register Common Stock issued or issuable upon exercise of the Warrant
under the 1933 Act, the Company shall, as expeditiously as possible:
6.7.1 Prepare and file with the Securities and Exchange Commission (the
"Commission") a registration statement (including amendments and
supplements) and otherwise comply with the provisions of the 1933 Act
with respect to the Securities and use its best efforts to cause the
registration statement to become and remain effective for the period,
not to exceed 180 days, as may be necessary to effect the sale or other
disposition of the Securities covered by the registration statement;
6.7.2 Before filing the registration statement, or prospectus or
amendments or supplements, furnish Lender with copies of all documents
proposed to be filed, which shall be subject to the approval of counsel
designated by Lender;
6.7.3 Notify Lender promptly of the time when any registration
statement or post effective amendment has become effective or any
supplement to any prospectus forming part of any registration statement
has been filed;
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<PAGE>
6.7.4 Notify Lender promptly of any stop order by the Commission
suspending the effectiveness of any registration statement or of the
initiation or threat of any proceeding for that purpose, and promptly
use its best efforts to prevent the issuance of a stop order and to
obtain the withdrawal of any stop order issued;
6.7.5 Use its best efforts to register or qualify the Securities
covered by the registration statement under the securities or Blue Sky
Laws of jurisdictions which Lender shall reasonably request and do any
and all other acts and things as may be necessary or advisable to
enable Lender to consummate the public sale or other disposition of the
Securities; and
6.7.6 Furnish to Lender a signed counterpart, addressed to Lender, of:
(a) an opinion of counsel for the Company, dated the effective date of
the registration statement, and (b) a "comfort" letter signed by the
Company's independent public accountants, covering substantially the
same matters with respect to the registration statement (and the
prospectus included therein) and, in the case of the accountants'
letter, with respect to events subsequent to the date of the financial
statement, as are customarily covered in opinions in connection with
underwritten public offerings of securities.
6.8 COSTS OF REGISTRATION.
The costs and expenses of registration, including legal fees, special audit
fees, printing expenses, filing fees and premiums for insurance, if any,
incurred by the Company in connection with any registration made pursuant to
this Article, shall be borne entirely by the Company.
6.9 INDEMNIFICATION OF LENDER.
In the event of any registration of the Common Stock issued or issuable upon
exercise of the Warrant pursuant to this Article, the Company shall indemnify
Lender against all losses, claims, damages and liabilities caused by any untrue
statement of a material fact contained in any registration statement or
prospectus as amended or supplemented, or any preliminary prospectus or any
offering circular, or caused by any omission to state a material fact required
to be stated or necessary to make the statements not misleading in light of the
circumstances under which they are made, except insofar as such losses, claims,
damages or liabilities of Lender are caused by any untrue statement or omission
based upon information furnished in writing to the Company by Lender expressly
for use therein.
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<PAGE>
6.10 INDEMNIFICATION OF THE COMPANY.
The obligations of the Company to register any of the Securities shall be
subject to the condition that Lender agrees in writing to indemnify the Company,
its officers and directors, against all losses, claims, damages and liabilities
caused by any untrue statement or omission based upon information furnished in
writing by Lender to the Company expressly for use in a registration statement,
prospectus or offering circular.
6.11 TERMINATION OF TRANSFER RESTRICTIONS.
The restrictions imposed by this Article on the transfer of the Securities shall
terminate as to any portion of the Securities when:
6.11.1 Such portion of the Securities shall have been effectively
registered under the 1933 Act and sold by Lender in accordance with
such registration; or
6.11.2 Written opinions to the effect that registration is not required
under any Federal or State law or regulation of Governmental authority
shall have been received from legal counsel for the Company or Lender
(and, if from legal counsel for Lender, such opinion is in form and
substance satisfactory to the Company). If a favorable opinion is
obtained only from Lender's counsel, Lender shall indemnify the Company
against all liability or loss it may sustain in connection with the
transfer.
Whenever the restrictions imposed by this Article shall terminate as to any
Securities, Lender shall be entitled to receive promptly from the Company,
without expense to Lender, a new certificate for the Securities, not bearing the
restrictive legend set forth in Section 6.2.
6.12 ADDITIONAL REGISTRATION COVENANTS.
So long as any of the Securities remain subject to the restrictions imposed by
this Article, the Company shall not without Lender's written consent enter into
any agreement or undertaking with any purchaser of the Company's capital stock,
Warrant, options or securities convertible into the Company's capital stock to
register any of the Securities pursuant to the 1933 Act (except with respect to
the warrants, options and convertible securities currently outstanding or the
issuance of which is currently contemplated by the Company in each case as
described in 2.2 of the Disclosure Schedule, which may contain such an agreement
or understanding).
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<PAGE>
ARTICLE SEVEN
PRIVATE, RULE 144 SALES
The Company shall file with the Securities and Exchange Commission on a timely
basis all current information regarding the Company as shall be necessary to
meet the current public information requirements of Rule 144 under the 1933 Act,
and shall otherwise fully cooperate with Lender in the private sale or sale
under Rule 144 of any of the Securities. In addition, the Company represents and
warrants that the information and documents so filed shall not contain any
untrue statement of a material fact or omit to state a material fact necessary
in order to make the statements, in light of the circumstances under which the
statements were made, not misleading, and further agrees to indemnify and hold
harmless Lender and each broker, dealer or underwriter (within the meaning of
the 1933 Act) acting for it in connection with any offering or sale of
Securities from all losses, liabilities and judgments arising out of or
resulting from any breach of the foregoing representations or warranty.
ARTICLE EIGHT
DEFAULT
The following acts by the Company shall constitute a default ("Default"):
8.1 FAILURE TO PAY INTEREST OR PRINCIPAL.
If the Company fails to pay any installment of interest or principal due on the
Note within 10 days after the due date.
8.2 UNTRUE REPRESENTATION OR WARRANTY.
If any representation or warranty made by the Company to the Lender subsequently
proves to have been incomplete or untrue in any material respect as of the
Closing Date, or any statement, certificate or data furnished by the Company
under this Agreement or its Exhibits proves to have been incomplete or untrue in
any respect or misleading under the circumstances in which it was provided as of
the date on which the information is stated or certified.
8.3 CONTRACTUAL DEFAULT.
If the Company breaches any part of this Agreement or the Exhibits thereto it
shall constitute a Default. The Company acknowledges and agrees that the failure
of the Company to comply with the Affirmative and Negative Covenants contained
in Articles Three and Four increases the risk to Lender's investment above that
contemplated and agreed to by the parties and the Company agrees that any
failure to comply with the Affirmative and Negative Covenants is a Default and
will be so treated by the Lender.
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<PAGE>
Provided, the Company shall have 30 days from the date of any Default to cure
the Default if there is a reasonable chance the Default can be cured.
8.4 OTHER OBLIGATIONS.
The Company defaults in any of its obligations to any party other than Lender
concerning borrowed money.
ARTICLE NINE
REMEDIES
9.1 LEGAL AND EQUITABLE REMEDIES.
Nothing contained in this Agreement is in any way intended by the parties to
waive or modify any legal or equitable remedies the parties may have. Where
specific remedies or adjustments to the Investment have been set out in this
Agreement and Exhibits, whether legal, equitable, contractual or otherwise, they
shall be in addition to the legal and/or equitable remedies the parties shall
have.
9.2 ACCELERATION.
In the event of any Default, Lender may, by notice in writing to the Company,
declare the entire principal amount and accrued interest of any of the Company's
debt held by Lender immediately due and payable without presentment, demand,
protest, notice of protest or other notice of dishonor of any kind, all of which
are waived by the Company. This remedy shall not be exclusive of any other
remedy in law or equity.
ARTICLE TEN
ADDITIONAL ACTIONS TAKEN BY THE COMPANY
The Company has delivered the following to Lender which are attached as
Exhibits:
10.1 OPINION OF COUNSEL FOR THE COMPANY.
An opinion of counsel for the Company, dated the Closing Date and attached as
Exhibit 10.1.
10.2 CERTIFIED ARTICLES AND CERTIFICATE OF GOOD STANDING.
A copy of the Company's Articles of Incorporation and a Certificate of Good
Standing, both certified to by the Secretary of State of the state in which the
Company was incorporated and attached as Exhibit 10.2.
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<PAGE>
10.3 CERTIFIED BY-LAWS.
A true and correct copy of the By-Laws of the Company, certified by the
secretary of the Company and attached as Exhibit 10.3.
10.4 GOVERNMENTAL AUTHORIZATIONS.
Consents, permits and authorizations from any governmental agency having
jurisdiction over the issuance of the Securities necessary for the Company
lawfully to issue the Securities. The permits, consents and authorizations are
listed in 10.4 of the Disclosure Schedule.
10.5 CONTRACTS.
All written employment contracts; contracts with any officer, director or
stockholder or their relatives; all plans pursuant to which benefits are paid to
any employee of the Company; and all material contracts with brokers or others
for services; and a brief written description of any such agreements that are
not in writing, all of which must be satisfactory to Lender and are attached as
Exhibit 10.5.
10.6 SBA FORMS.
An executed copy of SBA Form 480, SBA Form 652, Debarment certification, and
Statement of Qualification. The SBA forms are attached as Exhibit 10.6.
10.7 SECURITY AGREEMENTS.
The Lender shall be in receipt of the necessary UCC forms to perfect their
security interests and the mortgage documents necessary to grant the Lender a
second mortgage in all of the real property of the Company (the "Mortgages" and
the "Deed of Trust"). The documents are attached as Exhibit 10.7.
10.8 INSURANCE CERTIFICATE.
One or more Certificates of Insurance confirming that the Company has in force
fire, extended coverage and liability insurance in amounts satisfactory to the
Lender with Lender named as loss payee.
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<PAGE>
ARTICLE ELEVEN
GENERAL PROVISIONS
11.1 EXHIBITS.
The attached exhibits are by reference made an integral part of this Agreement:
Exhibit Title
-------------------
1.1 Promissory Note
1.2 Security Agreement
1.3 Intercreditor Agreement
1.4 Warrant
2.1 Disclosure Schedule
2.4 Financial Statements
2.5 Use of Proceeds
2.7 Shareholder Information
2.11 Tax Returns
2.13 Authorizations of Shareholders and Directors
3.6.3 Form of Certification
10.1 Opinion of Counsel
10.2 Articles of Incorporation and Certificate of Good Standing
10.3 By-Laws
10.5 Employment and Consulting Contracts
10.6 SBA Forms
10.7 UCC Forms
11.2 APPLICABLE LAW.
This Agreement is to be interpreted in conformity with the Small Business
Investment Act of 1958, as amended, and is otherwise governed by the laws of
Minnesota. The provisions of this Agreement shall be severable.
11.3 ASSIGNMENT.
This Agreement shall not be assigned by the Company except with the written
consent of Lender. Subject to the preceding sentence, the rights and obligations
of this Agreement shall be binding upon and inure to the benefit of the parties
and their respective successors and assigns.
11.4 HEADINGS.
The headings used in this Agreement are intended for informational purposes only
and shall not affect its interpretation.
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<PAGE>
Executed this 10th day of September, 1998.
APPLIANCE RECYCLING CENTERS OF AMERICA, INC.
By: /s/ Edward R. Cameron
-----------------------------------
Edward R. Cameron
President
MEDALLION CAPITAL, INC.
By: /s/ Dean R. Pickerell
-----------------------------------
Dean R. Pickerell
Executive Vice President
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EXHIBIT 10.2
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
THIS NOTE HAS BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE SOLD, OFFERED FOR SALE
OR TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THIS
NOTE UNDER THE ACT OR AN OPINION OF COUNSEL THAT REGISTRATION IS NOT REQUIRED
UNDER THE ACT.
APPLIANCE RECYCLING CENTERS OF AMERICA, INC.
NOTE DUE SEPTEMBER 30, 2005
Amount: $3,500,000 Date: September 10, 1998
Rate: 13% Maturity: September 30, 2005
FOR VALUE RECEIVED, the undersigned, APPLIANCE RECYCLING CENTERS OF
AMERICA, INC., a Minnesota corporation (the "Company"), promises to pay to the
order of MEDALLION CAPITAL, INC. ("Lender"), a licensee under the Small Business
Investment Act of 1958, at its office at 7831 Glenroy Road, Suite 480,
Minneapolis, Minnesota 55439-3132, or such other address as the holder hereof
may specify, the principal amount of Three Million Five Hundred Thousand Dollars
and No Cents ($3,500,000) together with interest on the unpaid principal balance
from the date hereof until paid at the rate of 13% per annum. Interest
calculations shall be based on a 360-day year.
Principal and interest shall be payable monthly based upon the attached
amortization schedule. Interest shall be paid at the rate of 19% per annum, so
far as the same may be legally enforceable, on any principal and interest
overdue for more than 180 days. All payments received will be first applied to
unpaid interest with any remainder being applied toward principal reduction.
This Note has been delivered in conjunction with the Loan Agreement dated
September 10, 1998, by and between the Company and Lender. Any capitalized terms
in this note shall have the same meaning as set forth in the Loan Agreement. The
Company's obligations under this Note are secured by a Security Agreement, Deed
of Trust and certain Mortgages.
This Note is subject to prepayment in whole or part at any time at the
option of the Company. However, prepayment is subject to prepayment penalties as
follows: 4% of the prepaid principal amount if repaid prior to September 1,
1999; 3% of the prepaid principal amount if repaid prior to September 1, 2000;
2% of the prepaid principal amount if repaid prior to September 1, 2001. In the
case of any payment of less than the total principal amount outstanding on the
Note, the payment shall be applied first to the interest owed and then to the
principal outstanding.
A Default shall be deemed to have occurred upon the happening of one or
more of the following events:
(a) A failure to make a payment of any installment of principal or
interest;
(b) Any obligation of the Company (other than its obligation
hereunder) for the payment of any other debt, except trade payables, is
not paid when due or within any applicable grace period;
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<PAGE>
(c) One or more judgments against the Company or attachments against
its property, which in the aggregate exceeds $50,000, or the operation or
result of which could be to interfere materially and adversely with the
conduct of the business of the Company remains unpaid, unstayed on appeal,
undischarged, unbonded and undismissed for a period of 30 days.
Upon the happening of any of the foregoing Defaults, then
(a) this Note shall become and be immediately due and payable
without declaration or other notice to the Company as set forth in Article
Nine of the Loan Agreement;
(b) Payee may exercise any other remedy provided by law,
administrative action, or action of any other type whatsoever.
(c) Payee may exercise any of the remedies set forth in the Security
Agreement, including but not limited to, the possession and sale of the
Collateral.
The Company agrees, if a Default should occur, to pay the holder's
collection costs, including reasonable attorneys' fees and other costs as
permitted by law. The Company waives demand for payment, presentment, notice of
dishonor, notice of non-payment, diligence in collecting, grace, notice and
protest (other than any notice of acceleration or grace period required or
provided for by this Note or Articles Eight or Nine of the Loan Agreement, which
the Company does not so waive). The use of any remedy by the holder hereof will
not constitute a waiver of the right to use any other remedy provided by law. No
release of any security for the principal or interest due under this Note or
extension of time for payment of this Note shall release or modify (except as
modified in any such extension) the liability of the Company under this Note.
This Note shall be binding upon the Company, its successors and assigns,
and shall inure to the benefit of the holder hereof, its successors and assigns.
APPLIANCE RECYCLING CENTERS OF AMERICA, INC.
/s/ Edward R. Cameron
------------------------------------------
Edward R. Cameron
President
EXHIBIT 10.3
SECURITY AGREEMENT
APPLIANCE RECYCLING CENTERS OF AMERICA, INC., ("Debtor") and MEDALLION
CAPITAL, INC., ("Secured Party") agree:
1. SECURITY INTEREST. Debtor grants Secured Party a security interest in
(i) the property described on the attached Schedule 1, (ii) any additions,
replacements, accessions and substitutions to or for that property, and (iii)
all proceeds of all of the foregoing (collectively "Collateral").
2. OBLIGATIONS SECURED. This security interest is given to secure (i) the
payment of the indebtedness described in the Note between the parties dated
September 10, 1998 (the "Note") and all extensions and renewals of that
indebtedness, (ii) the performance of Debtor under this Security Agreement and
(iii) the obligations of Debtor under the Loan Agreement, Warrant, Mortgages and
Deed of Trust of even date hereof executed by Debtor in favor of Lender
(collectively, "Obligations"), and (iii) the performance of Debtor and all other
obligors under the Guaranty and the Stock Pledge Agreements ("Guarantors")
attached to the Loan Agreement (collectively "Obligations").
3. OWNERSHIP. Debtor represents and warrants that Debtor owns, and to the
extent that the Collateral is to be acquired after the date hereof will own, the
Collateral free from encumbrance except any encumbrances shown on the Disclosure
Schedule to the Loan Agreement ("Permitted Encumbrances"). Debtor will defend
the Collateral against all claims of all persons at any time claiming the
Collateral or any interest in the Collateral except Secured Party and holders of
Permitted Encumbrances.
4. PERFECTION. Debtor that no Financing Statement covering the Collateral
is on file in any public office except those for Permitted Encumbrances. The
Collateral is and will remain personal property. Debtor will execute Financing
Statements, in a form satisfactory to Secured Party, and will pay the cost of
filing Financing Statements and Continuation Statements in all appropriate
public offices and will deliver any subordinations or waivers of other liens
deemed by Secured Party to be necessary. On demand by Secured Party, but subject
to the rights of other secured parties, Debtor will deliver to Secured Party all
items of Collateral in which Secured Party' security interest can be perfected
by taking possession. The Secured Party will hold those items of Collateral to
perfect Secured Party security interest. If those items of Collateral are held
by others to perfect another security interest, the others will be considered to
be holding those items also as agent for Secured Party. Debtor hereby appoints
Secured Party as its attorney-in-fact to do all acts and things which Secured
Party may deem necessary
<PAGE>
to perfect and to continue perfected the security interest created hereby and to
protect and to preserve the Collateral.
5. USE. Until default, Debtor may use the Collateral at Debtor's places of
business, in any lawful manner not inconsistent with this Security Agreement,
but may not transfer or encumber the Collateral except in the ordinary course of
business. A transfer or encumbrance in the ordinary course of business does not
include a transfer in partial or total satisfaction of a debt or in bulk. An
item of Collateral may not be leased to a third party. An item of collateral
with a fair value greater than $10,000 may not be transferred unless: (i) the
item is replaced with another item of equal or greater unencumbered value, or
(ii) the proceeds of the transfer are used to reduce the loan balance, or (iii)
the proceeds of the transfer are used for a purpose approved in writing by the
Lender.
6. PROTECTION. Debtor, at its expense, will keep items of Collateral in
good condition and will replace and repair any items of damaged or worn-out
Collateral in accordance with good management practices without allowing any
lien or security interest to be created on the Collateral because of such
replacement or repair. Secured Party may inspect the Collateral at any
reasonable time. Debtor will pay when due all taxes and assessments on the
Collateral and its use and operation, and all indebtedness secured by
encumbrances on the Collateral.
7. INSURANCE. Debtor, at its expense, will insure the items of Collateral
with a reliable insurance company against loss or damage by fire, theft and the
perils covered by extended coverage in an amount equal to the fair market value
of the Collateral with loss payable to Secured Party as its interest may appear,
and will deliver to Secured Party on demand evidence of such insurance. If a
loss occurs, Secured Party may make the proof of loss and the insurer shall pay
the Secured Party alone. Upon destruction of substantially all the destructible
items of Collateral, the proceeds will be applied to restoration of the
destroyed Collateral. If the Collateral is not restored, the Secured Party may
retain from the insurance proceeds and apply on the Obligations an amount equal
to the unpaid balance of the Obligations, whether or not the Obligations are
due.
8. COSTS. If Debtor fails to perform any of its duties hereunder, Secured
Party may, but shall not be required to, do so on Debtor's behalf. If this
Security Agreement is placed in the hands of an attorney for enforcement, Debtor
will pay the costs, including the reasonable actual attorneys fees, of the
Secured Party incurred in enforcing this Agreement. Any amounts expended by
Secured Party in performing Debtor's duties or enforcing this Security Agreement
will bear interest at the maximum rate allowed by law but not to exceed 18% per
year and will be payable by Debtor to Secured Party on demand.
9. DEFAULT. Debtor will be in default under this Security Agreement and
under the Obligations upon the happening of any of the following events:
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<PAGE>
(a) Debtor's failure to perform when due any of the terms, covenants
or conditions of this Agreement and such default shall continue for a
period of 30 days after written notice therof shall have been given by
Secured Party to Debtor; or
(b) The Debtor commits a Default as defined in the Loan Agreement or
the Note;
(c) Any representation or warranty made by Debtor herein is false.
10. REMEDIES. Upon Debtor's default Secured Party may, at any time
thereafter, declare any monetary Obligation due and payable and all other
Obligations immediately performable in accordance with the provisions hereof and
of the Loan Agreement, and will have the remedies of Secured Party under the
Uniform Commercial Code. Secured Party may take possession of the Collateral
with or without judicial process. Secured Party may require Debtor to assemble
the Collateral and make it available to Secured Party at a place to be
designated by Secured Party which is reasonably convenient to both Party.
Secured Party will give Debtor reasonable notice of the time and place of any
public sale or of the time after which any private sale or any other intended
disposition of the Collateral is to be made. The requirements of reasonable
notice shall be met if the notice is mailed, postage prepaid, to Debtor at least
10 days before the time of the sale or disposition.
11. WAIVER. No waiver by Secured Party of any default shall operate as a
waiver of any other default or of the same default on a future occasion. The
taking of this Security Agreement will not waive or impair any other security
Secured Party may have or hereafter acquire for the Obligations, nor will the
taking of any additional security waive or impair the rights granted in this
Security Agreement. Secured Party may resort to any security it may have in the
order it may deem proper, and may apply any payments made on any part of the
Obligations to any part of the Obligations, despite any directions of Debtor to
the contrary.
12. INFORMATION. Debtor will at all reasonable times allow Secured Party
and its agents, employees, attorneys or accountants to examine and inspect the
Collateral and to examine, inspect and make extracts from Debtor's books and
other records, and to verify under reasonable procedures directly with account
debtors or by other methods accounts which are Collateral. Debtor will furnish
to Secured Party upon request all documents evidencing any Collateral and any
guarantees, security or other information relating thereto.
13. BINDING EFFECT. This Security Agreement will inure to the benefit of,
and bind, the Party, their personal representatives, successors and assigns, is
specifically enforceable, may be executed in counterpart, is construed under the
laws of Minnesota, and may be modified only in writing.
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<PAGE>
14. TERMINATION. This Agreement shall terminate upon payment of all
obligations owed to Secured Party by the Debtor.
Dated: September 10, 1998.
DEBTOR: SECURED PARTY:
APPLIANCE RECYCLING CENTERS MEDALLION CAPITAL, INC.
OF AMERICA, INC.
BY: /s/ Edward R. Cameron BY: /s/ Dean R. Pickerell
-------------------------------- ---------------------------------
Edward R. Cameron Dean R. Pickerell
President Executive Vice President
-4-
EXHIBIT 10.4
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 (THE "1933 ACT") OR UNDER THE SECURITIES
LAWS OF ANY STATE. THEY MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED
OF FOR VALUE EXCEPT PURSUANT TO REGISTRATION OR OPERATION OF LAW WITHOUT
AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH TRANSFER MAY
LAWFULLY BE MADE WITHOUT REGISTRATION UNDER THE STATE SECURITIES LAWS
AND/OR THE 1933 ACT.
APPLIANCE RECYCLING COMPANIES OF AMERICA, INC.
STOCK PURCHASE WARRANT
700,000 SHARES OF COMMON STOCK
For value received MEDALLION CAPITAL, INC., a Licensee under the Small
Business Investment Act of 1958 ("Investor"), or its assigns, is entitled to
subscribe for and purchase, upon written notice given any time prior to the
latter of September 10, 2007 or two years after the repayment in full of the
Note dated September 10, 1998, 700,000 shares of the no par Common Stock, fully
paid and nonassessable, of APPLIANCE RECYCLING COMPANIES OF AMERICA, INC., a
Minnesota corporation (the "Company"), at the price of $2.50 per share (the
"Warrant Price"), subject to the terms and conditions set forth below.
1. LOAN AGREEMENT. This Warrant is issued pursuant to, and is subject to
all of the terms and conditions of the Loan Agreement between the Company and
Investor, dated September 10, 1998 (the "Loan Agreement").
2. METHOD OF EXERCISE; PAYMENT; ISSUANCE OF NEW WARRANT; TRANSFER AND
EXCHANGE. The holder may exercise the purchase right represented by this
Warrant, by surrendering this Warrant, properly endorsed, together with a
written request specifying the number of shares to be purchased and the purchase
price in cash or by check, at the principal office of the Company. Thereupon,
this Warrant shall be deemed exercised and the person exercising this Warrant
shall be deemed to have become a holder of record of shares of Common Stock (or
other securities or property to which such person is entitled upon such
exercise). Certificates for the shares of stock purchased shall be delivered to
the holder within 14 days after such exercise. Unless this Warrant has expired,
a new Warrant representing the balance of shares not issued under this Warrant
shall also be issued to the holder. Subject to the terms and
<PAGE>
provisions of this Warrant and Article Six of the Agreement, the holder may
transfer this Warrant and its rights, in whole or in part, by surrendering this
Warrant at the principal office of the Company, properly endorsed, and paying
any necessary governmental tax or transfer Charge. Upon any partial transfer,
the Company shall deliver to the holder an appropriate new Warrant certificate.
Each holder of this Warrant agrees that when this Warrant is endorsed in blank,
it shall be deemed negotiable and the holder may be treated by the Company and
all other persons dealing with this Warrant as the absolute owner having the
right to transfer of ownership on the books of the Company, any notice to the
contrary notwithstanding. However, until the transfer is recorded on the books,
the Company may treat the registered holder as the owner. This Warrant is
exchangeable at the principal office of the Company for Warrants for the
purchase of the same aggregate number of shares of Common Stock, each new
Warrant to represent the right to purchase the number of shares of Common Stock,
as the holder designates at the time of exchange. All Warrants issued on
transfers or exchanges shall be dated the date hereof and shall be identical to
this Warrant except as to the number of shares of Common Stock issuable.
3. STOCK FULLY PAID; RESERVATION OF SHARES. The Company covenants that all
shares which may be issued upon the exercise by this Warrant will be fully paid
and nonassessable and free from all taxes, liens and charges. The Company
further covenants that during the time this Warrant may be exercised, the
Company will at all times have authorized and reserved the number of shares of
its Common Stock issuable upon exercise of this Warrant.
4. ADJUSTMENT OF PURCHASE PRICE AND NUMBER OF SHARES. The number and kind
of securities purchasable upon the exercise of this Warrant and the Warrant
Price shall be subject to adjustment upon the happening of the following events:
A. CONSOLIDATION, MERGER OR RECLASSIFICATION. If the Company
consolidates or merges into any other corporation, or sells, transfers or
disposes of all or substantially all the property, assets, business and/or
goodwill of the Company to another corporation, or in any manner changes
the securities to be purchased upon the exercise of this Warrant,
appropriate provisions shall be made in writing to protect the holder of
this Warrant against dilution of the holder's interest and rights. A new
Warrant evidencing any changes necessary to protect the holder shall be
issued by the Board of Directors.
B. SUBDIVISION OR COMBINATION OF SHARES. In case of subdivision of
shares, the Warrant price shall be proportionately reduced and the number
of shares purchasable upon the exercise of this Warrant proportionately
increased. In the case of combination of shares, the Warrant Price shall
be proportionately increased and the number of shares purchasable upon the
exercise of this Warrant proportionately decreased.
-2-
<PAGE>
C. CERTAIN DIVIDENDS AND DISTRIBUTIONS. If the Company takes a
record of the holders of its Common Stock for the purpose of:
(i) STOCK DIVIDENDS. Entitling them to receive a dividend
payable in, or other distribution of, Common Stock, then the Warrant
Price shall be adjusted to that price determined by multiplying the
Warrant Price in effect immediately prior to the record date by a
fraction; the numerator of which shall be the total number of shares
of Common Stock outstanding immediately prior to the record date,
and the denominator of which shall be the total number of shares of
Common Stock outstanding (including for this purpose fractions of
shares which would have been distributed in connection with such
dividend or distribution had cash not been paid or script issued in
lieu thereof) immediately after the dividend or distribution. The
number of shares purchasable upon the exercise of this Warrant shall
be adjusted to that number determined by multiplying the number of
shares purchasable upon the exercise of this Warrant immediately
prior to the record date by a fraction, the numerator of which shall
be the Warrant Price adjusted as aforesaid and the denominator of
which shall be the Warrant Price immediately prior to the record
date; or
(ii) LIQUIDATING DIVIDENDS, ETC. Making a distribution of its
assets to the holders of its Common Stock as a dividend in
liquidation or partial liquidation or by way of return of capital or
other than as a dividend payable out of earnings or surplus legally
available for dividends under the laws of the State of Wisconsin,
the holders of this Warrant shall, upon its exercise, be entitled to
receive, in addition to the number of shares of Common Stock
receivable, a sum equal to the amount of assets as would have been
payable to them as owners of that number of shares of Common Stock
this Warrant represents had this Warrant been exercised immediately
prior to the record date for such distribution.
D. ADJUSTMENT FOR DECLINING NET WORTH OF THE COMPANY. If at the time
of exercise the net worth (assets minus liabilities as reflected on the
Company's last audited balance sheet) has decreased from the net worth
that existed on the Closing Date , the Warrant Price shall be equal to the
net worth divided by the number of shares of capital stock then
outstanding.
E. TREASURY SHARES EXCLUDED. The number of shares of Common Stock at
any time outstanding shall not include any shares then directly or
indirectly owned by the Company.
-3-
<PAGE>
F. OTHER ACTION AFFECTING COMMON STOCK. In the event the Company
shall take any action affecting its Common Stock, other than an action
described in subsections A through C, which would have a materially
adverse effect upon the rights of the holder of this Warrant, the Warrant
Price and the number of shares of Common Stock purchasable shall be
adjusted in such manner and at such time as the Board of Directors may in
good faith determine to be equitable under the circumstances.
5. NOTICE OF ADJUSTMENTS. Whenever any Warrant Price and/or the number of
shares of Common Stock purchasable is to be adjusted pursuant to Section 4, the
Company shall promptly provide to the holder of this Warrant, a certificate
signed by its President and by its Treasurer or Secretary setting forth the
event requiring the adjustment, the amount of the adjustment, the method by
which such adjustment was calculated (including a description of the basis on
which the Company's Board of Directors made any determination), and the Warrant
Price or Prices and number of shares of Common Stock purchasable after giving
effect to such adjustment.
6. NOTICES OF RECORD DATE, ETC. In the event the Company takes a record of
the holders of any class of securities, any capital reorganization,
reclassification, recapitalization or transfer of substantially all the assets
of the company, consolidation, merger, voluntary or involuntary dissolution,
liquidation or winding-up, the Company shall mail to each holder of a Warrant a
notice specifying (i) the date on which any record is to be taken, or (ii) the
date on which any reorganization, reclassification, recapitalization, transfer,
consolidation, merger, dissolution, liquidation or winding-up is to take place,
and the time as of which the holders or record of Common Stock (or other
securities) shall be entitled to exchange their shares of Common Stock (or other
securities) for securities or other property. The notice shall be mailed at
least 15 days prior to the date on the notice. If any right to subscribe for or
purchase securities is offered to the holders of Common Stock, the holder of a
Warrant shall similarly receive rights with respect to any unexercised shares
under the Warrant to the same extent as if the Warrant had been duly exercised.
-4-
<PAGE>
7. REGISTRATION RIGHTS. This Warrant shall have all of the registration
rights that are contained in Article Six of the Loan Agreement.
Dated and delivered on September 10, 1998.
APPLIANCE RECYCLING COMPANIES OF AMERICA, INC.
By: /s/ Edward R. Cameron
--------------------------------
Edward R. Cameron
President
By: /s/ Denis E. Grande
--------------------------------
Secretary
-5-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-START> JAN-04-1998
<PERIOD-END> OCT-03-1998
<CASH> 696,000
<SECURITIES> 0
<RECEIVABLES> 1,170,000
<ALLOWANCES> 0
<INVENTORY> 1,937,000
<CURRENT-ASSETS> 135,000
<PP&E> 9,977,000
<DEPRECIATION> 4,070,000
<TOTAL-ASSETS> 10,342,000
<CURRENT-LIABILITIES> 3,230,000
<BONDS> 0
0
0
<COMMON> 10,857,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 10,342,000
<SALES> 10,479,000
<TOTAL-REVENUES> 10,479,000
<CGS> 6,944,000
<TOTAL-COSTS> 6,944,000
<OTHER-EXPENSES> (277,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 412,000
<INCOME-PRETAX> (1,684,000)
<INCOME-TAX> 31,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,715,000)
<EPS-PRIMARY> (1.44)
<EPS-DILUTED> (1.44)
</TABLE>
