SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 3, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-19621
APPLIANCE RECYCLING CENTERS OF AMERICA, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1454591
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7400 EXCELSIOR BOULEVARD, MINNEAPOLIS, MINNESOTA 55426-4517
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 612-930-9000
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK,
WITHOUT PAR VALUE
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes __X__ No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of March 26, 1998, the aggregate market value of the voting stock held by
nonaffiliates of the registrant, computed by reference to the average of the
high and low prices on such date as reported by the Nasdaq SmallCap Market, was
$2,842,000.
As of March 26, 1998, there were outstanding 1,136,744 shares of the
registrant's Common Stock, without par value.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Annual Report to Shareholders for the fiscal year
ended January 3, 1998 are incorporated by reference into Part II hereof and
portions of the definitive proxy statement dated March 24, 1998 are incorporated
by reference into Part III hereof.
<PAGE>
TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business............................................................ 3
General........................................................ 3
Industry Background............................................ 3
Company Background............................................. 4
Customers and Source of Supply................................. 5
Company Operations............................................. 6
Principal Product and Services................................. 7
Sales and Marketing............................................ 7
Seasonality.................................................... 7
Competition.................................................... 8
Government Regulation.......................................... 8
Employees...................................................... 9
Item 2. Properties.......................................................... 9
Item 3. Legal Proceedings................................................... 9
Item 4. Submission of Matters to a Vote of Security Holders................. 10
PART II
Item 5. Market for the Company's Common Equity and Related Shareholder
Matters............................................................. 10
Item 6. Selected Financial Data............................................. 11
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................... 11
Item 7A. Quantitative and Qualitative Disclosure about Market Risk........... 11
Item 8. Financial Statements and Supplementary Data......................... 11
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure................................................ 11
PART III
Item 10. Directors and Executive Officers of the Company..................... 11
Item 11. Executive Compensation.............................................. 11
Item 12. Security Ownership of Certain Beneficial Owners and Management...... 12
Item 13. Certain Relationships and Related Transactions...................... 12
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K..... 13
SIGNATURES................................................................... 14
INDEX TO EXHIBITS............................................................ 15
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
Appliance Recycling Centers of America, Inc., together with its
operating subsidiaries ("ARCA" or the "Company"), provides a comprehensive range
of services for large-scale collection, resale and recycling of major household
appliances in an environmentally sound manner. The Company provides its
customers with integrated processes and programs addressing the solid waste
management, environmental and energy conservation issues involved with appliance
disposal and recycling. The Company generates revenues from fees charged for the
disposal of appliances, the sale of materials generated from processed
appliances (byproduct revenues) and the sale of reconditioned and distressed
appliances through a chain of Company-owned retail stores called Encore(R)
Recycled Appliances ("Encore").
The Company was incorporated in Minnesota in 1983, although through
its predecessors, it commenced the appliance recycling business in 1976. The
Company's principal office is located at 7400 Excelsior Boulevard, Minneapolis,
Minnesota 55426-4517. References herein to the Company include its operating
subsidiaries. (See Exhibit 21.1.)
INDUSTRY BACKGROUND
There are more than 500 million major household appliances, such as
refrigerators, freezers, ranges, dishwashers, microwaves, washers, dryers, room
air conditioners, water heaters and dehumidifiers, currently in use in the
United States. It is estimated by the Steel Recycling Institute that in 1995, 42
million major household appliances were taken out of use in the United States.
Industry sources estimate that 50 to 55 million major household appliances will
be disposed of each year between the years 1997 and 2000. The disposal of these
appliances has become a serious problem as a result of a number of factors
including: (i) decreasing landfill capacity in many parts of the country; (ii)
the inability of incinerators, composting facilities and other landfill
alternatives to process appliances; and (iii) the presence in appliances of
certain hazardous and other environmentally harmful materials that require
special processing.
Legislation affecting appliance disposal has been adopted in more
than 30 states. This legislation includes landfill restrictions, disposal bans,
advance disposal fees and other types of restrictions. As a result, appliances
must be dealt with outside the ordinary municipal solid waste stream.
Landfill restrictions arise in part because some appliance
components contain certain hazardous and other environmentally harmful
materials, including polychlorinated biphenyls (PCBs), mercury, refrigerants
such as chlorofluorocarbons (CFCs) and sulfur dioxide, and oils. PCBs are
suspected as carcinogens, are resistant to degradation when deposited in
landfills and can cause groundwater contamination. The production of PCBs was
banned by the EPA in 1979, although businesses were allowed to continue using
remaining inventories of components that contained PCBs. Mercury is toxic to
humans and can enter the body through inhalation, skin absorption or ingestion,
and it vaporizes at high temperatures forming extremely toxic fumes. CFCs are
believed to cause long-term damage to the earth's stratospheric ozone layer and
may contribute to global warming when released into the atmosphere. The 1990
Amendments to the Clean Air Act prohibit the venting of CFCs and since July 1,
<PAGE>
1992 have required the recovery of CFC refrigerants during the service, repair
and disposal of appliances. See Business - Government Regulation.
In addition to these solid waste management and environmental
issues, utility companies, motivated by economic and environmental factors to
control energy consumption, sponsor various programs to encourage and assist
residential consumers to conserve energy, including programs for turning in
surplus, energy-inefficient appliances. Many residential consumers own and
operate room air conditioners, freezers or more than one refrigerator,
contributing significantly to residential energy use and peak energy demand. In
addition, many of the refrigerators manufactured in the 1960s and early 1970s
consume up to 1,750 kilowatt-hours of electricity each year. The National
Appliance Energy Conservation Act requires that a typical 18-cubic-foot
refrigerator manufactured after 1992 have an energy consumption rate not
exceeding 700 kilowatt-hours per year. As new, more efficient appliances become
available, utility companies have begun to encourage the use of newer models and
the disposal of older, less efficient models.
The Federal Energy Policy Act of 1992 gives individual states the
option of deregulating their electric utility industry. The potential of
deregulation has caused uncertainty about the future and form of energy
conservation programs sponsored by electric utilities. Some electric utility
companies are delaying new energy conservation programs, including the Company's
refrigerator recycling program. The Company believes, however, that energy
conservation and efficiency programs will remain a long-term component of the
nation's electric utility industry. See Business - Government Regulation.
During 1997, the Company entered into agreements with Whirlpool
Corporation, the nation's largest manufacturer of major household appliances, to
develop a program for handling distressed appliances for Whirlpool. Under the
agreements, the Company will purchase distressed appliances from Whirlpool,
recondition suitable units and sell them through ARCA's network of Encore retail
stores. Appliances that cannot be reconditioned are recycled in accordance with
all applicable environmental regulations. The Company believes that these
contracts will provide a large quantity of high quality appliances that can be
sold through its Encore stores.
COMPANY BACKGROUND
The Company began business in 1976 as a retailer of reconditioned
appliances. Initially, the Company contracted with national and regional
retailers of appliances such as Sears, Roebuck & Company, Inc. ("Sears") and
Montgomery Ward & Co. ("Montgomery Ward") to collect major appliances in
Minneapolis/Saint Paul and two other metropolitan areas. As part of their new
appliance sales efforts, these customers arrange for the removal of old
appliances from consumers' residences. The Company collects old appliances on
behalf of its customers, reconditions and sells suitable used appliances through
its own retail stores and sells the remaining appliances to scrap metal
processors.
In the late 1980s, in response to stricter environmental protection
laws, the Company developed and marketed programs to process and dispose of
appliances in an environmentally sound manner. These programs are offered to new
appliance manufacturers and retailers, waste management companies and the
general public. See Business - Customers and Source of Supply.
In 1989, the Company expanded its appliance recycling concept to the
utility industry when it established an appliance processing center in
Milwaukee, Wisconsin, pursuant to a contract with a utility company. From 1989
to 1994 the Company focused its resources on the expansion of its business with
electric utility companies. During this time period the Company opened nine
centers
<PAGE>
throughout the U.S. and Canada, primarily serving seventeen electric utility
customers. The Company's electric utility business has been negatively impacted
by the potential of electric utility industry deregulation. The potential of
deregulation has caused electric utilities to decrease their sponsorship of
energy conservation programs like the one the Company offers. The Company
currently has only one major contract with an electric utility customer.
During fiscal year 1997, that customer, Southern California Edison
Company ("Edison"), accounted for approximately 38% of the Company's net
revenues. In February 1998, Edison entered into a contract with the Company to
extend the refrigerator recycling program through September 1998. The Company
has participated in that program through its California subsidiary since 1993.
Under the terms of the contract, Edison will provide for a minimum number of
refrigerators to be recycled during the contract period. The contract generated
revenues of $4.3 million in 1997 and will generate at least $3.0 million in
revenues in 1998.
In response to the decrease in demand for services from electric
utilities, the Company has increased its marketing of services to appliance
manufacturers and retailers, waste management companies and property management
companies. The Company also has increased its focus on the sale of reconditioned
appliances. In 1995, under the name Encore(R) Recycled Appliances, the Company
began operating a chain of Company-owned retail stores. These stores offer
reconditioned and manufacturers' distressed appliances to value-conscious
individuals and property managers.
During 1996 the Company continued to expand its focus on its Encore
retail stores and had more than 30 retail stores open at one point during the
year. Due to substantial losses in certain markets, the Company closed centers
and stores in three markets in the fourth quarter of 1996. Write-offs and other
significant expenses related to these closings caused the Company to report a
significantly larger than anticipated loss for the year. The Company currently
has four recycling centers, located in Columbus, Ohio; Minneapolis, Minnesota;
St. Louis, Missouri; and Los Angeles, California. The Company currently has 14
retail stores in these markets.
CUSTOMERS AND SOURCE OF SUPPLY
The Company offers its services to entities that as part of their
operations become responsible for disposing of large quantities of used
appliances. These entities include new appliance manufacturers and retailers,
waste management companies, property management companies and utility companies.
NEW APPLIANCE MANUFACTURERS AND RETAILERS. The Company began its
business by offering appliance recycling programs to Sears, Montgomery Ward and
other new appliance retailers to collect appliances from either the retailers'
facilities or from their consumers. Recently the Company expanded its existing
marketing efforts to new appliance manufacturers, a primary source of product
that can be reconditioned and sold in the Company's stores.
WASTE MANAGEMENT COMPANIES. The Company provides services to waste
management companies and the general public for the collection and recycling of
appliances for specified fees.
PROPERTY MANAGEMENT COMPANIES. The Company provides comprehensive
appliance exchange and recycling services to property managers of apartment
complexes as well as local housing authorities.
<PAGE>
UTILITY COMPANIES. The Company contracts with utility companies to
provide comprehensive appliance recycling services tailored to the needs of the
particular utility. The contracts historically have had terms of one to four
years, with provisions for renewal at the option of the utility company. Under
some contracts, the utility retains the Company to manage all aspects of its
appliance recycling program, while under other contracts, the Company provides
only specified services. Pricing for the Company's services is on a
per-appliance basis and depends upon several factors, including the total number
of appliances processed, the length of the contract term and the specific
services selected by the utility. Contracts with electric utility customers
require that the Company does not recondition for resale appliances received
from utility company energy conservation programs. The Company currently has
only one major contract with an electric utility customer.
The Company believes its sources are adequate to supply the current
number of retail stores and allow it to increase the number of retail stores.
COMPANY OPERATIONS
The Company provides an integrated range of collection, reuse and
recycling services. Appliances are collected from a variety of sources,
including new appliance retailers and manufacturers, solid waste management
companies, property managers, local government and electric utilities. Some
appliances are reconditioned and sold through the Company's retail network of
Encore stores. The remaining appliances are disposed of in an environmentally
responsible manner at a Company recycling center. Environmentally harmful
substances---including CFCs, PCBs and mercury---are removed and properly
managed. After all appliance processing is completed, scrap materials are sold
for recycling.
The Company believes 10 to 15% of all appliances collected can be
reconditioned. Appliances identified for resale are thoroughly inspected for
wear-and-tear and broken or damaged parts. Worn parts are replaced and
appliances are tested to ensure they are fully operational and function safely
under proper conditions. Appliances are professionally cleaned and touched-up or
repainted. Reconditioned appliances are then sold in the Company's chain of
Encore retail stores. Each appliance has a 90-day warranty, with an additional
extended warranty available for purchase. The Company offers a money-back
guarantee and provides delivery and repair services on products that it sells.
Appliances that don't meet the Company's standards are processed and
recycled in an environmentally sound manner. Appliances identified to be
recycled are processed per federal, state and local environmental regulations.
They are inspected and categorized according to the types of hazardous materials
they may contain. At the Company's centers, appliances are moved through the
processing area on a conveyor system, which eases the handling of heavy and
bulky items and promotes employee safety. After the appliances are moved to the
processing area, the Company's processing technicians remove electrical
capacitors and fluorescent light ballasts that may contain PCB dielectric fluid,
and components that may contain mercury. This procedure is conducted at a
specially constructed and controlled component removal area. The Company's
processing technicians are trained to locate and remove such components from all
makes and models of appliances. The technicians place the components in
separate, clearly marked containers in the component removal area.
When processing at the Company's centers has been completed and the
appliances are free of environmentally hazardous components and materials, they
are delivered to qualified metals processing facilities for shredding. Shredded
materials from the processed appliances are sold to steel mini-mills or other
metal recovery facilities for appropriate reuse.
<PAGE>
PLANNED EXPANSION. The Company plans to open three to five
additional retail stores in 1998 in its existing markets. Management believes
that the uncertainties in the electric utility industry regarding deregulation
will persist at least through 1998. The reaction to deregulation among states
and utilities has been varied. The Company believes, however, that energy
conservation and efficiency programs will remain a long-term component of the
nation's electric utility industry.
The Company believes that the growth and expansion of the business
in the near future will likely occur primarily through the expansion of revenues
from the Company's current retail stores, the development of contracts with
solid waste management companies and appliance retailers, and the generation of
revenues from the contract with Edison.
PRINCIPAL PRODUCT AND SERVICES
The Company generates revenues from three sources: recycling fees,
appliance sales and byproduct sales. The following table reflects the percentage
of total revenues from each source.
1997 1996 1995
---- ---- ----
Recycling fees 52.4% 48.4% 75.7%
Appliance sales 34.6% 36.7% 11.0%
Byproduct sales 13.0% 14.9% 13.3%
----- ----- -----
100.0% 100.0% 100.0%
====== ====== ======
SALES AND MARKETING
The Company uses various means to promote awareness of its services
and the need for environmentally sound recycling of appliances and believes it
is recognized as a leader in the appliance recycling industry.
The Company's strategy for its retail stores is to present an
upscale image in convenient, high-traffic locations. Store interiors are modern,
bright and clean. In every Encore market, the Company actively promotes its
stores through various forms of print advertising, including daily classified
ads in major newspapers, telephone yellow pages ads and direct mail. In
addition, the Company uses radio and television advertisements in some markets,
in addition to other types of promotions.
SEASONALITY
The Company experiences seasonal fluctuations in operating results,
with revenues generally higher during the second and third calendar quarters
than in the first and fourth calendar quarters. The lower levels in the first
and fourth quarters reflect consumer purchasing cycles, which result in lower
sales of major household appliances during such quarters and corresponding
reductions in the demand for appliance recycling services. Furthermore, utility
companies that sponsor appliance turn-in programs generally reduce their
promotional efforts for such programs during the first and fourth calendar
quarters. The Company expects that it will continue to experience lower revenues
in the first and fourth quarters of future years as compared to the second and
third quarters of such years.
<PAGE>
COMPETITION
Many factors, including existing and proposed governmental
regulation, may affect competition in the waste management and environmental
services industry. Recycling of appliances in conformity with recent legislative
and regulatory requirements is a relatively new industry. The Company generally
competes with two or three other companies which are based in the geographic
area to be served under the contract and which generally offer only some of the
services provided by the Company.
The Company expects its primary competition for contracts with
existing or new customers to come from entrepreneurs entering the appliance
recycling business, energy management consultants, current recycling companies,
major waste hauling companies, scrap metal processors and used appliance
dealers. In addition, customers such as utility companies and local governments
may operate appliance recycling programs internally rather than contracting with
the Company or other third parties. There can be no assurance that the Company
will be able to compete profitably in any of its chosen markets.
Competition for the Company's retail stores comes from new appliance
retailers and other reconditioned and used appliance retailers. Each Encore
location will compete not only with local and national chains of new appliance
retailers, many of whom have been in business longer than the Company and who
may have significantly greater assets than the Company, but will also be
required to compete with numerous independently owned retailers of used and
reconditioned appliances.
GOVERNMENT REGULATION
The business of recycling major appliances is subject to certain
governmental laws and regulations and is becoming increasingly regulated. These
laws and regulations include landfill disposal restrictions, hazardous waste
management requirements and air quality standards, as well as special permit and
license conditions for the recycling of appliances. In some instances, there are
bonding, insurance and other conditions for bidding on appliance recycling
contracts.
The Company's appliance recycling centers are subject to various
federal, state and local laws, regulations and licensing requirements relating
to the collection, processing and recycling of household appliances.
Requirements for registrations, permits and licenses vary among the Company's
market areas. The Company's centers are registered with the EPA as hazardous
waste generators and are licensed, where required, by appropriate state and
local authorities. The Company has agreements with approved and licensed
hazardous waste companies for transportation and disposal of PCBs from its
centers.
The 1990 Amendments to the Clean Air Act provide for the phaseout of
the production of CFCs over a period of years. Effective July 1, 1992, the Act
prohibited the venting of CFCs in the course of maintaining, servicing,
repairing or disposing of an appliance. The Act also requires the recovery of
CFC refrigerants from appliances prior to their disposal or delivery for
recycling. In 1995, the venting of CFC substitute refrigerants was also
prohibited.
In 1992, Congress adopted the Energy Policy Act of 1992 to encourage
energy efficiency. Requirements under this act establish, among other things,
mandatory energy performance standards that affect the manufacture and sale of
major household appliances. Another component of this act allows for
deregulation of the nation's energy providers, including the electric utility
industry. The ultimate impact of deregulation on the electric utility industry
is yet unknown; therefore, there can be
<PAGE>
no assurance that the Company will be able to continue certain of its current
operations in a deregulated environment.
Company management believes that further government regulation of
the appliance recycling industry could have a positive effect on the Company's
business; however, there can be no assurance what course future regulation could
have. Under some circumstances, further regulation could materially increase the
costs of the Company's operations and have an adverse effect on the Company's
business. In addition, as is the case with all companies handling hazardous
materials, under some circumstances, the Company may be subject to contingent
liability.
EMPLOYEES
At March 1, 1998, the Company had 158 full-time employees, of whom
approximately 55 percent were involved in the collection, transportation and
processing of appliances at the Company's centers and approximately 45 percent
were in sales, administration and management. The Company has not experienced
any work stoppages and believes its employee relations are good.
ITEM 2. PROPERTIES
The Company's executive offices are located in Minneapolis,
Minnesota, in a Company owned facility which includes approximately 11 acres of
land. The building contains approximately 122,000 square feet, including 27,000
square feet of office space and 95,000 square feet of operations and processing
space. The Southern California center building, which also is owned by the
Company, is located in Compton, California, and consists of 44,000 square feet:
6,000 square feet of office space and 38,000 square feet of warehouse space. In
addition, the Company owns a 14,000-square-foot facility in Saint Paul,
Minnesota, which contains a retail store at which it sells reconditioned and
distressed appliances. All properties owned by the Company currently secure
outstanding loans of the Company.
The Company generally leases the other facilities it operates. The
Company usually attempts to negotiate lease terms that correspond to the term of
the principal contract or contracts in connection with which the center is to be
operated. The Company's centers typically range in size from 12,000 to 40,000
square feet. The Company's retail stores are typically 2,500 to 5,000 square
feet. The Company is negotiating the settlement of one remaining lease from the
locations closed in 1996.
The Company believes that the facilities and equipment at each of
its centers are adequate to meet its anticipated needs for the near term and
believes that alternate facilities will readily be available to the Company to
meet its future needs.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are involved in various legal
proceedings arising in the normal course of business, none of which is expected
to result in any material loss to the Company or any of its subsidiaries.
<PAGE>
Due to legal proceedings brought in August 1997 against the Company,
its directors and its subsidiary, Appliance Recycling Centers of
America-California, Inc. ("ARCA California"), by the minority shareholder of
ARCA California, on October 9, 1997 ARCA California filed a voluntary petition
for relief seeking a reorganization of the subsidiary under Chapter 11 of the
Federal Bankruptcy Act. On November 5, 1997, a cash settlement agreement between
ARCA, Inc., ARCA California, its officers and directors, and the minority
shareholder was reached in which all claims between the parties were settled and
ARCA, Inc. acquired all of the minority shareholder's stock in ARCA California.
The agreement was approved by the United States Bankruptcy Court on November 26,
1997 and the Chapter 11 filing was dismissed. ARCA California accounts for all
of the revenues from the Edison contract.
In addition, the Company is involved in certain legal proceedings
arising from the cancellation of leases in connection with the closing of
certain facilities. The Company has established a reserve for lease settlements
and closing costs. See Note 7 in the "Notes to Consolidated Financial
Statements" contained in Exhibit 13.0 to this report.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to a vote of security holders
during the last quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
The Common Stock Data set forth on page 16 of the Company's 1997
Annual Report to Shareholders, presenting certain information regarding the
market for the Company's Common Stock, is incorporated herein by reference.
Within the last three years the Company has issued 79,839 (adjusted
for 1 for 4 reverse stock split in February 1997) unregistered shares.
In August 1995, the Company acquired Major Appliance Pickup Service
of St. Louis, Inc. DBA Gateway Appliance Center, Inc. ("Gateway"), a St. Louis,
Missouri-based used appliance retailer and recycler, by exchanging 7,143 shares
of its Common Stock for 100% ownership of Gateway.
In January 1996, the Company acquired Universal Appliance Company,
Inc. and Universal Appliance Recycling, Inc., Washington, D.C.-based companies,
by exchanging a total of 21,000 shares of its Common Stock for 100% ownership of
the respective companies, which merged into a subsidiary of the Company,
ARCA-Maryland, Inc.
In May 1996, the Company sold, in a privately negotiated
transaction, 50,000 shares of its Common Stock at a purchase price of $14.00 per
share to a fund owned by Perkins Capital Management Inc. The proceeds of this
sale were used to pay off an equipment loan of $480,000 and for additional
working capital.
In May 1996, the Company agreed to issue 1,696 shares of Common
Stock to Tom Harris & Associates, Inc. pursuant to a contract for service with
730 Creative Corporation.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The Selected Financial Data set forth on page 16 of the Company's
1997 Annual Report to Shareholders is incorporated herein by reference. Such
data should be read in conjunction with the Consolidated Financial Statements
and Notes thereto and Management's Discussion and Analysis appearing in the
Company's 1997 Annual Report to Shareholders. See Exhibit 13.0 to this report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS FOR THE FISCAL YEARS 1997, 1996 AND 1995
Management's Discussion and Analysis set forth on page 4 of the
Company's 1997 Annual Report to Shareholders, representing management's
discussion and analysis of financial condition and results of operations, is
incorporated herein by reference. See Exhibit 13.0 to this report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements, Notes to Consolidated
Financial Statements and Independent Auditor's Report set forth in the Company's
1997 Annual Report to Shareholders are incorporated herein by reference. See
Index to Financial Statements on page 13 of this report and Exhibit 13.0 to this
report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
No changes in or disagreements with accountants have occurred within
the two-year period ended January 3, 1998, which required reporting on Form 8-K.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Information regarding directors and executive officers of the
Company is set forth under "Information Concerning Directors, Nominees and
Executive Officers" and under "Beneficial Ownership Reporting Compliance" in the
Company's definitive Proxy Statement for its 1998 Annual Meeting of Shareholders
to be held April 30, 1998 and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding Executive Compensation set forth under
"Executive Compensation" in the Company's definitive Proxy Statement for its
1998 Annual Meeting of Shareholders to be held April 30, 1998, other than the
subsections captioned "Report of the Compensation and Benefits Committee" and
"Performance Graph," is incorporated herein by reference.
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial
owners and management is set forth under "Beneficial Ownership of Common Stock"
in the Company's definitive Proxy Statement for its 1998 Annual Meeting of
Shareholders to be held April 30, 1998, and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions
is set forth under "Information Concerning Directors, Nominees and Executive
Officers" in the Company's definitive Proxy Statement for its 1998 Annual
Meeting of Shareholders to be held April 30, 1998, and is incorporated herein by
reference.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND EXHIBITS
1. FINANCIAL STATEMENTS
The following consolidated financial statements of the
Company, included in the Company's 1997 Annual Report to
Shareholders, are incorporated herein by reference (See
Exhibit 13.0 hereto):
<TABLE>
<CAPTION>
PAGE IN 1997
DESCRIPTION ANNUAL REPORT
----------- -------------
<S> <C>
Independent Auditor's Report.................................................15
Consolidated Statements of Operations for
the three-year period ended January 3, 1998...............................7
Consolidated Balance Sheets at January 3, 1998 and December 28, 1996..........8
Consolidated Statements of Cash Flows for
the three-year period ended January 3, 1998...............................9
Consolidated Statements of Shareholders' Equity for
the three-year period ended January 3, 1998..............................10
Notes to Consolidated Financial Statements...................................11
</TABLE>
2. FINANCIAL STATEMENT SCHEDULES
The financial statement schedules of the Company are
omitted because of the absence of conditions under which
they are required, or the information required is
available in the financial statements listed above.
3. EXHIBITS
See Index to Exhibits on page 15 of this report.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the last quarter of the
fiscal year covered by this report.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or Section 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this Report to
be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: March 27, 1998 APPLIANCE RECYCLING CENTERS OF
AMERICA, INC.
(Registrant)
By /s/ Edward R. Cameron
-------------------------------------
Edward R. Cameron
President and Chief Executive Officer
By /s/ Kent S. McCoy
-------------------------------------
Kent S. McCoy
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ Edward R. Cameron Chairman of the Board, President and March 27, 1998
- ----------------------- Chief Executive Officer
Edward R. Cameron
/s/ Kent S. McCoy Chief Financial Officer March 27, 1998
- ----------------------- (Principal Accounting Officer)
Kent S. McCoy
/s/ George B. Bonniwell Director March 27, 1998
- -----------------------
George B. Bonniwell
/s/ Duane S. Carlson Director March 27, 1998
- -----------------------
Duane S. Carlson
/s/ Harry W. Spell Director March 27, 1998
- -----------------------
Harry W. Spell
<PAGE>
INDEX TO EXHIBITS
Exhibit
No. Description
- ------- -----------
3.1 Restated Articles of Incorporation of Appliance Recycling Centers of
America, Inc. [filed as Exhibit 3.1 to the Company's Registration
Statement on Form S-18 (Registration No. 33-43182C) and incorporated
herein by reference].
3.2 Restated Articles of Incorporation as amended June 3, 1993 [filed as
Exhibit 19.2 to the Company's Form 10-Q for the quarter ended June
30, 1993 (File No. 0-19621) and incorporated herein by reference].
3.3 Articles of Amendment of Articles of Incorporation of Appliance
Recycling Centers of America, Inc. dated February 7, 1997 [filed as
Exhibit 3.3 to the Company's Form 10-K for the year ended December
28, 1996 (File No. 0-19621) and incorporated herein by reference].
+3.4 Articles of Amendment of Articles of Incorporation of Appliance
Recycling Centers of America, Inc. dated April 24, 1997.
3.5 Bylaws of Appliance Recycling Centers of America, Inc. [filed as
Exhibit 3.2 to the Company's Registration Statement on Form S-18
(Registration No. 33-43182C) and incorporated herein by reference].
*10.1 Restated 1989 Stock Option Plan, as amended [filed as Exhibit 10.7
to the Company's Registration Statement on Form S-1 (Registration
No. 33-58338) and incorporated herein by reference].
10.2 Amendment dated May 14, 1992, to lease between Six Brainard
Associates Limited Partnership and ARCA Connecticut, Inc. [filed as
Exhibit 10.11 to the Company's Registration Statement on Form S-1
(Registration No. 33-58338) and incorporated herein by reference].
*10.3 Amended Appliance Recycling Centers of America, Inc. 1989 Stock
Option Plan [filed as Exhibit 19.3 to the Company's Form 10-Q for
the quarter ended June 30, 1993 (File No. 0-19621) and incorporated
herein by reference].
10.4 Agreement dated December 17, 1992, between Appliance Recycling
Centers of America, Inc. and TCF Savings Bank [filed with the
Company's Form 8-K, dated December 17, 1992 (File No. 0-19621) and
incorporated herein by reference].
10.5 Agreement dated January 19, 1994, between Appliance Recycling
Centers of America, Inc. and Standard Insurance Corporation [filed
as Exhibit 10.29 to the Company's Form 10-K for the year ended
December 31, 1993 (File No.0-19621) and incorporated herein by
reference].
10.6 Line of credit dated August 30, 1996, between Appliance Recycling
Centers of America, Inc. and Spectrum Commercial Services, a
division of Lyons Financial Services, Inc. [filed
<PAGE>
as exhibit 10.15 to the Company's Form 10-Q for the quarter ended
September 28, 1996 (File No. 0-19621) and incorporated herein by
reference].
10.7 Amended line of credit dated November 8, 1996, between Appliance
Recycling Centers of America, Inc. and Spectrum Commercial Services,
a division of Lyons Financial Services, Inc. [filed as exhibit 10.16
to the Company's Form 10-Q for the quarter ended September 28, 1996
(File No. 0-19621) and incorporated herein by reference].
+10.8 Agreement dated February 11, 1998, between Appliance Recycling
Centers of America, Inc. and Southern California Edison Company.
*10.9 1997 Stock Option Plan and Amendment [filed as exhibits 28.1 and
28.2 to the Company's Registration Statement on Form S-8
(Registration No. 333-28571) and incorporated herein by reference].
+10.10 Amended line of credit dated February 12, 1998 between Appliance
Recycling Centers of America, Inc. and Spectrum Commercial Services,
a division of Lyons Financial Services, Inc., Amended Revolving Note
and Amended Guarantor Acknowledgments.
+10.11 Agreement dated February 13, 1998 between Western Bank and Appliance
Recycling Centers of America, Inc.
*10.12 Amendment, effective April 24, 1997, to 1989 Stock Option Plan
[filed as exhibit 28.2 to the Company's Registration Statement on
Form S-8 (Registration No. 33-68890) and incorporated herein by
reference].
+13.0 Portions of the Annual Report to Shareholders for the fiscal year
ended January 3, 1998: Common Stock Data; Selected Financial Data;
Management Discussion and Analysis; Financial Statements.
+21.1 Subsidiaries of Appliance Recycling Centers of America, Inc.
+23.1 Consent of McGladrey & Pullen, LLP, Independent Public Accountants.
+27.0 Financial Data Schedule.
- -----------------
* Items that are management contracts or compensatory plans or arrangements
required to be filed as an exhibit pursuant to Item 14(c) of this Form
10-K.
+ Filed herewith.
EXHIBIT 3.4
ARTICLES OF AMENDMENT OF
ARTICLES OF INCORPORATION OF
APPLIANCE RECYCLING CENTERS OF AMERICA, INC.
The undersigned, as President and Chief Executive Officer of Appliance
Recycling Centers of America, Inc., a corporation subject to the provisions of
Chapter 302A of the Minnesota Statutes (the "Corporation"), does hereby certify
that the following resolutions were adopted by the Corporation's Board of
Directors, by the required vote of said Directors, effective as of March 7,
1997, and does hereby further certify that the following resolutions were
adopted by the Corporation's Shareholders, by the required vote of said
Shareholders on April 24, 1997:
NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors and
Shareholders hereby authorize the amendment of the Corporation's
Articles of Incorporation increasing the shares of authorized capital
stock from five million (5,000,000) shares, without par value, to ten
million (10,000,000) shares, without par value.
FURTHER RESOLVED, that, to effect said amendment, Article 3, paragraph
A of the Corporation's Articles of Incorporation hereby is amended to
read as follows:
"ARTICLE 3. AUTHORIZED SHARES
The total number of shares of stock which the
corporation shall have authority to issue is ten million
(10,000,000) shares, all of which shares shall be Common Stock
without par value."
FURTHER RESOLVED, that the Corporation's officers are hereby authorized
and directed to execute such documents and certificates and to take
such other actions and incur such other expenses as they may deem
necessary to effectuate the above resolution, including, but not
limited to, the execution and filing of Articles of Amendment with the
Minnesota Secretary of State.
IN WITNESS WHEREOF, Appliance Recycling Centers of America, Inc. has
caused these Articles of Amendment to be signed by its President and Chief
Executive Officer this 24th day of April, 1997.
/S/ EDWARD R CAMERON
------------------------------
Edward R. Cameron
President and Chief Executive
Officer
State of Minnesota
Department of State
Filed
May 27, 1997
EXHIBIT 10.8
SOUTHERN CALIFORNIA EDISON COMPANY'S 1998 REFRIGERATOR RECYCLING
AND HAZARDOUS MATERIALS DISPOSAL AGREEMENT
1. PARTIES
The parties to the Agreement are Appliance Recycling Centers of
America, Inc., the entity responsible for the performance of the work
as one Party (hereinafter referred to as "Contractor"), and Southern
California Edison Company, a California corporation (hereinafter
referred to as "Edison") as the other Party.
2. RECITALS
The Agreement is entered into with reference to the following facts,
among others:
2.1. The Parties have previously entered into agreements with
respect to the recycling of older inefficient refrigerators
and freezers and the disposal of hazardous materials ("the
Refrigerator Recycling Program").
2.2 The Parties desire to continue to implement a Refrigerator
Recycling Program ("the 1998 Program") for the removal of
older, inefficient second refrigerators and freezers
("Refrigerators and Freezers") from Edison Customer
residences thereby reducing the load demand on the
electrical system under the terms set forth below.
2.3 Edison desires to continue and increase its efforts to
reduce the load demand on the electrical system through the
further removal of older inefficient second Refrigerators
and Freezers.
2.4 Edison desires to ensure the safe, lawful recovery and
recycling or lawful disposal, as necessary, of CFCs, PCBs,
and Hazardous Materials.
2.5 In furtherance thereof, Edison desires to contract with
Contractor for the continued comprehensive management of the
1998 Program.
2.6 Contractor desires to contract with Edison for the continued
comprehensive management of the 1998 Program, said
management to include collection and dismantling of second
Refrigerators and Freezers; removal of CFCs, PCBs and other
Hazardous Materials from collected Refrigerators and
Freezers; handling storage and legal disposal of compressor
oil, PCBs and other Hazardous Materials; recycling of metal,
sulfur dioxide, and CFCs; providing incentives to
participating Edison Customers who relinquish second
Refrigerators and Freezers; and performance of a customer
survey.
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY'S 1998 REFRIGERATOR RECYCLING
AND HAZARDOUS MATERIALS DISPOSAL AGREEMENT
2.7 Contractor represents (i) that it has knowledge of the
Metallic Discard Act, effective January 1, 1994, which
prohibits the disposal of Refrigerators and Freezers in
landfills and requires that Refrigerators and Freezers be
shredded for metal recovery following removal of CFCs, PCBs,
and other Hazardous Materials contained in discarded
Refrigerators and Freezers, (ii) that it has knowledge of
the hazards associated with the removal, handling, storage,
recycling, and legal disposal of Hazardous Materials, (iii)
that it has experience and expertise in such removal,
handling, storage, recycling, and legal disposal, (iv) that
it uses only qualified personnel, (including subcontractor's
and agent's personnel) who have been instructed and
certified in the proper safety procedures to be used in such
removal, handling, storage, recycling, or legal disposal,
and (v) that it has purchased property and has established
and will continue to operate and maintain its recycling
center on said purchased property in the City of Compton or
other area acceptable to Contractor and Edison.
2.8 Pursuant to a 1997 decision of the California Public
Utilities Commission ("CPUC"), Edison's rights, duties and
obligations under this Agreement may be assigned in the
future to the California Board for Energy Efficiency
("Board") or, at the Board's discretion, to the Board's
administrator. In the event of such assignment, Edison will
have no further obligations under this Agreement except as
stated in Section 9.3.3.3.
2.9 The Parties hereto desire to set forth terms and conditions
under which the aforesaid management services shall be
performed and which shall constitute the Parties' agreement.
3. AGREEMENT
3.1 In consideration of the aforesaid Recitals, the mutual
covenants contained herein, the payments and agreement to be
made and performed by Edison as set forth in the pricing
schedule attached hereto as Exhibit A and incorporated by
reference herein, Contractor shall perform the Work and its
associated obligations as an independent contractor.
3.2 This Agreement shall be incorporated in a Purchase Order as
the terms and conditions for performing the work.
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY'S 1998 REFRIGERATOR RECYCLING
AND HAZARDOUS MATERIALS DISPOSAL AGREEMENT
4. DEFINITIONS
4.1 Agreement: This document, the terms and conditions contained
in this Agreement as amended from time to time.
4.2 CFCs: Chlorofluorocarbons
4.3 CFC-11: Chlorofluorocarbons contained in refrigerator and
freezer insulating foam.
4.4 Change Order: Document issued by Edison to Contractor to
change a Purchase Order.
4.5 Contract Period: January 1, 1998 to September 30, 1998, or
as extended by mutual agreement of the Parties.
4.6 Documentation: Specifications, procedures, instructions,
reports, test results, analyses, calculations, manuals, and
other data specified in the Purchase Order, Change Order,
this Agreement, and any amendment to this Agreement, as
required by any legal entity having jurisdiction over the
Work.
4.7 Edison's Specified Volume: The number of units to which
Edison commits for the Contract Period.
4.8 Eligible Customers: Residential customers in Edison service
territory who meet the customer eligibility criteria in
Section 7.
4.9 Eligible Freezers: Freezers that meet the 1998 Program
appliance eligibility criteria as set forth in Section 7.
4.10 Eligible Refrigerators: Second refrigerators that meet the
1998 Program appliance eligibility criteria as set forth in
Section 7.
4.11 Freezer: A freezer which provides supplementary cold storage
to a primary freezer or to the freezer section located
within the primary refrigerator in a residential household.
4.12 Hazardous Materials: Any substance or material which has
been designated as hazardous or toxic by the U.S.
Environmental Protection Agency, the California Department
of Toxic Substances Control and/or any other governmental
agency now or hereinafter authorized to regulate materials
in the environment, including, but not limited to
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY'S 1998 REFRIGERATOR RECYCLING
AND HAZARDOUS MATERIALS DISPOSAL AGREEMENT
"Materials which require special handling" as defined in
California Public Resources Code Section 42167, which is
contained in or is derived from the Refrigerators or
Freezers.
4.13 1998 Program: Refrigerator Recycling Program defined by this
Agreement.
4.14 1998 Program Participants: Eligible customers who turn in
qualifying Refrigerators or Freezers.
4.15 PCB: Polychlorinated Biphenyl
4.16 Purchase Order: Document issued by Edison to Contractor and
executed by the Parties, which incorporates by reference
this Agreement.
4.17 Recycling Center: The site at which Contractor will process
Refrigerators and Freezers, remove CFCs, PCBs and other
Hazardous Materials, and recycle or legally dispose of
Hazardous materials.
4.18 Recycling Charge: Per-unit price for services performed by
Contractor under scope of work, including CFC-11 recovery
services, and excluding bond purchasing, incentive and
financing services.
4.19 Second refrigerator: Surplus refrigerator utilized by
customer concurrently with primary refrigerator.
4.20 Specified Volume: The number of units to which Edison
commits for the Contract Period.
4.21 Subcontractor: Either an entity contracting directly with
Contractor to furnish services or materials as part of or
directly related to, the Work; or an entity contracting with
Subcontractor of any tier to furnish services or materials
as a part of, or directly related to, the Work.
4.22 Work: Any and all obligations of Contractor to be performed
pursuant to this Agreement or a Purchase Order incorporating
this Agreement, such as Refrigerator and Freezer collection,
Refrigerator and Freezer processing, handling, storing,
recycling, and legal disposal, of Hazardous Materials and
Documentation preparation.
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY'S 1998 REFRIGERATOR RECYCLING
AND HAZARDOUS MATERIALS DISPOSAL AGREEMENT
5. CONTRACT DOCUMENTS
5.1 The contract between the Parties shall consist of the
following documents: Change Orders, Purchase Order, this
Agreement, and any amendments to this Agreement. In the
event of conflicting provisions within the contract, the
provisions of the contract shall govern in the following
order:
5.1.1 Amendments to the Agreement in chronological order
from the most recent to the earliest;
5.1.2 Change Orders incorporating and reflecting any
Amendments to the Agreement in chronological order
from the most recent to the earliest.
5.1.3 This Agreement.
5.1.4 Purchase Order incorporating this Agreement.
5.2 Each party shall notify the other immediately upon the
determination of any such conflict or inconsistency.
6. SCOPE OF WORK
6.1 Contractor shall be responsible for customer services
including provision of inbound 800 telephone numbers for
Customers, use and all communication services, scheduling of
Refrigerator and Freezer collection appointments,
verification of customer and appliance eligibility, and
documentation of customer data.
6.2 Contractor shall (i) collect all Eligible Refrigerators and
Eligible Freezers from Customers' residences within 10 to 15
working days from the date of initial customer contact
(unless otherwise requested by the customer, in remote areas
of the service territory, or approved by Edison's 1998
Program Manager because of 1998 Program response in excess
of the Edison's Specified Volume for which approval shall
not be unnecessarily withheld, and collection shall be no
later than 25 working days from the date of the initial
customer contact, unless otherwise requested by customer),
(ii) ensure Refrigerator or Freezer is an operating unit
before removal from residence, (iii) disable the unit prior
to leaving pick-up location, and (iv) process unit at its
Recycling Center.
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY'S 1998 REFRIGERATOR RECYCLING
AND HAZARDOUS MATERIALS DISPOSAL AGREEMENT
6.3 Contractor shall be solely responsible for all methods,
techniques, sequences, and procedures for the dismantling of
Refrigerators and Freezers, processing of metal panels and
components, recycling of recovered scrap metal, removal,
recycling, or lawful disposal of Hazardous Materials.
6.4 Contractor shall be solely responsible for all methods,
techniques, sequences, and procedures for the removal and
management of all capacitors found in Refrigerators and
Freezers, and the removal and disposal of compressor oil,
PCBs, and other Hazardous Materials from the time Contractor
collects Refrigerators and Freezers pursuant to this
Agreement.
6.5 Contractor shall document and maintain records for services
under this Agreement, or the Purchase order, incorporating
this Agreement, as follows:
6.5.1 A Customer Comment Tracking System for recording
customer inquiries, complaints, and positive
feedback.
6.5.2 Appliance Turn-in Order Form to collect data such
as customer name, address, home and work phone
numbers; utility account number, Refrigerator or
Freezer manufacturer's name; Refrigerator or
Freezer model and style; defrost type; color,
size, and estimated age of unit; location of
Refrigerator or Freezer within the residence;
amperage, final disposition code (which indicates
operating condition of Refrigerator or Freezer),
identification of units containing CFC-11; special
pick-up instructions (if applicable) and signature
of customer following customer certification that
the unit is a Second Refrigerator or Freezer in
continuous use for a minimum of six months and
that in the event refrigerator or freezer is
discovered not to be an Eligible Refrigerator or
Freezer as certified, customer acknowledges
liability to Edison for recycling costs.
6.5.3 Compilation of data in paragraphs 6.5.1 and 6.5.2
in electronic mode, employing the Microsoft EXCEL
software program.
6.6 Contractor shall conduct a customer survey, comparable to
Exhibit B, attached and incorporated by reference herein,
using a stratified purposeful sample of 5 to 20% of the 1998
Program Participants. The stratification and frequency of
the survey may be modified periodically by Edison, provided
that an Amendment to this Agreement or a separate agreement
shall be entered into if any such modification
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY'S 1998 REFRIGERATOR RECYCLING
AND HAZARDOUS MATERIALS DISPOSAL AGREEMENT
necessitates unreasonable labor, as substantiated by
Contractor, requiring the negotiation of a charge separate
from the Recycling Charge. The purpose of the survey shall
be to elicit information such as appliance use, customer
demographics and customer satisfaction. Stratification and
frequency of survey shall be modified periodically as
determined by Edison provided modified survey is comparable
to Exhibit B.
6.7 Contractor and Edison shall establish and implement a
financial incentive service as follows:
6.7.1 The incentive to each 1998 Program Participant
will be a savings bond with a face value of Fifty
Dollars ($50.00) or, a check in the amount of
Twenty-Five Dollars ($25.00) or, an item with a
retail value of at least Twenty-Five dollars
($25.00) or, subject to availability, a 38
quart/36.1 liter Igloo(R)cooler ("Cooler") (the
"Cooler Promotion"). The savings bond, the check,
the retail item, and the Cooler are each referred
to individually as the "Incentive". Each 1998
Program Participant has a right to receive one
Incentive, at his or her discretion. The Parties
may agree in the future to increase the number of
Incentives a 1998 Program Participant may receive.
The Coolers shall be delivered to Contractor at a
location to be mutually agreed upon by the
Parties. Edison shall require the cooler
manufacturer to deliver the Coolers in either
individual boxes or shrink-wrapped with two
Coolers to a wrap in order to diminish the
possibility of damage to the Coolers. Edison shall
use its best efforts to have the manufacturer
deliver the Coolers in split lots with a minimum
of One Thousand (1,000) Coolers each. Contractor
shall provide Edison with a minimum of fifteen
(15) business days prior written notice in which
to deliver each Cooler lot to Contractor.
6.7.2. Contractor shall provide Edison with a weekly
listing for approval of Customers qualifying for
an Incentive. Customers qualifying for an
Incentive are 1998 Program Participants who turn
in an
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY'S 1998 REFRIGERATOR RECYCLING
AND HAZARDOUS MATERIALS DISPOSAL AGREEMENT
Eligible Refrigerator or Freezer for which Edison
will pay a per-unit price as set forth in Section
10.1 of the Agreement.
6.7.3 Upon reimbursement by Edison to Contractor of the
Incentives under Section 9.4 of this Agreement,
Edison shall be under no further obligation with
respect to reimbursement of such amounts and such
reimbursement shall constitute full payment to
Contractor on behalf of the 1998 Program
Participants entitled to Incentives. Moreover,
upon Edison's payment to Contractor of the amounts
described above, Contractor shall be deemed the
holder of such property as far as the interests of
the 1998 Program Participants entitled thereto are
concerned for any and all purposes, including, but
not limited to, complying with the unclaimed
property laws of California and any and all other
applicable states. At no time after such
reimbursement to Contractor is Edison to assume
any responsibility for other disposition of such
amounts and shall not be entitled to the reversion
of any amounts so paid.
6.8 Contractor shall provide Edison with reports for the
services performed under this Agreement as follows:
6.8.1 A monthly report, provided no later than the 15th
day of the month, listing the number of
Refrigerators and Freezers processed through the
Recycling Center during the previous month and
containing size in cubic feet, year of
manufacture, style, and defrost type.
6.8.2 A quarterly report, presented within fifteen (15)
days of the new quarter, summarizing the monthly
report information from the previous quarter and
containing environmental data such as an estimated
breakdown of amount of refrigerants recovered;
number of pounds of capacitors removed; number and
size of CFC-11 units and amount of CFC-11
recovered; amount of sulfur dioxide recovered,
amount of compressor oil recycled, and weight of
metals and nonrecyclable materials sold for
shredding.
6.8.3 A quarterly report presented within fifteen (15)
days of the new quarter summarizing the monthly
Customer Comment Tracking System information in
Section 6.5.1.
6.8.4 By the 15th day of each month during the term of
this Agreement, Contractor shall provide Edison
with monthly aging
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY'S 1998 REFRIGERATOR RECYCLING
AND HAZARDOUS MATERIALS DISPOSAL AGREEMENT
reports indicating the number of Refrigerators and
Freezers that were collected during the preceding
month and that were scheduled for collection from
customers during that month, the date of the
initial contact with the Customer, the date or
dates the appliance was scheduled for collection,
and the actual collection date.
6.8.5 Final summary reports covering all activity
requested in monthly reports plus information from
any incomplete month.
6.8.6 A final report by October 31 of all amounts paid
by Contractor in compliance with any unclaimed
property laws pursuant to Section 6.7.3, hereof.
6.8.7 Upon reasonable written request from an authorized
representative of Edison, special and nonrecurring
reports during course of the 1998 Program. Such
report content will be developed by the parties in
anticipation of requests from the CPUC, Edison
internal audits, or compilation of data relevant
to Rebuild LA activities. An amendment to this
Agreement or a separate agreement shall be entered
into only if any such report necessitates
unreasonable labor, as substantiated by
Contractor, requiring the negotiation of a charge
separate from the Recycling Charge.
6.8.8 Contractor shall modify its current computer
software program so that the Contractor's
Appliance Turn-In Order Form ("ATO") has a
disposition code which can be coded for each 1998
Program Participant indicating which Incentive was
selected by the 1998 Program Participant. In all
cases, when Contractor picks up an Eligible
Refrigerator or Eligible Freezer from a 1998
Program Participant, Contractor shall obtain the
1998 Program Participant's signature on the
Contractor's ATO. On a weekly basis, Contractor
shall prepare an invoice for Edison to evidence
the Cooler Fees due for Contractor's delivery of
Coolers under the Cooler Promotion and the costs,
if any, incurred by Contractor pursuant to Section
10.6 of the First Amendment ("Invoice"). The
Invoice shall include an ATO report showing the
delivery of Coolers during the billing period. All
Invoices will be paid pursuant to Section 10.5.3.
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY'S 1998 REFRIGERATOR RECYCLING
AND HAZARDOUS MATERIALS DISPOSAL AGREEMENT
7. CUSTOMER AND REFRIGERATOR ELIGIBILITY
7.1 Customer eligibility for the 1998 Program shall depend on
the following:
7.1.1 Customer is a resident in the Edison service
territory and occupies a single-family residential
(Domestic Rate) or multi-unit dwelling or mobile
home.
7.1.2 Customer owns the Eligible Refrigerator or Freezer
or possesses written consent from the Refrigerator
or Freezer owner to turn in Eligible Refrigerator
or Freezer.
7.1.3 Customer turns in no more than two Eligible
Refrigerators and two Eligible Freezers per year
unless written Edison approval is obtained for any
additional Refrigerator or Freezer.
7.2 Commercial customers do not qualify for the 1998 Program.
7.3 Refrigerator and Freezer eligibility for the 1998 Program
shall depend on the following:
7.3.1 Refrigerator or Freezer must be capable of cooling
or freezing, or both, as applicable, at time of
collection.
7.3.2 Refrigerator or Freezer minimum size is 10 cubic
feet and maximum size is 25 cubic feet.
7.3.3 Refrigerator or Freezer is certified by the
customer to have been in use for a minimum of six
months as a Second Refrigerator or Freezer, as the
case may be.
7.4 Commercial refrigerators, ammonia-containing gas
refrigerators, commercial freezers, and room air
conditioners do not qualify for the 1998 Program.
8. OWNERSHIP AND CONFIDENTIALITY
8.1 All information disclosed by Edison during meetings or
negotiations with regard to the 1998 Program, and any
information contained in drawings, specifications, technical
reports, and data provided by Edison to Contractor during
performance of this Agreement shall be
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY'S 1998 REFRIGERATOR RECYCLING
AND HAZARDOUS MATERIALS DISPOSAL AGREEMENT
held in confidence by Contractor and used only for the
performance of the Work pursuant to this Agreement.
8.2 Contractor, its employees, and any subcontractors shall not
disclose any 1998 Program or customer information to any
person other than Edison's personnel either during the term
of this Agreement or after its completion, without
Contractor having obtained the prior written consent of
Edison, except as provided by lawful court order or subpoena
and provided Contractor gives Edison advance written notice
of such order or subpoena. Prior to any approved disclosure,
persons receiving said information, including Contractor,
its employees, or third parties, must enter into a
nondisclosure agreement with Edison. Contractor agrees to
require its employees and subcontractors to execute a
nondisclosure agreement prior to performing any services
under this Agreement.
8.3 All material provided by Edison to Contractor during the
performance of this Agreement shall be returned to Edison
after this Agreement is terminated or at the request of
Edison. Contractor shall not duplicate any material
furnished by Edison without prior written approval from
Edison.
8.4 All information, material, and documents prepared or caused
to be prepared under this Agreement by Contractor shall
become the property of Edison. Such information, or
derivative information, materials, and documents, shall be
used by Contractor only for work done directly for Edison,
shall not be used in Contractor's general course of
business, and shall neither be disclosed nor revealed in any
way to a third party without the prior express written
consent of Edison.
8.5 All information disclosed by Contractor to Edison during
meetings or negotiations with regard to the 1998 Program,
and any information contained in drawings, specifications,
technical reports, and data provided by contractor to Edison
during performance of this Agreement, shall be held in
confidence by Edison, and used only in relation to the Work
pursuant to this Agreement.
8.6 Except as required by the CPUC, Edison, its employees and
any subcontractors of Edison shall not disclose any
confidential or proprietary information of Contractor
("Contractor's Confidential Information") to any person
other than Contractor's personnel, either during the term of
the Agreement, or after its completion, without having
obtained the prior written consent of Contractor. By way of
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY'S 1998 REFRIGERATOR RECYCLING
AND HAZARDOUS MATERIALS DISPOSAL AGREEMENT
example, Contractor's Confidential Information shall
include, without limitation, Contractor's systems for oil
degassing, CFC recovery, CFC-11 recovery and Contractor's
computer software. Prior to any approved disclosure, persons
to receive Contractor's Confidential Information, including
Edison, its employees or any third-party, must enter into a
nondisclosure agreement with Contractor. Edison agrees to
require its employees to execute appropriate nondisclosure
agreements prior to any contact with, or evaluation of
Contractor's Confidential Information.
8.7 Edison agrees that, without the prior written consent of
Contractor, it will not, during the term or after
termination of this Agreement, directly or indirectly,
disclose to any individual, corporation, or other entity, or
use for its own or such other's benefit, any of Contractor's
Confidential Information, whether reduced to written or
other tangible form, which:
8.7.1 Is not generally known to the public or in the
industry;
8.7.2 Has been treated by Contractor or any of its
subsidiaries as confidential or proprietary; and
8.7.3 Is of a competitive advantage to Contractor or any
of its subsidiaries and in the confidentiality of
which Contractor or any of its subsidiaries has a
legally protectable interest.
8.8 Contractor's Confidential Information which becomes
generally known to the public or in the industry, or, in the
confidentiality of which, Contractor and its subsidiaries
cease to have a legally protectable interest, shall cease to
be subject to the restrictions of this Paragraph 8.
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY'S 1998 REFRIGERATOR RECYCLING
AND HAZARDOUS MATERIALS DISPOSAL AGREEMENT
9. COMMERCIAL TERMS
9.1 Payment
No payment shall be made under this Agreement until Edison
has received a signed "Acceptance Copy" of the Purchase
Order from Contractor. Edison shall pay to Contractor, as
full compensation for completing the Work, the prices set
forth in Exhibit A in accordance with the payment provisions
set forth in Sections 9.2 through 9.4.
9.2 Summary of Charges
9.2.1 Recycling Charge Edison shall pay to Contractor a
per-unit Recycling Charge for the greater of the
number of units collected, or specified per
Section 9.3.2 below, pursuant to this Agreement at
the price or prices set forth in Section 9.3
below. The Recycling Charge covers the scope of
work described in Section 6, including CFC-11
Recovery and excluding bond or incentive
purchasing and financing services.
9.2.2 Other Charges. All other costs for services shall
be negotiated between the parties and implemented
by an amendment to the Agreement.
9.2.3 Pursuant to the terms of Section 10.5.3, Edison
shall pay Contractor a fee of Two Dollars ($2.00)
("Cooler Fee") per Cooler for each Cooler
distributed to 1998 Program Participants. The
Cooler Fee shall compensate Contractor for the
storage, handling and delivery of the Coolers,
additional labor, and any and all other costs and
expenses in connection with the Cooler Promotion,
including any additional documentation and reports
that may be necessary or required as a result of
the Cooler Promotion. Edison shall not be
responsible for any other compensation or
reimbursement to Contractor as a result of the
Cooler Promotion except for the Cooler Fee.
9.2.4 Bond or Incentive Cost and Finance Charges. Edison
shall pay to Contractor bond and Incentive costs
and finance charges as specified in Section 9.4,
below.
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY'S 1998 REFRIGERATOR RECYCLING
AND HAZARDOUS MATERIALS DISPOSAL AGREEMENT
9.3 Pricing Recycling Charge
9.3.1 The per-unit Recycling Charge to be paid by Edison
for the Contract Period shall be as set forth in
Exhibit A.
9.3.2 Edison's Specified Volume for the Contract Period
shall be 25,000 units.
9.3.3 If at the end of the Contract Period the Specified
Volume has not been achieved, Edison shall pay to
Contractor a per-unit Recycling Charge for each
unit in the shortfall.
9.3.3.1 The shortfall shall be determined by
subtracting from the Specified Volume
all units collected from Edison for the
Contract Period.
9.3.3.2 If this Agreement should be assigned to
the California Board for Energy
Efficiency ("Board") prior to September
1, 1998, the shortfall shall be prorated
by month and Edison shall pay 50% of the
per unit Recycling Charge for each unit
in the shortfall.
9.3.3.3 If this Agreement is assigned to the
Board prior to September 1, 1998, Edison
shall have no further payment
obligations to Contractor as of the
effective date of the assignment except
for any payments due under Section
9.3.3.2.
9.4 Pricing Bond or Incentive Costs and Finance Charges
9.4.1 Edison shall reimburse Contractor for the cost of
each bond or incentive payment distributed to 1998
Program Participants.
9.4.2 Edison shall pay to Contractor monthly interest at
the rate of three-quarter of one percent (0. 75%)
on the average monthly balance of the outstanding
bond or incentive costs.
9.5 Miscellaneous
Contractor agrees that any agreement it has, or in which it
may enter with other utilities or agencies for a recycling
program, shall not detrimentally affect Contractor's
services under this Agreement.
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY'S 1998 REFRIGERATOR RECYCLING
AND HAZARDOUS MATERIALS DISPOSAL AGREEMENT
10. BILLING
10.1 Contractor shall submit a weekly invoice reflecting the
per-unit charge for the refrigerators and freezers
collected, processed, and recycled, and for the purchase and
approval of U.S. Savings Bonds and incentives. Contractor
shall apply a per-unit charge on units that have been
disabled and only for the following transactions:
10.1.1 Collection of an Eligible Refrigerator or Freezer.
10.1.2 Collection contact made for Eligible Refrigerator
or Freezer that cannot be removed due to
obstruction because of size or structural barrier
provided that Contractor obtains written
permission from Customer to permanently disable
said unit, and Contractor then permanently
disables the unit.
10.1.3 Collection of an oversized Eligible Refrigerator
or Freezer that requires additional trips,
personnel, or equipment to execute removal.
Additional services for removal of an oversized
Eligible Refrigerator or Freezer shall be charged
as a single appointment with no extra charge for
said additional services.
10.1.4 Collection of an Eligible Refrigerator or Freezer
that could not be inspected for eligibility
confirmation.
10.2 Contractor shall submit a final invoice for the Contract
Period in hard copy and in electronic format acceptable to
Edison.
10.3 Contractor shall apply a 25% per unit discount to the
Recycling Charge to any additional units when two or more
refrigerators or freezers are removed during a single
collection appointment from Customer's residence. Said
discount shall be clearly documented and identified in
Contractor's invoice.
10.4 Contractor shall submit a weekly invoice for the purchase
price of the bonds and for other incentive payments and a
monthly invoice for the interest charge identified in
paragraph 9.5.
10.5 Edison shall make payment (less any unsubstantiated or
incorrect charge):
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY'S 1998 REFRIGERATOR RECYCLING
AND HAZARDOUS MATERIALS DISPOSAL AGREEMENT
10.5.1 For bond and check incentive services, within
thirty days of receipt of an Invoice by Edison's
Accounts Payable Department.
10.5.2 Of Recycling Fee, within thirty days of receipt of
an Invoice from Contractor approved by Edison..
10.5.3 For Cooler Fees within thirty days of receipt of
an Invoice from Contractor approved by Edison.
10.6 Upon receipt of each shipment of the Coolers, Contractor
shall inspect the shipment for any damaged or defective
Coolers. Contractor shall return any damaged and/or
defective Cooler directly to the manufacturer for a
replacement Cooler. Pursuant to Sections 6.8.8 and 10.5.3,
Edison shall reimburse Contractor for all costs associated
with the return of any such damaged and/or defective
Coolers.
10.7 On a weekly basis, Contractor shall provide Edison with an
unaudited accounting of Coolers remaining in Contractor's
inventory of Coolers. At the end of the Cooler Promotion,
Contractor shall complete and provide Edison with a
reconciliation to account for the Coolers that were
defective, damaged, or stolen. Contractor shall reimburse
Edison for any and all Coolers stolen from Contractor after
delivery to Contractor.
10.8 If after a Cooler is delivered by Contractor any 1998
Program Participant alleges that a Cooler is damaged or
defective, Edison shall replace such defective and/or
damaged Cooler. Edison shall be responsible for the
replacement of the such damaged and/or defective Cooler,
including, but not limited to, the deliver of a new Cooler
to the 1998 Program Participant. If the damage to a Cooler
is the result of any action by Contractor, Edison shall be
relieved of any obligation to pay Contractor a Cooler Fee
for the damaged Cooler.
11. RIGHT TO AUDIT
Edison, or its Authorized Representative, shall have the right and
free access, at any reasonable time during normal business hours, to
examine,
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY'S 1998 REFRIGERATOR RECYCLING
AND HAZARDOUS MATERIALS DISPOSAL AGREEMENT
audit, and copy all Contractor's records and books as related to
Contractor's obligations under this Agreement, including, but not
limited to, verification of costs to Edison, as claimed by Contractor.
12. CHANGES
Changes to this Agreement shall be made by mutual agreement of the
Parties through a written amendment to the Agreement, which shall be
incorporated into the Purchase order by Change Order.
13. PERMITS, CODES, AND STATUTES
13.1 Contractor shall perform the Work set forth in this
Agreement in accordance with all applicable Federal, state,
and local laws, rules, and/or ordinances. Prior to
performance of any services, Contractor shall, at its own
cost, have obtained, and shall have required all
Subcontractors to obtain, all licenses and permits required
by law, rule, regulation, and ordinance, or any of them, to
engage in the activities required in connection with this
transaction. Contractor also represents and warrants that,
to the best of its knowledge, based upon reasonable and
prudent inquiry, any storage site and any disposal facility
to which the Hazardous Materials may be moved are in
compliance with any and all federal, state and local laws
and regulations pertaining thereto and that such storage
sites and disposal facilities are suitable and may lawfully
receive and/or dispose of the Hazardous materials.
13.2 Contractor shall comply with all applicable local, state,
and federal safety and health laws in effect an the date of
this Agreement, including, but not limited to, EPA,
California EPA, RCRA, the Occupational Safety and Health Act
of 1970 (OSHA), and all standards, rules, regulations, and
orders issued pursuant to such local, state, and federal
safety and health laws. Should any such law, rule, or
regulation be enacted or promulgated subsequent to the date
of this Agreement, which renders Contractor's performance
impractical, Contractor and Edison shall, in good faith,
negotiate an amendment to this Agreement reasonably
compensating Contractor for its additional costs.
14. WARRANTY
Contractor warrants to Edison that the Work shall be performed in a
competent manner, in accordance with this Agreement, and that the
acceptance, handling, storage, recycling, and disposal of the
Refrigerators
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY'S 1998 REFRIGERATOR RECYCLING
AND HAZARDOUS MATERIALS DISPOSAL AGREEMENT
and Freezers and the Hazardous Materials shall be in accordance with
(i) the requirements of this Agreement and (ii) the applicable local,
state, and federal laws and regulations in effect at the time of the
work performed.
15. TITLE
15.1 Title to the Hazardous Materials shall pass to Contractor
when Contractor collects refrigerators and freezers from
customers.
15.2 Title of collected Refrigerators and Freezers shall pass to
Contractor.
16. INSURANCE
16.1 Without limiting Contractor's liability to Edison, including
the requirements of Section 18.0 Indemnity, Contractor shall
maintain For the work, and shall require that each
Subcontractor of the first tier maintain, at all times
during the work and at its own expense, valid and
collectible insurance as described below. This insurance
shall not be terminated, expire, not he materially altered,
except on thirty days prior written notice to Edison.
Contractor shall furnish Edison with certificates of
insurance an forms acceptable to Edison and shall require
each Subcontractor of the first tier to furnish Contractor
with certificates of insurance, as evidence that policies do
provide the required coverages and limits of insurance
listed below. Such certificates shall be furnished to
Edison's 1998 Program Manager by Contractor upon receipt of
the Purchase Order, and by Subcontractor for the first tier
upon receipt of its subcontract, but in any event prior to
start of its portion of the Work. Any other insurance
carried by Edison, its officers, agents, and employees,
which may be applicable, shall be deemed to be excess
insurance, and Contractor's insurance shall be deemed
primary for all purposes notwithstanding any conflicting
provision in Contractor's policies to the contrary.
(i) Workers' Compensation Insurance with statutory
limits, as required by the state in which the Work
is performed, and Employer's Liability Insurance
with limits of not less than $5,000,000. Carriers
furnishing such insurance shall be required to
waive all rights of subrogation against Edison,
its officers, agents, employees, and other
contractors and subcontractors.
(ii) Comprehensive Bodily Injury and Property Damage
Liability Insurance, including owners, and
contractors' protective liability,
product/completed operations liability,
contractual
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY'S 1998 REFRIGERATOR RECYCLING
AND HAZARDOUS MATERIALS DISPOSAL AGREEMENT
liability, and coverage for liability incurred as
a result of sudden and accidental discharge,
dispersal, release or escape of polluting
materials, (excluding automobile) with a combined
single limit of not less than $3,000,000 for each
occurrence. Such insurance shall: (a) acknowledge
Edison, its officers, agents, and employees, and
additional insureds; (b) be primary for all
purposes; and (c) contain standard cross-liability
provisions.
(iii) Automobile Bodily Injury and Property Damage
Liability Insurance with a combined single limit
of not less than $3,000,000 for each occurrence.
Such insurance shall cover liability arising out
of the use by Contractor and Subcontractors of
owned, non owned and hired automobiles in the
performance of the Work. As used herein, the term
"automobile" means vehicles licensed or required
to be licensed under the Vehicle Code of the state
in which the Work is performed. Such insurance
shall acknowledge Edison as an additional insured
and be primary for all purposes.
(iv) Environmental Impairment Expense Insurance with a
combined single limit of not less than $5,000,000
for each occurrence and overall limits of
$10,000,000. Such insurance shall provide coverage
for necessary costs or expense of removing,
cleaning-up, transporting, nullifying, and
rendering ineffective, or any of them, any
substance which has caused environmental
impairment and such insurance shall contain no
exclusions for non-sudden and/or non-accidental
discharge, release or escape of polluting
materials. Such insurance shall acknowledge Edison
as an additional insured and be primary for all
purposes.
Contractor shall report immediately to Edison and
confirm in writing any injury, loss, or damage
incurred by Contractor or Subcontractors in excess
of $500.00, or its receipt of notice of any claim
by a third party in excess of $500.00, or any
occurrence that might give rise to such claim.
If Contractor fails to comply with any of the
provisions of this Section 16.0, Contractor shall,
at its own cost, defend, indemnify, and hold
harmless Edison, its officers, agents, employees,
assigns, and successors in interest, from and
against any and all liability, damages, losses,
claims, demands, actions, causes of action, costs,
including attorney's fees and expenses, or any of
them, resulting from the death or injury to any
person or
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY'S 1998 REFRIGERATOR RECYCLING
AND HAZARDOUS MATERIALS DISPOSAL AGREEMENT
damage to any property to the extent that Edison
would have been protected had Contractor complied
with all of the provisions of this Section.
17. RESERVED.
18. INDEMNITY
18.1 Contractor shall, at its own cost, indemnify, defend,
reimburse, and hold harmless Edison, its officers,
directors, employees, agents, assigns, and successors in
interest, from and against any and all liability, damages,
losses, claims, suits, demands, actions, causes of action,
costs, expenses, including attorney's fees and expenses, or
any of them resulting from the death or injury to any person
or damage to or destruction of any property caused by
Contractor, Subcontractors, and employees, officers and
agents of either Contractor or Subcontractors, or any of
them, and arising out of or attributable to the performance
or nonperformance of Contractor's obligations under this
Agreement and including, without limitation, failure to
comply fully with every federal, state, or local law,
statute, regulation, rule, ordinance, or government
directive which directly or indirectly regulates or affects
the handling, storage, recycling, or disposal of the
Hazardous Materials to be managed by Contractor hereunder.
In all cases of death or injury to employees, officers or
agents of either Contractor or Subcontractors, whether or
not caused by Contractor, Edison shall be indemnified by
Contractor for any and all liability except to the extent
such death or injury results -from the negligence of Edison.
18.2 Contractor shall, at its own cost, indemnify, defend,
reimburse, and hold harmless Edison, its officers,
directors, employees, and agents, assigns, and successors in
interest, from and against any and all liability imposed
upon, or to he imposed upon Edison, under any law imposing
liability for the environmental clean-up of the Hazardous
Materials at any location (other than Edison's property)
where the Hazardous Materials have been placed, stored or
disposed of in the performance or nonperformance of
Contractor's obligations under this Agreement, or any other
site to which the Hazardous Materials have migrated.
18.3 The indemnities set forth in this Section 18.0 shall not be
limited by the insurance requirements set forth in Section
16.0.
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY'S 1998 REFRIGERATOR RECYCLING
AND HAZARDOUS MATERIALS DISPOSAL AGREEMENT
19. TERM AND TERMINATION
19.1 This Agreement shall commence on January 1, 1998 and shall
continue in effect until September 30, 1998, or until
Contractor has picked up all units called in prior to
September 30, 1998, whichever is later. This Agreement may
be extended as agreed to in writing by the Parties.
19.2 Either Party may terminate the Agreement for cause by 60
days advance written notice, and failure to cure, to the
other Party. If the default has not been cured within said
time period, the non-defaulting party may declare this
Agreement terminated, effective the last day of said notice
period. Contractor shall be paid for its services rendered
to the date of said termination with all required specified
volumes prorated to the date of termination.
19.3 Edison shall have the right to terminate this Agreement by
30 days advance written notice to Contractor upon CPUC
mandate, or upon depletion of the amount of funding
authorized by the CPUC for the Contract Period. In the event
the Agreement is terminated upon CPUC mandate, Edison shall
pay Contractor all amounts owed under the Agreement as of 30
days after Edison's written notice to Contractor of the
CPUC's mandate (the "Termination Date"). In such event,
Edison shall only be obligated to pay contractor for such
Refrigerators and Freezers actually collected by Contractor
for recycling as of the Termination Date, and shall not be
obligated to pay contractor for units not collected but
which would otherwise be required to be paid for as units
comprising Edison's Specified Volume.
19.4 In the event of termination pursuant to this Section 19,
Contractor and Edison shall work cooperatively to
facilitate the termination of the 1998 Program.
19.5 Each Party shall immediately provide at no cost to the other
any testimony, or any communications with the CPUC, or any
board, division, committee or member thereof, which could
reasonably be anticipated to effect the 1998 Program or
which addresses the 1998 Program in any manner.
20. SUBCONTRACTS
20.1 Contractor shall contractually require each Subcontractor of
the first tier providing service in connection with the Work
to be bound by
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY'S 1998 REFRIGERATOR RECYCLING
AND HAZARDOUS MATERIALS DISPOSAL AGREEMENT
general terms and conditions protecting Edison which are
equivalent to the terms and conditions of this Agreement.
20.2 Contractor shall, at all times, be responsible for the work,
and acts and omissions, of Subcontractors and persons
directly or indirectly employed by them for services in
connection with the Work. The Purchase Order and this
Agreement shall not constitute a contractual relationship
between any Subcontractor and Edison nor any obligation for
payment to any Subcontractor.
21. CALIFORNIA PUBLIC UTILITIES COMMISSION
This Agreement and the Purchase Order incorporating this Agreement
shall at all times be subject to such changes or modifications by the
CPUC as it may from time to time direct in the exercise of its
jurisdiction.
22. NON-WAIVER
None of the provisions of the Agreement shall be considered waived by
either Party unless such waiver is specifically stated in writing.
23. ASSIGNMENT
Edison may be required to assign its rights, duties and obligations
under this Agreement to the California Board for Energy Efficiency
("Board") or, at the Board's discretion, to the Board's Administrator.
Contractor hereby consents to such assignment. Other than Edison's
assignment to the Board or the Board's administrator, neither Party
shall delegate or assign this Agreement or any part or interest
thereof, without the prior written consent of the other Party, and any
assignment without such consent shall be void and of no effect.
24. FORCE MAJEURE
Failure of Contractor to perform any of the provisions of this
Agreement by reason of any of the following shall not constitute an
event of default or breach of this Agreement: strikes, picket lines,
boycott efforts, earthquakes, fires, floods, war (whether or not
declared), revolution, riots, insurrections, acts of God, acts of
government (including, without limitation, any agency or department of
the United States of America), acts of the public enemy, scarcity or
rationing of gasoline or other fuel or vital products, inability to
obtain materials or labor, or other causes which are reasonably beyond
the control of the Contractor.
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY'S 1998 REFRIGERATOR RECYCLING
AND HAZARDOUS MATERIALS DISPOSAL AGREEMENT
25. GOVERNING LAW
The contract shall be interpreted, governed, and construed under the
laws of the State of California as if executed and to be performed
wholly within the State of California.
26. SECTION HEADINGS
Section headings appearing in this Agreement are for convenience only
and shall not be construed as interpretations of text.
27. SURVIVAL
Notwithstanding completion or termination of the Work, of this
Agreement, any amendment to the Agreement, or of any Purchase Order or
Change Order, the Parties shall continue to be bound by the provisions
of this Agreement and any Purchase order incorporating this Agreement,
Amendment to this Agreement and Change Orders, which by their nature
shall survive such completion or termination. Such provisions shall
include, but not be limited to, Contractor's indemnity protecting
Edison from any liability for environmental clean up as provided in
Section 18 of this Agreement.
28. NONRELIANCE
Neither Party has relied upon any representation, warranty,
projection, estimate or other communication from the other not
specifically so identified in this Agreement.
29. ATTORNEYS' FEES
In the event of any legal action or other proceeding between the
parties arising out of this Agreement or the transactions contemplated
herein, the prevailing party in such legal action or proceeding shall
be entitled to have and recover from the other party all costs and
expenses incurred therein, including reasonable attorneys' fees.
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY'S 1998 REFRIGERATOR RECYCLING
AND HAZARDOUS MATERIALS DISPOSAL AGREEMENT
30. COOPERATION
Each of the parties agrees to cooperate with the other in whatever
manner reasonably required to facilitate such parties' successful
completion of the Agreement.
31. ENTIRE AGREEMENT
This Agreement contains the entire agreement and understanding between
the Parties and merges and supersedes all prior representations and
discussions pertaining to the Agreement, including Contractor's
proposal. Any changes, exceptions, or different terms and conditions
proposed by Contractor, or contained in Contractor's acknowledgment of
the Agreement, or Change Order, are hereby rejected unless expressly
stated in the Agreement or incorporated by a Change Order.
CONTRACTOR:
APPLIANCE RECYCLING CENTERS SOUTHERN CALIFORNIA
OF AMERICA. INC. EDISON COMPANY
BY: By:
------------------------------ ------------------------------
Its: Its:
------------------------- -------------------------
Dated as of: Dated as of:
--------------------- ---------------------
EXHIBIT 10.10
SECOND AMENDMENT
TO
GENERAL CREDIT AND SECURITY AGREEMENT AND WAIVER
THIS AGREEMENT, dated as of March 31, 1998, between SPECTRUM
Commercial Services, a division of Lyon Financial Services, Inc., a Minnesota
Corporation, having its mailing address and principal place of business at 7900
International Drive, Suite 890, Bloomington, Minnesota 55425 (herein called
"Lender" or "SCS"), and Appliance Recycling Centers of America, Inc., a
Minnesota corporation, having the mailing address and principal place of
business at 7400 Excelsior Boulevard, Minneapolis, MN 55426,(herein called
"Borrower"), amends that certain General Credit and Security Agreement dated
August 30, 1996, ("Credit Agreement") as amended. Where the provisions of this
Agreement conflict with the Credit Agreement, the intent of this Agreement shall
control.
1. The definition of "Maximum Principal Amount" under paragraph 2 of
the Credit Agreement is hereby deleted and replaced with the following:
"Maximum Principal Amount" shall mean, at any date, Two
Million Seven Hundred Fifty Thousand and No/100ths Dollars
($2,750,000).
2. The definition of "Borrowing Base" appearing in Paragraph 2 are
respectively amended in their entirety to read as follows:
"Borrowing Base" shall mean the sum of (i) Eighty percent
(80%) of the net amount of Eligible Receivables or such
greater or lesser percentage as Lender, in its sole
discretion, shall deem appropriate, plus (ii) the lesser of
(x) One Hundred Fifty Thousand and No/100ths Dollars
($150,000.00) or (y) Twenty Five percent (25%) of the net
amount of Eligible Inventory (excluding Eligible Whirlpool
Inventory), or such greater or lesser dollars and/or
percentage as Lender, in its sole discretion, shall deem
appropriate, plus (iii) the lesser of (x) Seven Hundred Fifty
Thousand and No/100ths Dollars ($750,000.00) or (y) Seventy
Five percent (75%) of the net amount of Eligible Whirlpool
Inventory, or such greater or lesser dollars and/or percentage
as Lender, in its sole discretion, shall deem appropriate,
plus (iv) One Hundred Sixty Four Thousand and No/100ths
Dollars ($164,000.00) for liquidation value of equipment or
such greater or lesser dollars as Lender, in its sole
discretion, shall deem appropriate, plus (v) Six Hundred Fifty
Thousand and No/100ths ($650,000.00) for the value of the
Mortgaged Premises or such greater or lesser dollars as
Lender, In its sole discretion, shall deem appropriate.
3. The following definition is added to paragraph 2:
"Eligible Whirlpool Inventory" shall mean that portion of
Eligible Inventory which consists of so called Scratch and
Dent, Ding and Dent, and Obsolete inventory, all of which are
purchased by Borrower directly from Whirlpool Corporation.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of
the date first above written.
LENDER: SPECTRUM COMMERCIAL SERVICES
By
---------------------------------------
Its
----------------------------------
BORROWER: APPLIANCE RECYCLING CENTERS
OF AMERICA, INC.
By
---------------------------------------
Its
-----------------------------------
<PAGE>
SECOND AMENDED AND RESTATED REVOLVING NOTE
$2,750,000.00 March 31, 1998
Bloomington, Minnesota
FOR VALUE RECEIVED, the undersigned, APPLIANCE RECYCLING CENTERS OF AMERICA,
INC. promises to pay to the order of SPECTRUM COMMERCIAL SERVICES, a division of
Lyon Financial Services, Inc., a Minnesota corporation, (the "Lender") at its
office in Bloomington, Minnesota, or at such other place as any present or
future holder of this Note may designate from time to time, the principal sum of
(i) Two Million Seven Hundred Fifty and 00/100 Dollars ($2,750,000.00), or (ii)
the aggregate unpaid principal amount of all advances and/or extensions of
credit made by the Lender to the undersigned pursuant to this Note as shown in
the records of any present or future holder of this Note, whichever is less,
plus interest thereon from the date of each advance in whole or in part included
in such amount until this Note is fully paid. Interest shall be computed on the
basis of the actual number of days elapsed and a 360-day year, at an annual rate
equal to 5.0% per annum in excess of the Prime Rate of Norwest Bank Minnesota,
NA, and that shall change when and as said Prime Rate shall change; provided,
however, that (i) in no event shall the interest rate in effect hereunder at any
time be less than 10% per annum; and (ii) interest payable hereunder with
respect to each calendar month shall not be less than $10,000 regardless of the
amount of loans, advances or other credit extensions that actually may have been
outstanding during the month.. Interest is due and payable on the first day of
each month and at maturity. The term "Prime Rate" means the rate established by
Norwest Bank in its sole discretion from time to time as its Prime or Base Rate,
and the undersigned acknowledges that Norwest Bank and/or Lender may lend to its
customers at rates that are at, above or below the Prime Rate. Notwithstanding
the foregoing, after an Event of Default, this Note shall bear interest until
fully paid at 5% per annum in excess of the rate otherwise then in effect, which
rate shall continue to vary based on further changes in the Prime Rate;
provided, however, that after an Event of Default, (i) in no event shall the
interest rate in effect hereunder at any time be less than 15% per annum; and
(ii) interest payable hereunder with respect to each calendar month shall not be
less than $10,000 regardless of the amount of loans, advances or other credit
extensions that actually may have been outstanding during the month. The
undersigned also shall pay the holder of this Note a late fee equal to 10% of
any payment under this Note that is more than 10 days past due.
All interest, principal, and any other amounts owing hereunder are due on August
30, 1999 or earlier UPON DEMAND by Lender or any holder hereof, and Lender
specifically reserves the absolute right to demand payment of all such amounts
at any time, with or without advance notice, for any reason or no reason
whatsoever. Lender's right to make such demand is not exclusive and Lender may
coincidentally or separately from such demand make further demand for payment
pursuant to the terms hereof (including but not limited to upon the occurrence
of an Event of Default), and further, amounts may become due hereunder without a
demand by Lender.
All or any part of the unpaid balance of this Note may be prepaid at any time,
provided however, that if this Note is completely repaid after August 30, 1997
and on or before August 30, 1998, then there shall be a prepayment charge equal
to $40,000.00; provided further, however, that if this Note is completely repaid
after August 30, 1998 and on or before August 30, 1999, then there shall be a
prepayment charge equal to $35,000.00; provided further, however, that if
Borrower completely repays this Note prior to August 30, 1999 and repays all
amounts owing hereunder completely from funds borrowed from Western State Bank
(and not from any other source of funds), then no prepayment charge shall be
due. At the option of the then holder of this Note, any payment under this Note
may be applied first to the payment of other charges, fees and expenses under
this Note and any other agreement or writing in
<PAGE>
connection with this Note, second to the payment of interest accrued through the
date of payment, and third to the payment of principal. Amounts may be advanced
and readvanced under this Note at the Lender's sole and absolute discretion,
provided the principal balance outstanding shall not exceed the amount first
above written. Neither the Lender nor any other person has any obligation to
make any advance or readvance under this Note.
The occurrence of any of the following events shall constitute an Event of
Default under this Note: (i) any default in the payment of this Note; or (ii)
any other default under the terms of any now existing or hereafter arising debt,
obligation or liability of any maker, endorser, guarantor or surety of this Note
or any other person providing security for this Note or for any guaranty of this
Note, including, but not limited to, that certain General Credit and Security
Agreement dated August 30, 1996 as amended by the First Amendment dated November
8, 1996, and as amended by the Second Amendent thereto dated of even date, the
Combination Mortgage, Security Agreement and Fixture Financing Statement dated
November 5, 1996, or the Assignment of Leases and Rents dated November 8, 1996;
or (iii) the insolvency (other than the insolvency of the undersigned), death
dissolution, liquidation, merger or consolidation of any such maker, endorser,
guarantor, surety or other person; or (iv) any appointment of a receiver,
trustee or similar officer of any property of any such maker, endorser,
guarantor, surety or other person; or (v) any assignment for the benefit of
creditors of any such maker, endorser, guarantor, surety or other person; or
(vi) any commencement of any proceeding under any bankruptcy, insolvency,
dissolution, liquidation or similar law by or against any such maker, endorser,
guarantor, surety or other person, provided however, that if such a proceeding
is commenced against the maker hereof or any Guarantor on an involuntary basis,
then only if such action is not dismissed within 60 days of first being filed;
or (vii) the sale, lease or other disposition (whether in one transaction or in
a series of transactions) to one or more persons of all or a substantial part of
the assets of any such maker, endorser, guarantor, surety or other person; or
(viii) any such maker, endorser, guarantor, surety or other person takes any
action to revoke or terminate any agreement, liability or security in favor of
the Lender; or (ix) the entry of any judgment or other order for the payment of
money in the amount of $10,000.00 or more against any such maker, endorser,
guarantor, surety or other person which judgment or order is not discharged or
stayed in a manner acceptable to the then holder of this Note within 10 days
after such entry; or (x) the issuance or levy of any writ, warrant, attachment,
garnishment, execution or other process against any property of any such maker,
endorser, guarantor, surety or other person; or (xi) the attachment of any tax
lien to any property of any such maker, endorser, guarantor, surety or other
person which is other than for taxes or assessments not yet due and payable; or
(xii) any statement, representation or warranty made by any such maker,
endorser, guarantor, surety or other person (or any representative of any such
maker, endorser, guarantor, surety or other person) to any present or future
holder of this Note at any time shall be false, incorrect or misleading in any
material respect when made; or (xiii) there is a material adverse change in the
condition (financial or otherwise), business or property of any such maker,
endorser, guarantor, surety or other person. Upon the occurrence of an Event of
Default and at any time thereafter while an Event of Default is continuing, the
then holder of this Note may, at its option, declare this Note to be immediately
due and payable and thereupon this Note shall become due and payable for the
entire unpaid principal balance of this Note plus accrued interest and other
charges on this Note without any presentment, demand, protest or other notice of
any kind.
The undersigned: (i) waives demand, presentment, protest, notice of
protest, notice of dishonor and notice of nonpayment of this Note; (ii) agrees
to promptly provide all present and future holders of this Note from time to
time with financial statements of the undersigned and such other information
respecting the financial condition, business and property of the undersigned as
any such holder of this Note may reasonably request, in form and substance
acceptable to such holder of this Note; (iii) agrees that when or at any time
after this Note becomes due the then holder of this note may offset or charge
<PAGE>
the full amount owing on this note against any account then maintained by the
undersigned with such holder of this Note without notice; (iv) agrees to pay on
demand all fees, costs and expenses of all present and future holders of this
Note in connection with this Note and any security and guaranties for this Note,
including but not limited to audit fees and expenses and reasonable attorneys'
fees and legal expenses, plus interest on such amounts at the rate set forth in
this Note; and (v) consents to the personal jurisdiction of the state and
federal courts located in the State of Minnesota in connection with any
controversy related in any way to this Note or any security of guaranty for this
Note, waives any argument that venue in such forums is not convenient, and
agrees that any litigation initiated by the undersigned against the Lender or
any other present or future holder of this Note relating in any way to this Note
or any security or guaranty for this Note shall be venued (at the sole option of
Lender or the holder hereof) in either the District Court of Dakota or Hennepin
County, Minnesota, or the United States District Court, District of Minnesota.
Interest on any amount under this Note shall continue to accrue, at the option
of any present or future holder of this Note, until such holder receives final
payment of such amount in collected funds in form and substance acceptable to
such holder. The maker agrees that, if it brings any action or proceeding
arising out of or relating to this Agreement, it shall bring such action or
proceeding in the District Court of Hennepin County, Minnesota.
No waiver of any right or remedy under this Note shall be valid unless in
writing executed by the holder of this Note, and any such waiver shall be
effective only in the specific instance and for the specific purpose given. All
rights and remedies of all present and future holders of this Note shall be
cumulative and may be exercised singly, concurrently or successively. The
undersigned, if more than one, shall be jointly and severally liable under this
Note, and the term "undersigned," wherever used in this Note, shall mean the
undersigned or any one or more of them. This Note shall bind the undersigned and
the successors and assigns of the undersigned. This Note shall be governed by
and construed in accordance with the laws of the State of Minnesota.
This Note amends and restates, but does not repay, that certain Amended
Revolving Note dated as of November 8, 1996 made by the undersigned payable to
the order of Lender in the original principal amount of $2,000,000.00.
THE UNDERSIGNED REPRESENTS, CERTIFIES, WARRANTS AND AGREES THAT THE UNDERSIGNED
HAS READ ALL OF THIS NOTE AND UNDERSTANDS ALL OF THE PROVISIONS OF THIS NOTE.
THE UNDERSIGNED ALSO AGREES THAT COMPLIANCE BY ANY PRESENT OR FUTURE HOLDER OF
THIS NOTE WITH THE EXPRESS PROVISIONS OF THIS NOTE SHALL CONSTITUTE GOOD FAITH
AND SHALL BE CONSIDERED REASONABLE FOR ALL PURPOSES.
APPLIANCE RECYCLING CENTERS
OF AMERICA, INC.
By
---------------------------------------
Edward R. Cameron
President
<PAGE>
GUARANTOR ACKNOWLEDGMENT AND AMENDMENT
The undersigned, Edward R. Cameron (the "Guarantor") has entered into a
certain Guaranty, dated as of August 30, 1996 (the "Guaranty;" capitalized terms
not otherwise defined herein being used herein as therein defined), pursuant to
which the Guarantor has guarantied the payment and performance of certain
Indebtedness of Appliance Recycling Centers of America, Inc., a Minnesota
corporation ("Borrower") to SPECTRUM Commercial Services, a division of Lyon
Financial Services, Inc., a Minnesota corporation, ("SCS"), which Indebtedness
includes, without limitation, all obligations of Borrower under that certain
letter agreement dated as of August 30, 1996 between the Borrower and SCS as
amended by a First Amendment dated November 8, 1996, (as so amended the
"Original Loan Agreement").
The Guarantor hereby acknowledges that it has received a copy of: (a)
the Second Amendment to General Credit and Security Agreement and Waiver dated
as of the date hereof (the "Loan Agreement") between the Borrower and SCS
amending and restating the Original Loan Agreement;
The Guarantor hereby:
(a) agrees and acknowledges that:
(i) the Guaranty is generally amended so
that the guaranty shall be increased to a maximum of
$350,000 plus all of Lender's fees, costs, expenses
and attorneys' fees incurred in enforcing the
Guarantee; and
(b) confirms that:
(i) by the Guaranty as so amended, the
Guarantor continues to guarantee the payment and
performance of the Indebtedness owed to SCS,
including, without limitation, all obligations of
Borrower under the Original Loan Agreement as amended
and restated by the Loan Agreement; and
(ii) the Guaranty as so amended remains in
full force and effect, enforceable against the
Guarantor in accordance with its terms.
---------------------------------------
Edward R. Cameron
Guarantor
Accepted and Agreed to this 12th day of February, 1998
SPECTRUM COMMERCIAL SERVICES
By:
------------------------------
Its:
------------------------------
<PAGE>
GUARANTOR ACKNOWLEDGMENT AND AMENDMENT
Each of the undersigned, collectively (the "Guarantors") has entered
into a certain Guaranty, dated as of August 30, 1996 (the "Guaranty;"
capitalized terms not otherwise defined herein being used herein as therein
defined), pursuant to which the Guarantor has guarantied the payment and
performance of certain Indebtedness of Appliance Recycling Centers of America,
Inc., a Minnesota corporation ("Borrower") to SPECTRUM Commercial Services, a
division of Lyon Financial Services, Inc., a Minnesota corporation, ("SCS"),
which Indebtedness includes, without limitation, all obligations of Borrower
under that certain letter agreement dated as of August 30, 1996 between the
Borrower and SCS as amended by a First Amendment dated November 8, 1996, (as so
amended the "Original Loan Agreement").
Each of the Guarantors hereby acknowledges that it has received a copy
of: (a) the Second Amendment to General Credit and Security Agreement and Waiver
dated as of the date hereof (the "Loan Agreement") between the Borrower and SCS
amending and restating the Original Loan Agreement;
Each of the Guarantors hereby agrees and acknowledges that the
amendment shall in no way impair or limit the right of SCS under Guarantor's
Guaranty or any other Loan Document to which such Guarantor is a party and
confirms that:
(a) by the Guaranty as so amended, the Guarantor continues to
guarantee the payment and performance of the Indebtedness owed
to SCS, including, without limitation, all obligations of
Borrower under the Original Loan Agreement as amended and
restated by the Loan Agreement; and
(b) with respect to each corporate Guarantor, by such
Guarantor's Subsidiary Security Agreement, such Guarantor
continues to grant a security interest in the "Collateral"
described in such Guarantor's Subsidiary Security Agreement to
secured the payment and performance of the "obligations"
described therein; and
(c) the Guaranty as so amended remains in full force and
effect, enforceable against the Guarantor in accordance with
its terms.
ARCA of St. Louis, Inc. ARCA-Maryland, Inc.
By: By:
---------------------------------- ----------------------------------
Its: Its:
---------------------------------- -----------------------------
Appliance Recycling Centers of America, California, Inc.
By:
------------------------------
Its:
--------------------------
Accepted and Agreed to this 12th day of February, 1998
SPECTRUM COMMERCIAL SERVICES
By:
------------------------------
Its:
------------------------------
EXHIBIT 10.11
#730900124
TOTAL INDEBTEDNESS SECURED BY THIS MORTGAGE IS $249,950.00
COMBINATION MORTGAGE AND SECURITY AGREEMENT
This Combination Mortgage and Security Agreement made as of the 13th
day of February 1998 (the "Mortgage") by Appliance Recycling Centers of America,
Inc., a Minnesota corporation, as mortgagor ("Mortgagor") and Western Bank, 663
University Ave., St. Paul, a Minnesota banking corporation, as mortgagee (the
"Mortgagee").
WHEREAS:
a. The Mortgagor holds record fee title to certain land (the
"Land") fully described on Exhibit I attached hereto located in the City of St.
Paul, County of Ramsey, State of Minnesota;
b. The land is improved with a Commercial building and related
facilities (the "Building");
c. On the date hereof Mortgagee has advanced (or is committed to
advance) to Mortgagor the sum of $249,950.00
d. Pursuant to Mortgagor's Note of even date here-with payable
to the order of Mortgagee (the "Note") in the principal amount of $249,950.00,
Mortgagor has agreed to repay to Mortgagee the total amount advanced by
Mortgagee together with interest thereon at the rate(s) stated in the Note, on
or before February 13, 2008 ; and
e. To secure payment of the Note, Mortgagor has executed and
delivered to Mortgagee this Mortgage.
<PAGE>
NOW, THEREFORE, in consideration of One Dollar ($1.00) and other
good and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged; and to secure (a) the due and punctual payment of principal of and
interest on the Note, and all renewals, extensions and modifications thereof and
any agreements or obligations issued in substitution thereof (provided the
principal amount of such shall not exceed the original principal amount of the
Note); and (b) the performance of all the covenants and agreements of Mortgagor
herein and in any other agreement now or hereafter entered into between the
Mortgagor and Mortgagee in connection with the Note (the payment and other
obligations evidenced by the Note, this Mortgage and all such other agreements
are hereinafter collectively referred to as the "Indebtedness"), the Mortgagor
does hereby mortgage, grant, bargain, sell, assign, transfer and convey unto the
Mortgagee forever, with power of sale, the following:
I.
All of Mortgagor's right, title and interest in and to the Land
and the Building, structures, other improvements, fixtures and personal property
now standing or at any time hereafter constructed or placed upon the Land (the
"Improvements"), including but not limited to (i) all building materials,
supplies and equipment now or hereafter located on the Land and suitable or
intended to be incorporated in any Improvements located or to be erected on the
Land, (ii) all heating, plumbing and lighting apparatus, motors, engines and
machinery, electrical equipment, incinerator apparatus, air-conditioning
equipment, water and gas apparatus, pipes, faucets, and all other fixtures of
every description which are now or may hereafter be placed or used upon the Land
or in any of the Improvements now or hereafter located thereon, (iii) all
additions, accessions, increases, parts, fittings, accessories, replacements,
substitutions, betterments, repairs and proceeds to and of any and all of the
foregoing, (iv) all hereditaments, easements, appurtenances, estates, and other
rights and interests now or hereafter belonging to or in any way pertaining to
the Land or to any of the Improvements now or hereafter located thereon, and (v)
all tangible personal owned by the Mortgagor and now or at any time hereafter
located on or relating to the Land.
II.
All rents, issues, profits, condemnation awards, revenues and
income arising from the ownership, operation or sales of the Land and the
Improvements and all proceeds and products thereof (herein collectively called
"Revenues and Income").
To Have and To Hold the Land and the Improvements (together the
"Mortgaged Property"), and the Revenues and Income unto the Mortgagee forever;
provided, nevertheless, that this Mortgage is upon the express condition that if
the Mortgagor shall cause to be paid to the Mortgagee as and when due and
payable the Indebtedness, and shall also keep and perform each and every
covenant and agreement of Mortgagor herein contained, then, this Mortgage and
the estate hereby granted shall cease
<PAGE>
and be and become void and shall be released of record at the expense of the
Mortgagor; otherwise this Mortgage shall be and remain in full force and effect.
The Mortgagor represents, warrants and covenants to and with the
Mortgagee that Mortgagor is lawfully seized of the Land in fee simple and has
good right and full power and authority to execute this Mortgage and to mortgage
and Mortgaged Property; that the Mortgagor owns the Mortgaged Property free from
all liens, security interests and encumbrances except as listed in Exhibit 2
attached hereto; that the Mortgagor will warrant and defend the title to the
Mortgaged Property and the lien and priority of this Mortgage against all claims
and demands of all persons whomsoever, whether now existing or hereafter
arising, not listed in Exhibit 2 to this Mortgage. The covenants and warranties
of this paragraph shall survive foreclosure of this Mortgage and shall run with
the Land.
The Mortgagor further covenants and agrees as follows:
1. Payment of the Indebtedness and Compliance with Other Agreements.
(a) Mortgagor will cause the principal of and interest on the
Indebtedness to be duly and punctually paid in accordance with the terms
of the Note and this Mortgage when and as due and payable. The
provisions of the Note are hereby incorporated by reference into this
Mortgage as fully as if set forth at length herein.
(b) Mortgagor will duly and punctually perform each and every obligation
under any other agreement now or hereafter entered into by the Mortgagor
and Mortgagee in connection with the Note.
2. Application of Payments. All payments received by Mortgagee
with respect to the Note of this Mortgage shall be applied by Mortgagee in the
following order of priority: (i) interest payable on advances made pursuant to
paragraph 11 hereof; (ii) principal of advances made pursuant to paragraph 11
hereof; (iii) interest payable on the Indebtedness; (iv) principal of the
Indebtedness; and (v) any other sums secured by this Mortgage, in such order of
application as Mortgagee may determine.
3. Payment of Taxes, Assessments and Other Charges; Escrow.
Subject to paragraph 7 relating to contest, the Mortgagor shall pay before a
penalty might attach for nonpayment thereof, all taxes and assessments and all
other charges whatsoever levied upon or assessed or placed against the Mortgaged
Property, except that assessments may be paid in installments so long as no fine
or penalty is added to any installment for the nonpayment thereof. Mortgagor
shall likewise pay all taxes, assessments and other charges, levied upon or
assessed, placed or made against, or measured by, this Mortgage, or the
recordation hereof, or the Indebtedness secured hereby, provided that the
Mortgagor shall not be obliged to pay such tax, assessment or charge if such
payment would be contrary to law or would result in the payment of an unlawful
rate of interest on the indebtedness secured hereby; and provided further that
<PAGE>
nothing herein contained shall be construed as requiring Mortgagor to pay any
net income, profits or revenue taxes of the Mortgagee. Mortgagor shall promptly
furnish to the Mortgagee all notices received by the Mortgagor of amounts due
under this paragraph and shall furnish receipts evidencing such payments within
10 days after such payments are made.
At the request of Mortgagee, Mortgagor shall deposit with the
Mortgagee on the first day of each and every month hereafter, an amount equal to
one-twelfth (1/12th) of the estimated annual taxes, assessments, and insurance
premiums ("Charges") due on the Mortgaged Property. From time to time out of
such deposits Mortgagee will, upon the presentation to the Mortgagee by the
Mortgagor of the bills thereof, pay the Charges or will upon presentation of
receipted bills thereof, reimburse the Mortgagor for such payments made by the
Mortgagor. In the event the deposits on hand shall not be sufficient to pay all
of the estimated Charges when the same shall become due from time to time, or
the prior payments shall be less than the currently estimated monthly amounts,
then the Mortgagor shall pay to the Mortgagee on demand any amount necessary
make up the deficiency. The excess of any such deposits shall be credited to
subsequent payments to be made for such items. If a default or an Event of
Default shall occur under the terms of this Mortgage or the Note the Mortgagee
may, at its option, without being required so to do, apply any deposits on hand
to the Indebtedness. in such order and manner as the Mortgagee may elect. When
the Indebtedness has been fully paid any remaining deposits shall be returned to
the Mortgagor as its interest may appear. All deposits are hereby pledged as
additional security for the Indebtedness, shall be held for the purposes for
which made as herein provided, may be commingled with other funds of the
Mortgagee, and shall be held without any allowance of interest thereon.
4. Payment of Utility Charges. Subject to paragraph 7 relating
to contest, the Mortgagor shall pay all charges made by utility companies,
whether public or private, for electricity, gas, heat, water, or sewer,
furnished or used in connection with the Mortgaged Property or any part thereof,
and will, upon written request of Mortgagee, furnish proper receipts evidencing
such payment.
5. Liens. Subject to paragraph 7 hereof relating to contests,
the Mortgagor shall not create, incur or suffer to exist any lien, encumbrance
or charge on the Mortgaged Property or Revenues and Income or any part thereof,
other than the lien of current real estate taxes and installments of special
assessments with respect to which no penalty is yet payable. Mortgagor shall
pay, when due, the claims of all persons supplying labor or materials to or in
connection with the Mortgaged Property.
6. Compliance with Laws. Subject to paragraph 7 relating to
contests, Mortgagor shall comply with all present and future statutes, laws,
rules, order, regulations and ordinances affecting the Mortgaged Property, any
part thereof or the use thereof. The Mortgagor represents and warrants that no
hazardous or toxic substances are buried or otherwise located on the Land.
<PAGE>
7. Permitted Contests. The Mortgagor shall not be required to
(i) pay any tax, assessment or other charge referred to in paragraph 3 hereof,
(ii) pay any charge referred to in paragraph 4 hereof, (iii) discharge or remove
any lien encumbrance or charge referred to in paragraph 5 hereof, or (iv) comply
with any statute, law, rule, regulation or ordinance referred to in paragraph 6
hereof, so long as Mortgagor shall (a) contest, in good faith, the existence,
amount or the validity thereof, the amount of damages caused thereby or the
extent of Mortgagor's liability therefor, by appropriate proceedings which shall
operate during the pendency thereof to prevent (A) the collection of, or other
realization upon the tax, assessment, charge or lien, encumbrance or charge so
contested, (B) the sale, forfeiture or loss of the Mortgaged Property or any
part thereof, and (C) any interference with the use or occupancy of the
Mortgaged Property or any part thereof, and (b) shall give such security to the
Mortgagee as may be reasonably demanded by the Mortgagee to insure compliance
with the foregoing provisions of this paragraph 7. Mortgagor shall give prompt
written notice to Mortgagee of the commencement of any contest referred to in
this paragraph 7.
8. Insurance.
(a) Risks to be Insured. Mortgagor, at Mortgagor's sole cost and
expense, will maintain insurance of the following character:
(i) "All-Risk" Insurance on the Building and other
Improvements now existing or hereafter erected on the
Land against loss by fire, lightning, extended coverage
perils, collapse, water damage, vandalism, malicious
mischief and all other risks and contingencies, subject
only to such exceptions as the Mortgagee may approve, in
an amount equal to the actual replacement cost thereof
(exclusive of foundations and excavations) or the
outstanding balance of the Indebtedness, whichever is
greater, without deduction for physical depreciation,
with coverage for demolition and increased costs of
construction, and providing coverage in an "agreed
amount" or without provisions for co-insurance. While
any Building or other Improvement is in the course of
being constructed or rebuilt on the Land, the Mortgagor
shall provide the aforesaid hazard insurance in
builder's risk completed value form, including coverage
available on the so-called 'all risk' non-reporting form
of policy.
(ii) Business interruption or loss of rents insurance in
an amount not less than the total amount of principal,
interest, taxes and insurance premiums payable hereunder
for a period of six (6) months.
(iii) If the Land or any part thereof is located in a
designated official flood-hazard area, flood insurance
insuring the Building and
<PAGE>
Improvements now existing or hereafter erected on the
Land in an amount equal to the actual replacement cost
thereof or to the maximum limit of coverage made
available with respect to such Building and Improvements
under the Flood Insurance Act of 1968, as amended,
whichever is less.
(iv) Public liability, including personal injury and
property damage, insurance applicable to the Mortgaged
Property in such amounts as are usually carried by
persons operating similar properties in the same general
locality but in any event with limits of liability not
less than $1,000,000 combined single limit.
(v) Appropriate worker's compensation insurance with
respect to any work on or about the Mortgaged Property.
(b) Policy Provisions. All insurance policies and renewals thereof
maintained by Mortgagor pursuant to subparagraph (a) above shall be
written by insurance carriers satisfactory to the Mortgagee, contain,
except in the case of liability insurance and worker's compensation
insurance, a standard mortgagee clause in favor of and in form
acceptable to Mortgagee, contain an agreement of the insurer that it
will not cancel or materially modify the policy except after 30 days
prior written notice to the Mortgagee, include effective waivers by the
insurer of all claims for insurance premiums against the Mortgagee,
provide, except in the case of liability insurance and worker's
compensation insurance, that all sums paid for losses of $10,000 or more
shall be paid solely to the Mortgagee, provide that any losses shall be
payable notwithstanding
(1) any act or negligence of the Mortgagor or Mortgagee, (2) any foreclosure or
other proceedings or notice of sale relating to the Mortgaged Property, or (3)
any change in the title to or ownership of the Mortgaged Property, and be
reasonably satisfactory to Mortgagee in all other respects.
(c) Delivery of Policy. Mortgagor will deliver to Mortgagee certificates
of insurance or copies of policies satisfactory to Mortgagee evidencing
the insurance which is required under subparagraph (a), and Mortgagor
shall promptly furnish to Mortgagee all renewal notices and all receipts
of paid premiums received by it. At least 30 days prior to the
expiration date of a required policy, Mortgagor shall deliver to
Mortgagee a renewal policy or certificate of insurance in form
satisfactory to Mortgagee.
(d) Assignment of Policy. If the Mortgaged Property is sold at a
foreclosure sale or if Mortgagee shall acquire title to the Mortgaged
Property, the Mortgagee shall have all of the right, title and interest
of Mortgagor in and to any insurance policies required under paragraph
8(a) hereof and the unearned premiums thereon
<PAGE>
and in and to the proceeds resulting from any damage to the Mortgaged
Property prior to such sale or acquisition.
(e) Notice of Damage or Destruction; Adjusting Loss. If the Mortgaged
Property or any part thereof shall be damaged or destroyed by fire or
other casualty, Mortgagor will promptly give written notice thereof to
the insurance carrier and Mortgagee, and the Mortgagee shall have the
right to join the Mortgagor in adjusting any damage or loss which is
estimated by Mortgagee in good faith to exceed $10,000; but if there has
been no adjustment of any such damage or loss within 30 days from the
date of occurrence thereof and if an Event of Default shall exist at the
end of such 30 day period or at any time thereafter, Mortgagee may alone
make proof of loss, adjust and compromise any claim under the policies
and appear in and prosecute any action arising from such policies. In
connection therewith, Mortgagor does hereby irrevocably authorize,
empower and appoint Mortgagee as attorney-in-fact for Mortgagor (which
appointment is coupled with an interest) to do any and all of the
foregoing in the name and on behalf of Mortgagor.
(f) Restoration of Damaged or Destroyed Property. In case of any damage
to or destruction of the Mortgaged Property or any part thereof, the
Mortgagor, whether or not the insurance proceeds, if any, on account of
such damage or destruction shall be sufficient for the purpose, at its
expense, shall promptly commence and complete the restoration, repair,
replacement or rebuilding of the Mortgaged Property that is damaged or
destroyed (the "Restoration") as nearly as possible to its value,
condition and character, immediately prior to such damage or
destruction, with such alterations and additions as may be made at the
Mortgagor's election.
(g) Application of Insurance Proceeds.
(i) All sums paid for losses of $10,000 or more under any hazard
insurance policy and/or flood insurance policy required in
paragraph 8(a) shall be paid to Mortgagee. All such sums
recovered by the Mortgagee, less the reasonable cost, if any, to
the Mortgagee of such recovery (including attorneys' fees) may,
at the sole discretion of the Mortgagee, be applied to the
Restoration or to the reduction of the Indebtedness in such
order of application as the Mortgagee may determine.
(ii) Mortgagor shall promptly reimburse Mortgagee upon demand
for all of Mortgagee's expenses incurred in connection with the
collection of the insurance proceeds and all such expenses,
together with interest from the date of disbursement at the rate
of interest provided in the Note (unless collection of interest
from Mortgagor at such rate would be contrary to applicable law,
in which event such amounts shall bear interest at the
<PAGE>
highest rate which may be collected from Mortgagor under
applicable law) shall be additional amounts secured by this
Mortgage.
9. Preservation and Maintenance of Mortgaged Property. Mortgagor
(i) shall keep the Building and other Improvements now or hereafter erected on
the Land in safe and good repair and condition, ordinary wear and tear excepted,
(ii) shall constantly maintain the parking and landscaped areas of the Mortgaged
Property, (iii) shall not commit waste or permit impairment or deterioration of
the Mortgaged Property, (iv) shall not alter or permit the alteration of the
design or structural character of any Building now or hereafter erected on the
Land or hereafter construct, or permit any tenant to construct, additions to the
original Building or additional buildings on the Land without the prior written
consent of the Mortgagee and (v) shall not remove from the Land any of the
fixtures and personal property included in the Mortgaged Property unless the
same is immediately replace with like property of at least equal value and
utility, and this Mortgage becomes a valid first lien on such property.
10. Inspection. The Mortgagee, or its agents, shall have the
right at all reasonable times, to enter upon the Mortgaged Property for the
purposes of inspecting the Mortgaged Property or any part thereof. The Mortgages
shall, however, have no duty to make such inspection.
11. Protection of Mortgagee's Security. Subject to the rights of
the Mortgagor under paragraph 7 hereof, if the Mortgagor fails to perform any of
the covenants and agreements contained in this Mortgage or if any action or
proceeding is commenced which affects the Mortgaged Property or the interest of
the Mortgagee therein, or the title thereto, then the Mortgagee, at Mortgagee`s
option, may perform such covenants and agreements, defend against and/or
investigate such action or proceeding, and take such other action as the
Mortgagee deems necessary to project the Mortgagee's interest. Mortgagee shall
be the sole judge of the legality, validity and priority of any claim, lien,
encumbrance, tax, assessment, charge and premium paid by it and of the amount
necessary to be paid in satisfaction thereof. Mortgagee is hereby given the
irrevocable power of attorney (which power is coupled with an interest and is
irrevocable) to enter upon the Mortgaged Property as the Mortgagor's agent in
the Mortgagor's name to perform any and all covenants and agreements to be
performed by the Mortgagor as herein provided. Any amounts disbursed or incurred
by the Mortgagee pursuant to this paragraph 11, with interest thereon, shall
become additional Indebtedness of the Mortgagor secured by this Mortgage. Unless
Mortgagor and Mortgagee agree in writing to other terms of repayment, such
amounts shall be immediately due and payable, and shall bear interest from the
date of disbursement at the rate of interest provided in the Note, unless
collection from Mortgagor of interest at such rate would be contrary to
applicable law, in which event such amounts shall bear interest at the highest
rate which may be collected from Mortgagor under applicable law. Mortgagee
shall, at its option, be subrogated to the lien of any mortgage or other lien
discharged in whole or in part by the Indebtedness or by the Mortgagee under the
provisions hereof, and any such subrogation rights shall additional and
cumulative security for this Mortgage. Nothing contained in
<PAGE>
this paragraph 11 shall require the Mortgagee to incur any expense or do any act
hereunder, and the Mortgagee shall not be liable to the Mortgagor for any
damages or claims arising out of action taken by the Mortgagee pursuant to this
paragraph 11.
12. Condemnation.
(a) Mortgagor hereby irrevocably assigns to the Mortgagee any
award or payment which becomes payable by reason of any taking of the Mortgaged
Property, or any part thereof, whether directly or indirectly or temporarily or
permanent, in or by condemnation or other eminent domain proceedings or by
reason of sale under threat thereof,or in anticipation of the exercise of the
right of condemnation or other eminent domain proceedings (hereinafter called
"Taking"). Forthwith upon receipt by Mortgagor of notice of the institution of
any proceeding or negotiations for a Taking, Mortgagor shall give notice thereof
to Mortgagee. Mortgagee may appear in any such proceedings and participate in
any such negotiations and may be represented by counsel. Mortgagor,
notwithstanding that Mortgage may not be a party to any such proceeding, will
promptly give to Mortgagee copies of all notices, pleadings, judgements,
determinations and other papers received by Mortgagor therein. Mortgagor will
not enter into any agreement permitting or consenting to the Taking of the
Mortgaged Property, or any part thereof, or providing for the conveyance thereof
in lieu of condemnation, with anyone authorized to acquire the same in
condemnation or by eminent domain unless Mortgagee shall first have consented
thereto in writing, which consent will not be unreasonably withheld. All Taking
awards shall be adjusted jointly by Mortgagee. All awards payable as a result of
a Taking shall be paid to Mortgagee, which may, at its option, apply them, after
first deducting Mortgagee's expenses incurred in the collection thereof, to the
payment of the Indebtedness, whether or not due and in such order of application
as Mortgagee may determine, or to the repair or restoration of the Mortgaged
Property, in such manner as Mortgagee may determine. Any application of Taking
awards to principal of the Indebtedness shall not extend or postpone the due
dates of the installments payable under the Indebtedness or change the amount of
such installments.
(b) If the Taking involves a taking of any Building or other
Improvements now or hereafter located on the Land, Mortgagor shall
proceed, with reasonable diligence, to demolish and remove any ruins and
complete repair or restoration of the Mortgaged Property as nearly as
possible to its respective size, type, and character immediately prior
to the Taking, whether or not the condemnation awards are available or
adequate to complete such repair or restoration.
(c) Mortgagor shall promptly reimburse Mortgagee upon demand for all of
Mortgagee's expenses (including reasonable attorney's fees) incurred in
the collection of awards and their disbursement in accordance with this
paragraph, and all such expenses, together with interest from the date
of disbursement at the rate of interest provided in the Note (unless
collection of interest from Mortgagor at such rate would be contrary to
applicable law, in which event such amounts shall
<PAGE>
bear interest at the highest rate which may be collected from Mortgagor
under applicable law) shall be additional amounts secured by this
Mortgage.
13. Information; Books and Records. Mortgagor will prepare or
cause to be prepared at Mortgagor's expense and deliver of any condition or
event which constitutes, or which after notice or lapse of time or both would
constitute, an Event of Default, written notice specifying the nature and period
of existence thereof and what action Mortgagor has taken, is taking or proposes
to take with respect thereto. Mortgagor shall keep and maintain at all times at
Mortgagor's address stated below or at such other places as Mortgagee may
approve in writing, complete and accurate books of accounts and records in
sufficient detail and accurate books of accounts and records in sufficient
detail to reflect correctly the receipts and expenses in connection with the
acquisition, construction, operation and/or sale of the Mortgaged Property and
copies of all written contracts, leases and other instruments which affect the
Mortgaged Property. Such books, records, contracts, leases and other instruments
shall be subject to examination and inspection by the Mortgagee or its
representative during ordinary business hours.
14. Indemnification by the Mortgagor. The Mortgagor shall bear
all loss, expense (including attorneys' fees) and damage in connection with, and
agrees to indemnify and hold harmless the Mortgagee and each of its agents,
servants and employees from, all claims, demands and judgements made or
recovered against the Mortgagee or any of its agents, servants and employees
because of bodily injuries, including death at any time resulting therefrom,
and/or because of damages to property of the Mortgagee or others (including loss
of use) from any cause whatsoever, arising out of, incidental to, or in
connection with the construction and/or operation of the Improvements or arising
by reason of the presence of hazardous or toxic substances on the Land or in the
Improvements or releases thereof from the Mortgaged Property, whether or not due
to any act of omissions or commission, including negligence of the Mortgagor or
its employees, servants or agents, and whether or not due to any act of omission
or commission of the Mortgagee or its employees, servants or agents. The
Mortgagor's liability hereunder shall not be limited to the extent of insurance
carried by or provided by the Mortgagor or subject to any exclusions from
coverage in any insurance policy. The obligations of the Mortgagor under this
paragraph shall survive the payment of the Note.
15. Security Interest. This Mortgage shall constitute a security
agreement with respect to (and the Mortgagor hereby grants the Mortgagee a
security interest in) the tangible personal property and fixtures included in
the Mortgaged Property (as more particularly described in Granting Clause I of
this Mortgage) and the Revenues and Income (as more particularly described in
Granting Clause II). The Mortgagor will from time to time, at the request of the
Mortgagee, execute any and all fixtures (in a form satisfactory to the
Mortgagee, execute any and all financing statements covering such personal
property and fixtures (in a form satisfactory to the Mortgagee) which the
Mortgagee may reasonably consider necessary or appropriate to perfect its
security interest.
<PAGE>
16. Events of Default. Each of the following occurrences shall
constitute an event of default hereunder (herein called an "Event of Default"):
(a) Mortgagor shall fail to duly and punctually pay any obligation
payable under the Note or this Mortgage.
(b) Mortgagor shall fail duly to perform or observe any of the covenants
or agreements contained in this Mortgage (other than a default in the
performance, or breach, of any covenant of the Mortgagor in paragraph
1(a) hereof) and such failure shall continue for a period of thirty (30)
days after the Mortgagee has given written notice to the Mortgagor
specifying such default or breach.
(c) Mortgagor shall make an assignment for the benefit of Mortgagor's
creditors, or shall admit in writing Mortgagor's inability to pay
Mortgagor's debts as they become due, or shall file a petition in
bankruptcy, or shall become or be adjudicated a bankrupt or insolvent,
however defined, or shall file a petition seeking any reorganization,
dissolution, liquidation, arrangement, composition, readjustment or
similar relief under any present or future bankruptcy or insolvency
statute, law or regulation or shall file an answer admitting to or not
consenting the material allegations of petition filed against the
Mortgagor in such proceedings, or shall not, within 60 days after the
filing of such petition against the Mortgagor, have same dismissed or
vacated, or shall seek or consent to or acquiesce in the appointment of
any trustee, receiver or liquidator of a material part of the
Mortgagor's properties or of the Mortgaged Property or shall not, within
60 days after the appointment (without the Mortgagor's consent or
acquiescence) of a trustee, receiver or liquidator of any material part
of the Mortgagor's properties or of the Mortgaged Property, have such
appointment vacated.
(d) The Land or Building or Revenues and Income, or if any part thereof
or any legal or equitable interest therein, shall be sold, conveyed,
transferred or further encumbered without the prior written consent of
Mortgagee. This provision shall apply to each and every sale, transfer
or conveyance, regardless of whether or not the Mortgagee has waived its
rights hereunder, whether by action or inaction in connection with any
previous sale, transfer or conveyance, whether one or more.
(e) Mortgagor shall default in the payment of any obligation other then
the Indebtedness, whether as a principal or as a surety, in favor of the
Mortgagee and any periods of grace with respect thereto shall have
expired.
17. Acceleration; Foreclosure. Whenever any Event of Default
shall have occurred and be subsisting, the Mortgagee may, at its option,
exercise one or more of the following rights and remedies (and/or any other
rights and remedies available to it):
<PAGE>
(a) Mortgagee may, by written notice to the Mortgagor, declare
immediately due and payable all Indebtedness secured by this Mortgage,
and the same shall thereupon be immediately due and payable, without
further notice or demand.
(b) Mortgagee shall have and may exercise with respect to all personal
property and fixtures which are part of the Mortgaged Property and with
respect to the Revenues and Income, all the rights and remedies accorded
upon default to a secured party under the Uniform Commercial Code, as in
effect in the State of Minnesota. If notice to the Mortgagor of intended
disposition of such property is required by law in a particular
instance, such notice shall be deemed commercially reasonable if given
to Mortgagor (in the manner specified in paragraph 21) at least 10
calendar days prior to the date of intended disposition. Mortgagor shall
pay on demand all costs and expenses incurred by Mortgagee in exercising
such rights and remedies, including without limitation, reasonable
attorneys' fees and legal expenses.
(c) Mortgagee may (and is hereby authorized and empowered to) foreclose
this Mortgage by action or advertisement, pursuant to chapters 580
through 582 of the statutes of the State of Minnesota in such case made
and provided, power being expressly granted to sell the Mortgaged
Property (including, without limitation, and at the option of the
Mortgagee, any goods constituting a part thereof) at public auction and
convey the same to the purchaser in fee simple and out of the proceeds
arising from such sale, to pay all or any part of the Indebtedness
secured hereby with interest, and all legal costs and charges of such
foreclosure and the maximum attorneys' fees permitted by law, which
costs, charges and fees the Mortgagor agrees to pay.
(d) The Mortgagor shall be entitled, without notice and without any
showing of waste of the Mortgaged Property, inadequacy of the Mortgaged
Property as security for the Indebtedness, or insolvency of the
Mortgagor, to the appointment of a receiver of the rents and profits of
the Mortgaged Property, including those past due.
(e) Mortgagee may pursue one or more of the remedies provided for
herein, in the Note, or in any other agreement now or hereafter entered
into between the Mortgagor and Mortgagee in connection with the Note.
18. Estoppel Certificates. Mortgagor agrees at any time and from
time to time, upon not less than 15 days' prior notice by Mortgagee, to execute,
acknowledge and deliver, without charge, to Mortgagee or to any person
designated by Mortgagee, a statement in writing certifying that this Mortgage is
unmodified (or if there have been modifications, identifying the same by the
date thereof and specifying the nature thereof), the principal amount then
secured hereby, that Mortgagor has not received any notice of default or notice
acceleration or foreclosure of this notice of this Mortgage (or if Mortgagor has
received such a notice, that it has been revoked, if such be the case), that
<PAGE>
to the knowledge of Mortgagor no Event of Default exists hereunder (or if any
such Event of Default does exist, specifying the same and stating that the same
has been cured, if such be the case), the Mortgagor to Mortgagor's knowledge has
no claims or offsets against Mortgagee (or if Mortgagor has any such claims,
specifying the same), and the dates to which the principal and interest and the
other sums and charges payable by Mortgagor pursuant to the Note and this
Mortgage have been paid. In the event Mortgagor fails to execute, acknowledge
and deliver such statement within the time above required, Mortgagor hereby
appoints and constitutes Mortgagee as Mortgagor's attorney-in-fact to do so
(which power of attorney is coupled with an interest and is irrevocable), and
Mortgagor shall be fully bound by any such statement executed by Mortgagee on
Mortgagor`s behalf to the same extent as if Mortgagor had executed, acknowledged
and delivered the same.
19. Forbearance Not a Waiver, Rights and Remedies Cumulative. No
delay by the Mortgagee in exercising any right shall be deemed a waiver of or
preclude the exercise of such right or remedy, and no waiver by the Mortgagee of
any particular provision of this Mortgagee shall be deemed effective unless in
writing signed by the Mortgagee. All such rights and remedies provided for
herein or which the Mortgagee may have otherwise, at law or in equity, shall be
distinct, separate and cumulative and may be exercised concurrently,
independently or successively in any order whatsoever, and as often as the
occasion therefor arises. The Mortgagee's taking action pursuant to paragraph 11
or receiving proceeds, awards or damage pursuant to paragraphs 8 or 12 shall not
impair any right or remedy available to the Mortgagee under paragraph 17 hereof.
Acceleration of maturity of the Indebtedness, once claimed hereunder by the
Mortgagee, may, at the option of Mortgagee, be rescinded by written
acknowledgement to that effect by Mortgagee, but the tender and acceptance of
partial payments alone shall not in any way affect or rescind such acceleration
of maturity of the Indebtedness or constitute a waiver of any proceedings
commenced to foreclose this Mortgage.
20. Successors and Assigns Bound; Number; Gender; Agents,
Captions. The covenants and agreements herein contained shall bind, and the
rights hereunder shall inure to, the respective heirs, legal representatives,
successors and assigns of the Mortgagee and the Mortgagor, subject to paragraph
16(d). Wherever used, the singular number shall include the plural, and the
plural the singular, and the use of any gender shall apply to all genders. In
exercising any rights hereunder or taking any actions provided for herein,
Mortgagee may act through its employees, agents or independent contractors as
authorized by Mortgagee. The captions are headings of the paragraphs of this
Mortgage are for convenience only and are not to be used to interpret or define
the provisions hereof.
21. Notice. Any notice from the Mortgagee to the Mortgagor under
this Mortgage shall be deemed to have been given by the Mortgagee and received
by the Mortgagor when mailed by certified mail by the Mortgagee or its agents to
the Mortgagor at the address set forth in paragraph 25(a) below or at such other
address as the Mortgagor may designate in writing to the Mortgagee.
<PAGE>
22. Governing Law; Severability. This mortgage shall be governed
by the laws of the State of Minnesota. In the event that any provision or clause
of this Mortgage conflicts with applicable law, such conflict shall not affect
other provisions of this Mortgage which can be given effect without the
conflicting provisions and to this end the provisions of the Mortgage are
declared to be severable.
23. Counterparts. This Mortgage may be executed in any number of
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
24. Waiver of Marshalling. Mortgagor, any party who consents to
this mortgage and any party who now or hereafter acquires a lien on the
Mortgaged Property and who has actual or constructive notice of this Mortgage
hereby waives any and all right to require the marshalling of assets in
connection with the exercise of any of the remedies permitted by applicable law
or provided herein and waives any right to have the Mortgaged Property sold in
separate tracts pursuant to section 580.08, Minnesota Statutes.
25. Fixture Filing. From the date of its recording, this
Mortgage shall be effective as a financing statement filed as a fixture filing
with respect to all goods constituting part of the Mortgaged Property (as more
particularly described in Granting Clause I of this Mortgage) which are or are
to become fixtures related to the real estate described herein. For this
purpose, the following information is set forth:
(a) Name and Address of Debtor and Record Owner of Real Estate:
Appliance Recycling Centers of America, Inc.
7400 Excelsior Blvd.
St. Louis Park, MN 55426
(b) Name and Address of Secured Party:
Western Bank
663 University Avenue West
St. Paul, MN 55104
Attention: Loan Servicing Dept.
(c) This document covers goods which are or are to become
fixtures.
IN WITNESS WHEREOF, the Mortgagor has caused this Mortgage to be
duly executed as of the day and year first above written.
<PAGE>
THE TOTAL INDEBTEDNESS SECURED BY THIS DOCUMENT IS $249,950.00.
Appliance Recycling Centers of America, Inc.
By:
Kent S. McCoy, Chief Financial Officer
STATE OF Minnesota )
) SS.
COUNTY OF Ramsey )
The foregoing instrument was acknowledged before me this ______
day of February, 1998 by Kent S. McCoy, Chief Financial Officer of Appliance
Recycling Centers of America, Inc., a Minnesota Corporation, on behalf of the
corporation. .
-----------------------------------------
Notary Public
This instrument was
drafted by: Western Bank, 663 University Ave., St. Paul, MN 55104
<PAGE>
EXHIBIT 1
TO
COMBINATION MORTGAGE AND SECURITY AGREEMENT
(DESCRIPTION OF THE "LAND")
Legal:
Lots 6, 7, 8, 9, 10 and 11, in Chute Brothers Division No. 1 Addition to the
City of St. Paul, Minnesota
Address: 654 University Avenue, St. Paul, MN 55104
<PAGE>
EXHIBIT 2
TO
COMBINATION MORTGAGE AND SECURITY AGREEMENT
(PERMITTED ENCUMBRANCES)
1) Taxes not yet due and payable.
EXHIBIT 13.0
PORTIONS OF
1997 ANNUAL REPORT
OF
APPLIANCE RECYCLING CENTERS
OF AMERICA, INC.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The 1997 fiscal year (1997) ended January 3, 1998.
The Company generates revenues from three major areas: recycling fees, sales of
reconditioned and distressed appliances, and sales of byproducts. The Company
experiences seasonal fluctuations in operating results, with revenues generally
higher during the second and third calendar quarters than in the first and
fourth quarters. The lower levels in the first and fourth quarters reflect
consumer purchasing cycles, which result in lower demand for appliances and
recycling services.
In 1997 the Company focused on stabilizing its operations and developing a
stronger foundation for its appliance reuse business. The Company made
significant progress towards these objectives. The Company reduced its loss to
$748,000 in 1997 from $7,269,000 in 1996. Though the Company had lower revenues
in 1997, same-store sales for its reconditioned and distressed appliance
business increased 19%. Overall, gross profit as a percentage of sales increased
to 41.7% in 1997 compared to 19.6% in the previous year. In addition, selling,
general and administrative expenses decreased by $4,164,000 from the previous
year.
REVENUES
The Company's total revenues for 1997 were $11,979,000 compared to $14,030,000
in 1996. Recycling revenues decreased to $6,274,000 in 1997 from $6,785,000 in
1996. The decrease was primarily due to the Company's closing four recycling
centers in late 1996 and early 1997, partially offset by increased recycling
revenues from the Company's Southern California Edison Company ("Edison")
contract. Edison has renewed its contract through September 30, 1998. This
contract is expected to generate minimum revenues of $3,000,000. The Company
believes its 1998 recycling revenues level is dependent on the volume of
appliances processed from the Edison program and whether the Edison program is
extended for the last three months of 1998.
Appliance sales decreased to $4,149,000 in 1997 from $5,148,000 in 1996. The
decrease was primarily due to the Company's reducing its number of retail stores
to 13 in 1997 from 26 in the fourth quarter 1996. Due to substantial losses in
1996, the Company withdrew from three markets during the fourth quarter of 1996,
closing 12 retail locations and three recycling centers. The Company operated 13
stores throughout 1997. Same-store sales (for stores open for the full years
1997 and 1996) increased 19% in 1997.
In 1997, the Company entered into agreements with Whirlpool Corporation to
purchase Whirlpool's distressed, discontinued and returned products. The Company
believes the availability of these products along with its traditional products
will increase retail sales significantly in 1998.
Byproduct revenues decreased to $1,556,000 in 1997 from $2,097,000 in 1996. The
decrease was primarily due to fewer appliances recycled in 1997 compared to
1996, which resulted from the closing of three recycling centers in the fourth
quarter of 1996.
The Company's total revenues for 1996 were $14,030,000 compared to $16,241,000
in 1995. Recycling revenues decreased to $6,785,000 in 1996 from $12,300,000 in
1995, primarily due to decreased revenues from electric utility programs that
ended during 1996.
Appliance sales increased to $5,148,000 in 1996 from $1,793,000 in 1995. The
increase was due to the Company's expansion of its retail business through a new
chain of stores under the name "Encore Recycled Appliances." During 1996, the
Company opened 22 retail locations in seven markets. Due to substantial losses,
the Company closed 12 retail locations in the fourth quarter of 1996.
Byproduct revenues decreased slightly to $2,097,000 in 1996 from $2,148,000 in
1995. The decrease was primarily due to lower sales of reclaimed CFCs offset by
a small increase in scrap metal income.
GROSS PROFIT
The Company's overall gross profit rate increased to 41.7% in 1997 from 19.6% in
1996. The increase was primarily due to the closing of the under-performing
recycling centers and Encore stores in the fourth quarter of 1996 and increased
operating efficiencies in the remaining centers. The Company believes the gross
profit rate will continue to improve in 1998 due to continued operating
efficiencies and higher sales volumes at the existing centers. The Company
believes the gross profit will be dependent on the volume of appliances
processed from the Edison program and the gross profit margin the Company can
achieve on Whirlpool product sales.
The overall gross profit rate decreased to 19.6% for 1996 from 34.7% for 1995.
The decrease was primarily due to costs related to a decrease in units recycled
from utility customers, start-up inefficiencies related to the expansion of the
reconditioned appliance business, lower than planned retail sales and write-offs
and other
4
<PAGE>
significant expenses related to the closing of retail stores and recycling
centers. The gross profit rate in the closed markets was a negative 12.7% in
1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were 45.7% of sales in 1997
compared to 68.7% and 36.0% in 1996 and 1995, respectively. Selling, general and
administrative expenses decreased to $5,479,000 in 1997 from $9,643,000 in 1996,
a 43.2% decrease. Selling expenses decreased to $1,498,000 in 1997 from
$3,275,000 in 1996. The decrease in selling expenses was primarily due to
operating fewer retail stores in 1997 compared to 1996. General and
administrative expenses decreased to $3,981,000 from $6,368,000 in 1996. The
decrease was primarily due to operating fewer centers in 1997 compared to 1996
and incurring lower costs associated with the closed markets.
Selling, general and administrative expenses increased to $9,643,000 in 1996
from $5,852,000 in 1995. The increase was primarily due to opening and operating
additional centers and retail operations in 1996 compared to 1995. The increase
was also due to costs incurred related to closing three recycling centers and 12
retail locations.
In 1995, the Company took a one-time charge of $1,316,000 related to a loss on
impaired assets and non-recurring charges associated with the Company's utility
business.
INTEREST EXPENSE
Interest expense increased slightly in 1997 compared to 1996 due to a higher
average borrowed amount in 1997 than 1996. Interest expense in 1996 was
approximately the same as in 1995.
INCOME TAXES AND NET OPERATING LOSSES
As of its 1997 and 1996 year-ends, the Company recorded a valuation allowance of
$2,952,000 and $2,795,000, respectively, against its net deferred tax assets due
to the uncertainty of their realization. In addition, in conjunction with the
fourth quarter business restructuring, the Company wrote-off $235,000 of
deferred tax assets recorded in prior years due to the uncertainty of their
realization. The realization of deferred tax assets is dependent upon sufficient
future taxable income during the period when deductible temporary differences
and carryforwards are expected to be available to reduce taxable income.
The Company has net operating losses of approximately $5,630,000 at January 3,
1998 which are available to reduce income taxes payable in future years. Future
utilization of these loss carryforwards is dependent upon the Company's
attaining profitable operations.
To the extent the Company is able to generate taxable income in a period in
which this net operating loss carryforward is available, the Company's cash
requirements for the payment of income taxes would be reduced.
MINORITY INTEREST IN NET INCOME OF SUBSIDIARY
The Company was an 80% shareholder in its California subsidiary, and
accordingly, recorded the minority shareholder's interest in the subsidiary's
net income during 1997. No minority interest was recorded in 1996 and 1995 since
the subsidiary had an accumulated net loss. During the fourth quarter of 1997,
the Company purchased all the minority shareholder's stock in the California
subsidiary.
LIQUIDITY AND CAPITAL RESOURCES
At January 3, 1998, the Company had a working capital deficit of $1,959,000
compared to a working capital deficit of $1,671,000 at December 28, 1996. Cash
and cash equivalents decreased to $13,000 at January 3, 1998 from $280,000 at
December 28, 1996. Net cash provided by operating activities was $308,000 in
1997 compared to net cash used in operating activities of $4,142,000 in 1996.
The increase in cash provided by operating activities was primarily due to a
decrease in the Company's net loss of $6,521,000 offset by a decrease in
depreciation expense of $1,450,000.
Net cash used in investing activities was $467,000 in 1997 compared to $954,000
in 1996. The decrease in net cash used in investing activities in 1997 from 1996
was due to a decrease in capital expenditures offset by lower proceeds for
selling excess equipment and the purchase of the minority interest in the
California subsidiary. In November 1997, the Company purchased all outstanding
shares held by the minority shareholder of its California subsidiary for
$275,000.
Net cash used in financing activities was $108,000 compared to net cash provided
by financing activities of $750,000 in 1996. The increase in cash used in
financing activities was primarily due to the nonissuance of Common Stock in
1997.
The Company's capital expenditures were approximately $299,000 in 1997 and
$1,285,000 in 1996. The 1997 capital expenditures were primarily related to
building improvements. The 1996 capital expenditures were primarily related to
leasehold improvements to the Company's recycling centers and additional retail
stores. The Company did not have any material purchase commitments for assets as
of January 3, 1998.
As of January 3, 1998, the Company had a $2.0 million line of credit with a
lender. In February 1998, the line
5
<PAGE>
of credit was increased to $2.75 million. The amount of borrowings available
under the line of credit is based on a formula using receivables, inventories,
and property and equipment. 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 loan provides for a rate
of interest equal to 5 percentage points over the prime lending rate per annum,
but never less than 10% per annum (the interest rate as of January 3, 1998 was
13.5%), and minimum monthly interest payments of $10,000 regardless of the
outstanding principal balance. Upon an event of default, the interest rate may
increase by 5 percentage points per annum. The line of credit is secured by
receivables, inventories, equipment, real estate and other assets of the Company
and a portion is guaranteed by the President of the Company. The loan also
requires that the Company meet certain financial covenants, provides payment
penalties for noncompliance, limits the amount of other debt the Company can
incur, limits the amount of spending on fixed assets and limits payments of
dividends. At January 3, 1998, the Company's borrowing capacity was fully
utilized.
In May 1996, $700,000 was raised in a private placement of Common Stock to an
institutional investor that currently holds approximately 11% of the outstanding
shares. These proceeds were used to pay off an equipment loan of $480,000 and
for additional working capital. The proceeds were raised from selling 50,000
shares at $14.00 per share after giving effect to the Company's 1997 reverse
stock split.
The Company believes, based on anticipated revenues from the Edison contract,
the anticipated growth in retail sales and the anticipated improvement in gross
profit, that funds generated from operations and the current line of credit will
be sufficient to finance its operations and capital expenditures through
December 1998. The Company's total capital requirements will depend, among other
things as discussed below, on the number of recycling centers operating and the
number and size of retail stores operating during the fiscal year. Currently,
the Company has four centers and 13 stores in operation. If revenues are lower
than anticipated or expenses are higher than anticipated or the line of credit
cannot be maintained, the Company may require additional capital to finance
operations. Sources of additional financing, if needed in the future, may
include further debt financing or the sale of equity (including the issuance of
Preferred Stock if authorized by the shareholders at the 1998 Annual Meeting of
Shareholders) or other securities. There can be no assurance that such
additional sources of financing will be available or available on terms
satisfactory to the Company or permitted by the Company's current lender.
YEAR 2000
Based on a recent assessment of the Year 2000 Issue, 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 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 the software for Year 2000 modifications. The Company plans to complete the
Year 2000 project no later than December 31, 1998. The costs of the project are
expected to be funded through operating cash flows. A portion of the costs will
be used to purchase new software, which will be capitalized. The remaining
portion of the costs will be expensed as incurred over the course of the
project. The overall cost of the project is not expected to have a material
effect on the results of operations.
The costs of the project and the date by 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 assurances 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 contained in the annual report regarding the Company's future
operations, performance and results, and anticipated liquidity discussed herein
are forward-looking and therefore are subject to certain risks and
uncertainties, including those discussed herein. In addition, any
forward-looking information regarding the operations of the Company will be
affected by the ability of individual stores to meet planned revenue levels, the
speed at which individual Encore stores reach profitability, costs and expenses
being realized at higher than expected levels, the 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, and the ability of Edison to deliver units
under its contract with the Company and the timing of such delivery.
6
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
Appliance Recycling Centers of America, Inc. and Subsidiaries
<TABLE>
<CAPTION>
For the fiscal year ended
- -----------------------------------------------------------------------------------------------------------------------------
JANUARY 3, December 28, December 30,
1998 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES (Notes 3 and 10)
Recycling revenues $ 6,274,000 $ 6,785,000 $ 12,300,000
Appliance sales 4,149,000 5,148,000 1,793,000
Byproduct revenues 1,556,000 2,097,000 2,148,000
- -----------------------------------------------------------------------------------------------------------------------------
Total revenues $ 11,979,000 $ 14,030,000 $ 16,241,000
COST OF REVENUES 6,989,000 11,286,000 10,611,000
- -----------------------------------------------------------------------------------------------------------------------------
Gross profit $ 4,990,000 $ 2,744,000 $ 5,630,000
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 5,479,000 9,643,000 5,852,000
LOSS ON IMPAIRED ASSETS AND NON-RECURRING CHARGES (Note 11) -- -- 1,316,000
- -----------------------------------------------------------------------------------------------------------------------------
Operating income (loss) $ (489,000) $ (6,899,000) $ (1,538,000)
OTHER INCOME (EXPENSE)
Other income 134,000 122,000 65,000
Interest income 8,000 37,000 230,000
Interest expense (347,000) (294,000) (290,000)
- -----------------------------------------------------------------------------------------------------------------------------
Income (loss) before provision for income taxes and minority interest $ (694,000) $ (7,034,000) $ (1,533,000)
PROVISION FOR (BENEFIT OF) INCOME TAXES (Note 8) (31,000) 235,000 (590,000)
- -----------------------------------------------------------------------------------------------------------------------------
Net income (loss) before minority interest $ (663,000) $ (7,269,000) $ (943,000)
MINORITY INTEREST IN NET INCOME OF SUBSIDIARY 85,000 -- --
- -----------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (748,000) $ (7,269,000) $ (943,000)
=============================================================================================================================
BASIC AND DILUTED LOSS PER COMMON SHARE $ (0.66) $ (6.53) $ (0.90)
=============================================================================================================================
WEIGHTED AVERAGE NUMBER OF COMMON SHARES 1,137,000 1,114,000 1,052,000
=============================================================================================================================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
7
<PAGE>
CONSOLIDATED BALANCE SHEETS
Appliance Recycling Centers of America, Inc. and Subsidiaries
<TABLE>
<CAPTION>
JANUARY 3, December 28,
1998 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 13,000 $ 280,000
Accounts receivable, net of allowance of $35,000 in 1997
and $84,000 in 1996 (Notes 4 and 10) 736,000 1,127,000
Inventories (Note 4) 694,000 444,000
Refundable income taxes 29,000 400,000
Other current assets 140,000 246,000
- --------------------------------------------------------------------------------------------
Total current assets $ 1,612,000 $ 2,497,000
- --------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT, AT COST (Notes 4, 5 and 11)
Land $ 2,103,000 $ 2,103,000
Buildings and improvements 3,955,000 3,798,000
Equipment 5,461,000 5,604,000
- --------------------------------------------------------------------------------------------
$ 11,519,000 $ 11,505,000
Less accumulated depreciation 4,807,000 4,086,000
- --------------------------------------------------------------------------------------------
Net property and equipment $ 6,712,000 $ 7,419,000
- --------------------------------------------------------------------------------------------
OTHER ASSETS $ 55,000 $ 76,000
GOODWILL, NET 190,000 --
- --------------------------------------------------------------------------------------------
Total assets $ 8,569,000 $ 9,992,000
============================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Line of credit (Note 4) $ 1,513,000 $ 1,390,000
Current maturities of long-term obligations (Note 5) 101,000 227,000
Accounts payable 1,136,000 1,391,000
Accrued expenses (Note 6) 821,000 1,160,000
- --------------------------------------------------------------------------------------------
Total current liabilities $ 3,571,000 $ 4,168,000
LONG-TERM OBLIGATIONS, LESS CURRENT MATURITIES (Note 5) 1,633,000 1,711,000
- --------------------------------------------------------------------------------------------
Total liabilities $ 5,204,000 $ 5,879,000
- --------------------------------------------------------------------------------------------
COMMITMENTS (Note 7)
SHAREHOLDERS' EQUITY (Notes 3, 4 and 9)
Common Stock, no par value; authorized 10,000,000 shares;
issued and outstanding 1,137,000 shares $ 10,350,000 $ 10,350,000
Accumulated deficit (6,985,000) (6,237,000)
- --------------------------------------------------------------------------------------------
Total shareholders' equity $ 3,365,000 $ 4,113,000
- --------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 8,569,000 $ 9,992,000
============================================================================================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
8
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Appliance Recycling Centers of America, Inc. and Subsidiaries
<TABLE>
<CAPTION>
For the fiscal year ended
- ---------------------------------------------------------------------------------------------------------------------------------
JANUARY 3, December 28, December 30,
1998 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (748,000) $(7,269,000) $ (943,000)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization 1,027,000 2,477,000 1,452,000
Minority interest in net income of subsidiary 85,000 -- --
Common Stock issued for services -- 30,000 --
(Gain) loss on sale of equipment (80,000) (118,000) 15,000
Deferred income taxes -- 650,000 (586,000)
Loss on impaired assets and non-recurring charges -- -- 1,316,000
Change in assets and liabilities, net of effects from acquisition of
Universal Appliance Company, Inc., and Universal Appliance Recycling, Inc.
in 1996:
Accounts receivable 391,000 510,000 2,850,000
Inventories (250,000) 37,000 (247,000)
Other current assets 106,000 88,000 (17,000)
Refundable income taxes 371,000 (294,000) (106,000)
Accounts payable (255,000) (327,000) 834,000
Accrued expenses (339,000) 87,000 (433,000)
Income taxes payable -- (13,000) (429,000)
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities $ 308,000 $(4,142,000) $ 3,706,000
- ---------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment $ (299,000) $(1,285,000) $(1,549,000)
Purchase of minority interest in California subsidiary (275,000) -- --
Cash acquired in 1996 business acquisition -- 26,000 --
Proceeds from disposal of property and equipment 107,000 415,000 177,000
Payments for non-compete agreements -- (110,000) --
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities $ (467,000) $ (954,000) $(1,372,000)
- ---------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings under line of credit $ 123,000 $ 1,390,000 $ --
Payments on long-term obligations (231,000) (1,412,000) (788,000)
Proceeds and tax benefits from stock option exercises -- 55,000 181,000
Proceeds from long-term obligations -- 17,000 --
Proceeds from issuance of Common Stock -- 700,000 --
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities $ (108,000) $ 750,000 $ (607,000)
- ---------------------------------------------------------------------------------------------------------------------------------
Effect of foreign currency exchange rate
changes on cash and cash equivalents $ -- $ 21,000 $ 18,000
- ---------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents $ (267,000) $(4,325,000) $ 1,745,000
CASH AND CASH EQUIVALENTS
Beginning 280,000 4,605,000 2,860,000
- ---------------------------------------------------------------------------------------------------------------------------------
Ending $ 13,000 $ 280,000 $ 4,605,000
=================================================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments (receipts) for:
Interest $ 346,000 $ 285,000 $ 288,000
Income taxes $ (399,000) $ (103,000) $ 413,000
=================================================================================================================================
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Long-term obligations incurred for purchase of equipment $ 27,000 $ -- $ 712,000
=================================================================================================================================
Acquisition of Universal Appliance Company, Inc. and
Universal Appliance Recycling, Inc.
Working capital acquired, including cash and
cash equivalents of $26,000 $ -- $ 118,000 $ --
Fair value of other assets acquired, principally
property and equipment and a non-compete agreement -- 176,000 --
Purchase price assigned to goodwill -- 301,000 --
Long-term debt assumed -- (207,000) --
- ---------------------------------------------------------------------------------------------------------------------------------
Total consideration, 21,000 shares of Common Stock $ -- $ 388,000 $ --
=================================================================================================================================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
9
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Appliance Recycling Centers of America, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Retained Foreign
Common Stock Earnings Currency
------------------------- (Accumulated Translation
Shares Amount Deficit) Adjustment Total
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994 1,045,000 $ 8,996,000 $ 1,975,000 $ (39,000) $ 10,932,000
Exercise of Common Stock
options and warrants and related
tax benefits (Note 9) 12,000 181,000 -- -- 181,000
Foreign currency translation adjustment -- -- -- 18,000 18,000
Net income (loss) -- -- (943,000) -- (943,000)
- --------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 30, 1995 1,057,000 $ 9,177,000 $ 1,032,000 $ (21,000) $ 10,188,000
Issuance of Common Stock (Notes 3 and 9) 73,000 1,118,000 -- -- 1,118,000
Exercise of Common Stock options
and warrants (Note 9) 7,000 55,000 -- -- 55,000
Foreign currency translation adjustment -- -- -- 21,000 21,000
Net income (loss) -- -- (7,269,000) -- (7,269,000)
- --------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 28, 1996 1,137,000 $ 10,350,000 $ (6,237,000) $ -- $ 4,113,000
Net income (loss) -- -- (748,000) -- (748,000)
- --------------------------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 3, 1998 1,137,000 $ 10,350,000 $ (6,985,000) $ -- $ 3,365,000
==========================================================================================================================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Appliance Recycling Centers of America, Inc. and Subsidiaries
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS: Appliance Recycling Centers of America, Inc. and
subsidiaries (the "Company") is in the business of selling reconditioned and
distressed appliances and providing recycling services in an environmentally
sound manner for major household appliances throughout the United States. The
Company sells appliances through a chain of Company-owned stores under the name
"Encore(R) Recycled Appliances." The Company provides recycling services on a
credit basis to utilities, local governments, appliance retailers and waste
management companies.
A SUMMARY OF THE COMPANY'S SIGNIFICANT ACCOUNTING POLICIES IS AS FOLLOWS:
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the
accounts of Appliance Recycling Centers of America, Inc. and its subsidiaries.
All significant intercompany accounts and transactions have been eliminated in
consolidation.
FAIR VALUE OF FINANCIAL INSTRUMENTS: The following methods and assumptions are
used to estimate the fair value of each class of financial instruments:
CASH EQUIVALENTS: Due to their short-term maturities, the carrying amount
approximates fair value.
SHORT- AND LONG-TERM DEBT: The fair value of short- and long-term debt is
estimated based on interest rates for the same or similar debt offered to the
Company having the same or similar remaining maturities and collateral
requirements. At January 3, 1998, and December 28, 1996, the carrying value
of the Company's short- and long-term debt approximated its fair value.
FISCAL YEAR: The fiscal year ended January 3, 1998 includes 53 weeks. The fiscal
years ended December 28, 1996 and December 30, 1995 include 52 weeks.
REVENUE RECOGNITION: The Company recognizes revenue from appliance sales in the
period the appliance is sold. Recycling revenue is recognized when a unit is
collected and processed. Byproduct revenue is recognized upon shipment.
The Company provides allowances for uncollectable revenues receivable based on
management's periodic assessment of the need for such allowances.
The Company defers revenue under extended warranty arrangements and recognizes
it over the term of the warranty contract.
CASH AND CASH EQUIVALENTS: For purposes of reporting cash flows, the Company
considers all cash and any treasury bills, commercial paper and money-market
funds with an initial maturity of three months or less to be cash equivalents.
The Company maintains its cash in bank deposits and money-market accounts which,
at times, exceed federally insured limits. The Company has not experienced any
losses in such accounts.
INVENTORIES: Inventories, consisting primarily of reconditioned and distressed
appliances, are stated at the lower of cost, first-in, first-out (FIFO) basis,
or market.
GOODWILL: The Company was an 80% shareholder in its California subsidiary, and
accordingly, recorded the minority shareholder's interest in the subsidiary's
net income. During the fourth quarter of 1997, the Company purchased all the
minority shareholder's stock in the California subsidiary. This transaction
resulted in the Company's recording goodwill of $190,000. Goodwill is being
amortized by the straight-line method over a period of five years.
PROPERTY AND EQUIPMENT: Depreciation is computed using straight-line and
accelerated methods over the following estimated useful lives:
YEARS
- ---------------------------------------------------------------
Buildings and improvements 18 - 30
Equipment 3 - 8
The Company reviews its long-lived assets periodically to determine potential
impairment by comparing the carrying value of the long-lived assets with the
estimated future net undiscounted cash flows expected to result from the use of
the assets, including cash flows from disposition. Should the sum of the
expected future net cash flows be less than the carrying value, the Company
would recognize an impairment loss at the date. An impairment loss would be
measured by comparing the amount by which the carrying value exceeds the fair
value (estimated discounted future cash flows or appraisal of assets) of the
long-lived assets. In 1995, the Company recorded a charge for impairment of
certain assets. (See Note 11.)
11
<PAGE>
INCOME TAXES: Deferred taxes are provided on an asset and liability method
whereby deferred tax assets are recognized for deductible temporary differences
and operating loss and tax credit carryforwards, and deferred tax liabilities
are recognized for taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and liabilities and their tax
basis. Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or all of
the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates on the
date of enactment.
NET LOSS PER SHARE: The Company adopted Statement of Financial Accounting
Standards No. 128 (SFAS No. 128), Earnings per Share, which supersedes APB
Opinion No. 15. SFAS No. 128 requires the presentation of earnings per share by
all entities that have common stock or potential common stock, such as options,
warrants and convertible securities, outstanding that trade in a public market.
Those entities that have only common stock outstanding are required to present
basic earnings per-share amounts. Basic per-share amounts are computed,
generally, by dividing net income or loss by the weighted-average number of
common shares outstanding. All other entities are required to present basic and
diluted per-share amounts. Diluted per-share amounts assume the conversion,
exercise or issuance of all potential common stock instruments unless the effect
is anti-dilutive, thereby reducing the loss or increasing the income per common
share.
The Company initially applied SFAS No. 128 for the year ended January 3, 1998
and, as required by the Statement, has retroactively applied it to all periods
presented. As described in Note 9, at January 3, 1998 and December 28, 1996, the
Company had stock options outstanding. However, because the Company has incurred
a loss in all periods presented, the inclusion of those potential common shares
in the calculation of diluted loss per-share would have an antidilutive effect.
Therefore, basic and diluted loss per-share amounts are the same in each period
presented.
ESTIMATES: The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NOTE 2. MARKET CLOSINGS AND CORPORATE LIQUIDITY
The Company withdrew from three under-performing markets in the fourth quarter
of 1996. The Company closed three recycling centers and nine retail stores in
Hartford, Connecticut; Washington D.C./Baltimore, Maryland; and Oakland,
California. In addition, the Company closed its three retail stores in Los
Angeles, California. In connection therewith, the Company incurred charges of
approximately $2.0 million which included the write-off of leasehold
improvements, deferred tax assets, goodwill and certain non-compete agreements,
receivables, and inventories, and the accrual of potential lease contingencies
and other costs.
The Company believes, based on anticipated revenues from the Southern California
Edison Company ("Edison") contract, the anticipated growth in retail sales and
the anticipated improvement in gross profit, that funds generated from
operations and the current line of credit will be sufficient to finance its
operations and capital expenditures through December 1998. The Company's total
capital requirements will depend, among other things, on the number of recycling
centers operating and the number and size of retail stores operating during the
fiscal year. If revenues are lower than anticipated, expenses are higher than
anticipated or the line of credit cannot be maintained, the Company may require
additional capital to finance operations. Sources of additional financing, if
needed in the future, may include further debt financing or the sale of equity
or other securities. There can be no assurance that such additional sources of
financing will be available or available at terms satisfactory to the Company or
permitted by the Company's current lender.
NOTE 3. BUSINESS COMBINATIONS
On January 2, 1996, the Company acquired Universal Appliance Company, Inc. and
Universal Appliance Recycling, Inc., Washington, D.C.-based companies, by
exchanging a total of 21,000 shares of its Common Stock for 100% ownership of
the respective companies. The acquisitions were accounted for under the Purchase
Method of accounting. Also, the selling shareholders received $110,000 under
non-compete agreements. In December 1996, the Company withdrew from the
Baltimore, Maryland/Washington, D.C. market and closed the center and three
retail locations. Accordingly, the goodwill and non-compete agreements were
written off in the fourth quarter of 1996. Pro forma income statement
information for 1995 has not been presented due to immateriality.
On August 23, 1995, the Company acquired Major Appliance Pickup Service of St.
Louis, Inc., a St. Louis, Missouri-based used appliance retailer and recycler,
by
12
<PAGE>
issuing 7,143 shares of its Common Stock. The acquisition has been accounted for
as a pooling of interests.
NOTE 4. LINE OF CREDIT
At January 3, 1998, the Company had a bank line of credit of $2.0 million. In
February 1998, the line was increased to $2.75 million. The amount of borrowings
available under the line of credit is based on a formula using receivables,
inventories, and property and equipment. 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
loan provides for a rate of interest equal to 5 percentage points over the prime
lending rate per annum, but never less than 10% per annum (the interest rate as
of January 3, 1998 was 13.5%), and minimum monthly interest payments of $10,000
regardless of the outstanding principal balance. Upon an event of default, the
interest rate may increase by 5 percentage points per annum. The line of credit
is secured by receivables, inventories, equipment, real estate and other assets
of the Company and a portion is guaranteed by the President of the Company. The
loan also requires that the Company meet certain financial covenants, provides
payment penalties for noncompliance, limits the amount of other debt the Company
can incur, limits the amount of spending on fixed assets and limits payments of
dividends.
NOTE 5. LONG-TERM OBLIGATIONS
Long-term obligations consisted of the following:
1997 1996
- ---------------------------------------------------------------
9.00% mortgage, due in
monthly installments of
$11,411, including interest,
balance due February 2004,
secured by land
and building $ 962,000 $ 1,010,000
8.75% mortgage, due
in monthly installments
of $6,981, including
interest, balance due January
2003, secured by land
and building 700,000 722,000
8.25% note payable, paid
December 1997 - 127,000
Other 72,000 79,000
- ---------------------------------------------------------------
$ 1,734,000 $ 1,938,000
Less current maturities 101,000 227,000
- ---------------------------------------------------------------
$ 1,633,000 $ 1,711,000
===============================================================
The annual maturities of long-term debt as of January 3, 1998 were as follows:
1998 $ 101,000
1999 102,000
2000 110,000
2001 102,000
2002 110,000
Thereafter 1,209,000
- ---------------------------------------------------------------
$ 1,734,000
===============================================================
NOTE 6. ACCRUED EXPENSES
Accrued expenses were as follows:
1997 1996
- ---------------------------------------------------------------
Compensation $ 167,000 $ 218,000
Lease contingencies
and closing costs 289,000 466,000
Other 365,000 476,000
- ---------------------------------------------------------------
$ 821,000 $ 1,160,000
===============================================================
NOTE 7. COMMITMENTS
OPERATING LEASES: The Company leases certain of its recycling center facilities
and retail stores under noncancelable operating leases. The leases require the
payment of taxes, maintenance, utilities and insurance. In the fourth quarter of
1996, the Company withdrew from three under-performing markets and closed its
retail locations in the Los Angeles, California, market. The Company is
currently negotiating the cancellation of leases in these markets. At January 3,
1998, the Company had accrued $269,000 for estimated settlements of these
leases.
Minimum rental commitments under noncancelable operating leases excluding the
aforementioned leases subject to settlement as of January 3, 1998 were as
follows:
1998 $ 373,000
1999 $ 157,000
2000 $ 108,000
2001 $ 4,000
Rent expense for the fiscal years ended January 3, 1998, December 28, 1996 and
December 30, 1995 was $433,000, $1,585,000 and $1,010,000, respectively.
NOTE 8. INCOME TAXES
The provision for (benefit of) income taxes consisted of the following:
1997 1996 1995
- --------------------------------------------------------------------------
Current:
Federal $ - $ (415,000) $ (4,000)
State (31,000) - -
Deferred - 650,000 (586,000)
- --------------------------------------------------------------------------
$ (31,000) $ 235,000 $ (590,000)
==========================================================================
13
<PAGE>
A reconciliation of the effective tax rates with the federal statutory tax rate
is shown below:
1997 1996 1995
- -------------------------------------------------------------------------
Income taxes at
statutory rate $ (236,000) $ (2,462,000) $ (566,000)
State taxes, net
of federal
tax effect (26,000) (208,000) (24,000)
Permanent differences 74,000 110,000 -
Change in valuation
allowance (289,000) 235,000 -
Effect of NOL with no
current tax benefit 446,000 2,560,000 -
- -------------------------------------------------------------------------
$ (31,000) $ 235,000 $ (590,000)
=========================================================================
The tax effects of principal temporary differences are as follows:
1997 1996
- -------------------------------------------------------------------------
Deferred tax assets:
Net operating loss carryforwards $ 2,319,000 $ 1,873,000
Loss on asset impairment 429,000 478,000
Federal and state tax credits 250,000 250,000
Accrued expenses 246,000 397,000
- -------------------------------------------------------------------------
Gross deferred tax assets $ 3,244,000 $ 2,998,000
Deferred tax liability:
Accelerated tax depreciation (292,000) (203,000)
Valuation allowance (2,952,000) (2,795,000)
- -------------------------------------------------------------------------
Net deferred tax assets $ - $ -
=========================================================================
At January 3, 1998, the Company recorded a valuation allowance of $2,952,000 on
deferred tax assets to reduce the total to an amount management believes will
ultimately be realized. Realization of deferred tax assets is dependent upon
sufficient future taxable income during the period that deductible temporary
differences and carryforwards are expected to be available to reduce taxable
income.
At January 3, 1998, the Company had net operating loss carryforwards consisting
of the following:
Expiration Amount
- -------------------------------------------------------------------------
2011 $ 4,515,000
2012 $ 1,115,000
NOTE 9. SHAREHOLDERS' EQUITY
STOCK OPTION PLANS: The Company has two Stock Option Plans (the "Plans") that
permit the granting of "incentive stock options" meeting the requirements of
Section 422 of the Internal Revenue Code of 1986, as amended, and nonqualified
options which do not meet the requirements of Section 422. The Plans have
150,000 and 100,000 shares, respectively, available for grant. The options that
have been granted under the Plans are exercisable for a period of five or seven
years from the date of grant and vest over a period of two or three years from
the date of grant.
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation."
Accordingly, no compensation cost has been recognized for the Plans. Had
compensation cost for the Plans been determined based on the fair value at the
grant date consistent with the provisions of SFAS No. 123, the Company's net
loss and basic and diluted loss per share would have been increased to the pro
forma amounts indicated below:
1997 1996
- -----------------------------------------------------------------------
Net loss - as reported $ (748,000) $ (7,269,000)
Net loss - pro forma $ (847,000) $ (7,348,000)
Basic and diluted loss per share
- as reported $ (0.66) $ (6.53)
Basic and diluted loss per share
- pro forma $ (0.75) $ (6.60)
=======================================================================
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions:
1997 1996
- -----------------------------------------------------------------------
Expected dividend yield - -
Expected stock price volatility 50.43% 51.02%
Risk-free interest rate 6.00% 6.00%
Expected life of options (years) 3 3
=======================================================================
Additional information relating to all outstanding options is as follows:
Weighted Average
Shares Exercise Price
- -----------------------------------------------------------------------
Outstanding at
December 31, 1994 71,000 $ 25.92
Exercised (6,000) $ 9.44
Cancelled (1,000) $ 28.20
- -----------------------------------------------------------------------
Outstanding at
December 30, 1995 64,000 $ 27.08
Granted 37,000 $ 12.72
Exercised (9,000) $ 9.60
Cancelled (12,000) $ 20.72
- -----------------------------------------------------------------------
Outstanding at
December 28, 1996 80,000 $ 23.36
Granted 44,000 $ 2.54
Cancelled (31,000) $ 31.31
- -----------------------------------------------------------------------
Outstanding at
January 3, 1998 93,000 $ 10.93
=======================================================================
The weighted average fair value per option of options granted during 1997 and
1996 was $0.96 and $4.92, respectively.
The following tables summarize information about stock options outstanding as of
January 3, 1998:
OPTIONS OUTSTANDING
Weighted
Average Weighted
Range of Number Remaining Average
Exercise Options Contractual Exercise
Prices Outstanding Life (Years) Price
- -----------------------------------------------------------------------
$35.50 to $45.52 6,000 1.6 $ 39.64
$17.50 27,000 3.7 $ 17.50
$10.52 to $12.76 18,000 5.5 $ 10.58
$2.38 to $3.00 42,000 6.7 $ 2.55
- -----------------------------------------------------------------------
93,000
=======================================================================
14
<PAGE>
OPTIONS EXERCISABLE
Weighted
Range of Number Average
Exercise Options Exercise
Prices Exercisable Price
- ----------------------------------------------------------------------
$35.50 to $45.52 6,000 $ 39.64
$17.50 25,000 $ 17.50
$10.52 to $12.76 9,000 $ 10.58
$2.38 to $3.00 - -
- ----------------------------------------------------------------------
40,000
======================================================================
PRIVATE PLACEMENT: In May 1996, $700,000 was raised in a private placement of
Common Stock to an institutional investor by selling 50,000 shares at $14.00 per
share.
REVERSE SPLIT: In February 1997, the Company had a 1-for-4 reverse stock split
and decreased the number of authorized shares to five million. The effect of the
reverse stock split has been retroactively reflected in these financial
statements and notes for all periods presented.
In April 1997, the shareholders approved an increase in the number of authorized
shares to 10 million.
NOTE 10. MAJOR CUSTOMERS
Net revenues include sales to major customers as follows:
1997 1996 1995
- --------------------------------------------------------------
REVENUE PERCENTAGE:
Customer A 37.8% 22.1% 23.5%
Customer B - 1.9% 14.0%
- --------------------------------------------------------------
Totals 37.8% 24.0% 37.5%
==============================================================
As of January 3, 1998, the receivable amount from Customer A on the Company's
balance sheet was $350,000.
NOTE 11. LOSS ON IMPAIRED ASSETS AND NON-RECURRING CHARGES
As of December 30, 1995, the Company recorded a charge of $1,316,000 consisting
of a loss on impaired assets and accruals associated with the Company's business
with utility customers. The loss on impaired assets was $1,194,000 with related
charges of $122,000.
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders
Appliance Recycling Centers of America, Inc.
Minneapolis, Minnesota
We have audited the accompanying consolidated balance sheets of Appliance
Recycling Centers of America, Inc. and Subsidiaries as of January 3, 1998 and
December 28, 1996, and the related consolidated statements of operations,
shareholders' equity, and cash flows for each of the years in the three year
period ended January 3, 1998. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Appliance Recycling
Centers of America, Inc. and Subsidiaries as of January 3, 1998 and December 28,
1996, and the results of their operations and their cash flows for each of the
years in the three year period ended January 3, 1998, in conformity with
generally accepted accounting principles.
/s/ McGladrey & Pullen, LLP
Minneapolis, Minnesota
February 17, 1998
15
<PAGE>
FIVE-YEAR FINANCIAL SUMMARY
<TABLE>
<CAPTION>
Fiscal Years Ended 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
- ---------------------------------------------------------------------------------------------------------------
Total revenues $ 11,979,000 $ 14,030,000 $ 16,241,000 $ 20,327,000 $ 14,943,000
- ---------------------------------------------------------------------------------------------------------------
Gross profit $ 4,990,000 $ 2,744,000 $ 5,630,000 $ 8,360,000 $ 4,996,000
- ---------------------------------------------------------------------------------------------------------------
Operating income (loss) $ (489,000) $ (6,899,000) $ (1,538,000) $ 1,753,000 $ (645,000)
- ---------------------------------------------------------------------------------------------------------------
Net income (loss) $ (748,000) $ (7,269,000) $ (943,000) $ 877,000 $ (455,000)
- ---------------------------------------------------------------------------------------------------------------
Basic and diluted earnings
(loss) per share $ (0.66) $ (6.53) $ (0.90) $ 0.82 $ (0.47)
- ---------------------------------------------------------------------------------------------------------------
Weighted average number of
common shares outstanding 1,137,000 1,114,000 1,052,000 1,071,000 975,000
BALANCE SHEET
- ---------------------------------------------------------------------------------------------------------------
Working capital (deficit) $ (1,959,000) $ (1,671,000) $ 3,503,000 $ 4,700,000 $ 2,046,000
- ---------------------------------------------------------------------------------------------------------------
Total assets $ 8,569,000 $ 9,992,000 $ 15,890,000 $ 16,912,000 $ 14,481,000
- ---------------------------------------------------------------------------------------------------------------
Long-term liabilities $ 1,633,000 $ 1,711,000 $ 2,084,000 $ 2,741,000 $ 2,474,000
- ---------------------------------------------------------------------------------------------------------------
Shareholders' equity $ 3,365,000 $ 4,113,000 $ 10,188,000 $ 10,932,000 $ 9,840,000
</TABLE>
COMMON STOCK DATA*
The Company's Common Stock trades on the Nasdaq SmallCap Market under the symbol
ARCI.
The Company has never paid or declared any cash dividends and the line of credit
agreement entered into in 1996 prohibits the payment of cash dividends. The
Company does not intend to pay dividends on its Common Stock in the foreseeable
future.
The following table sets forth the range of low and high prices for the
Company's Common Stock for each of the four quarters of 1997 and 1996:
1997 1996
Low High Low High
- -----------------------------------------------------------------------
First Quarter $ 2 $ 4 $ 12 $ 19 1/2
Second Quarter 2 3/8 3 3/8 14 1/2 20
Third Quarter 2 1/2 3 1/4 8 1/2 17 1/2
Fourth Quarter 2 1/8 4 1/4 2 1/3 11 1/2
*In February 1997, the Company had a 1-for-4 reverse stock split. These numbers
reflect that split.
The Company had approximately 1,815 shareholders of record as of March 20, 1998.
16
EXHIBIT 21.1
APPLIANCE RECYCLING CENTERS OF AMERICA, INC.
SUBSIDIARIES AS OF JANUARY 3, 1998
JURISDICTION OF PERCENT VOTING
NAME OF SUBSIDIARY INCORPORATION SECURITIES OWNED
- ------------------ ------------- ----------------
Appliance Recycling Centers of
America-California, Inc. California 100%
ARCA of St. Louis, Inc. Missouri 100%
ARCA-Maryland, Inc. Maryland 100%
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (commission file No. 33-51584), on Form S-8 (commission
file No. 33-68890), on Form S-8 (commission file No. 333-28571), and on Form S-3
(commission file No. 333-15463) of our report dated February 17, 1998, with
respect to the consolidated financial statements of Appliance Recycling Centers
of America, Inc., incorporated by reference from the Annual Report to the
Shareholders in the Company's Annual Report on Form 10-K for the year ended
January 3, 1998.
McGLADREY & PULLEN, LLP
Minneapolis, Minnesota
April 2, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-03-1998
<PERIOD-START> DEC-29-1996
<PERIOD-END> JAN-03-1998
<CASH> 13,000
<SECURITIES> 0
<RECEIVABLES> 765,000
<ALLOWANCES> 0
<INVENTORY> 694,000
<CURRENT-ASSETS> 140,000
<PP&E> 11,519,000
<DEPRECIATION> 4,807,000
<TOTAL-ASSETS> 8,569,000
<CURRENT-LIABILITIES> 3,571,000
<BONDS> 0
0
0
<COMMON> 10,350,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 8,569,000
<SALES> 11,979,000
<TOTAL-REVENUES> 11,979,000
<CGS> 6,989,000
<TOTAL-COSTS> 6,989,000
<OTHER-EXPENSES> (134,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 347,000
<INCOME-PRETAX> (694,000)
<INCOME-TAX> (31,000)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (748,000)
<EPS-PRIMARY> (0.66)
<EPS-DILUTED> (0.66)
</TABLE>
