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 2, 1999
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. [ ]
As of March 12, 1999, the aggregate market value of the voting stock held by
nonaffiliates of the registrant, computed by reference to the average of the
high and low prices on such date as reported by the OTC Bulletin Board, was
$1,416,715.
As of March 12, 1999, there were outstanding 2,266,744 shares of the
registrant's Common Stock, without par value.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement dated March 23, 1999,
are incorporated by reference into Part III hereof.
<PAGE>
TABLE OF CONTENTS
PART I
Item 1. Business
General
Industry Background
Company Background
Customers and Source of Supply
Company Operations
Principal Product and Services
Sales and Marketing
Seasonality
Competition
Government Regulation
Employees
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for the Company's Common Equity and Related Shareholder
Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 7A. Quantitative and Qualitative Disclosure about Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Company
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
SIGNATURES
INDEX TO EXHIBITS
<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 the large-scale 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 the sale of
reconditioned and distressed appliances through a chain of Company-owned retail
stores called Encore(R) Recycled Appliances ("Encore") and Appliance$mart(R),
fees charged for the disposal of appliances, and the sale of materials generated
from processed appliances (byproduct revenues).
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.
A developing market for the Company is handling distressed
appliances for new appliance manufacturers ("manufacturers"). Manufacturers
generate distressed product in a variety of ways: discontinued models, customer
returns, freight damaged units and warranty exchanges. Historically,
manufacturers disposed of the majority of their distressed product through their
small dealer network. The manufacturer normally discounts the product and
provides warranties and financing. Large retailers do not want to handle
distressed appliances because the majority of the merchandise is out of carton,
requires special handling and pricing, and may require some repair. As small
dealers are having an increasingly more difficult time competing with large
chains (the top 10 chains have 80% of the appliance sales market), manufacturers
are seeing their traditional distribution channel for distressed appliances
shrink. Manufacturers also anticipate that small appliance retailers will be
negatively impacted as manufacturers begin selling directly to the consumer over
the Internet.
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.
<PAGE>
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 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.
Currently, the Company expects to have only one major contract with an electric
utility customer.
During fiscal year 1998, that customer, Southern California Edison
Company ("Edison"), accounted for approximately 29% or $3.5 million of the
Company's total revenues. The Company is anticipating that it will have a
program with Edison for 1999. Edison recently received budget approval from the
California Public Utilities Commission ("CPUC") for a 1999 program. The Company
is currently in final contract negotiations with Edison. Edison has continued
its appliance recycling program through the first quarter of 1999 while waiting
for CPUC approval and final contract negotiations with the Company.
In February 1999, the Company entered into an 18-month refrigerator
recycling contract with the Los Angeles Department of Water and Power ("DWP").
Under this program, the Company will recycle, from low income housing units in
Los Angeles, refrigerators that have been replaced with new energy-efficient
models. The DWP program contains no minimum guarantees and is expected to start
at relatively low levels in this year's second quarter.
In response to the decrease in demand for services from electric
utilities, the Company has increased its marketing of services to appliance
manufacturers and retailers, waste management companies and property management
companies. The Company also has increased its focus on the sale of reconditioned
appliances. In 1995, under the name Encore(R) Recycled Appliances, the Company
began operating a chain of Company-owned retail stores. In 1998, the Company
began using the name Appliance$mart(R) for its retail stores. The retail 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
significant loss for the year.
In 1997, the Company entered into pilot program agreements with
Whirlpool Corporation, the nation's largest manufacturer of major household
appliances, to develop a program for handling distressed appliances for
Whirlpool. In 1998, the Company entered into a contract with Whirlpool to
acquire its distressed appliances (including "scratch and dent" units with only
cosmetic imperfections) from distribution centers serving the Midwest and
certain western states. Under the contract, the Company purchases distressed
appliances from Whirlpool, reconditions suitable units and sells them through
ARCA's network of Encore and Appliance$mart retail stores. With increased supply
of product, the Company began opening larger stores and closing its smaller
ones. Appliances that cannot be reconditioned are recycled in accordance with
all applicable environmental regulations. The Company recently scaled back its
agreement with Whirlpool to a level consistent with its current financial
resources. The Company will now buy inventory mainly from Whirlpool's Ohio
distribution
<PAGE>
center. The Company believes that this contract will provide an adequate
quantity of high quality appliances that can be sold through its retail stores.
In late 1998, the Company decided to close its St. Louis, Missouri
operations and close one store in the Minneapolis/St. Paul market. The Company
currently has three recycling centers located in Columbus, Ohio, Minneapolis,
Minnesota and Los Angeles, California. Also, the Company currently has eight
retail stores: four in Minneapolis/St. Paul, two in California and two in
Columbus, Ohio.
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 and
distressed 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 has focused its
marketing efforts to new appliance manufacturers, including Whirlpool
Corporation, 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.
UTILITY COMPANIES. The Company contracts with utility companies to
provide comprehensive appliance recycling services tailored to the needs of the
particular utility. The contracts historically have had terms of one to four
years, with provisions for renewal at the option of the utility company. Under
some contracts, the utility retains the Company to manage all aspects of its
appliance recycling program, while under other contracts, the Company provides
only specified services. Pricing for the Company's services is on a
per-appliance basis and depends upon several factors, including the total number
of appliances processed, the length of the contract term and the specific
services selected by the utility. Contracts with electric utility customers
require that the Company does not recondition for resale appliances received
from utility company energy conservation programs. Currently, the Company
expects to have 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 the Company to grow its retail sales.
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 governments and electric utilities. Some
appliances are reconditioned and sold through the Company's retail network of
Encore and Appliance$mart stores. The remaining appliances are disposed of in an
environmentally responsible manner at the Company's recycling centers.
Environmentally harmful substances---including CFCs,
<PAGE>
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 used 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
retail stores. Each appliance has a 90-day or one year 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. 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. The Company's processing technicians are trained to locate and
remove such components from all makes and models of appliances.
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.
Management believes that the uncertainties in the electric utility
industry regarding deregulation will persist at least through 1999. 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 does not expect to expand its retail business into new
geographic markets at this time. The Company plans to close three to four of its
smaller stores while opening 1 to 2 larger stores in its existing markets. The
Company believes that the growth of its business in the near future will likely
occur primarily through the expansion of revenues from the Company's current
retail stores and the generation of revenues from the expected 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.
1998 1997 1996
---- ---- ----
Retail revenues 57.6% 34.6% 36.7%
Recycling revenues 35.6% 52.4% 48.4%
Byproduct revenues 6.8% 13.0% 14.9%
100.0% 100.0% 100.0%
<PAGE>
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 a large
warehouse image in convenient, high-traffic locations. Store interiors are
bright and clean. In every market, the Company actively promotes its stores
through various forms of print advertising, including daily classified ads in
major newspapers, telephone yellow pages ads and direct mail. In addition, the
Company uses radio and television advertisements in some markets, 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.
COMPETITION
Competition for the Company's retail stores comes from new appliance
manufacturers and retailers and other reconditioned and used appliance
retailers. Each retail location will compete not only with local and national
chains of new appliance retailers, many of whom have been in business longer
than the Company and 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.
Many factors, including existing and proposed governmental
regulation, may affect competition in the waste management and environmental
services industry. The Company generally competes with two or three other
companies which are based in the geographic area to be served under the contract
and which generally offer only some of the services provided by the Company.
The Company expects its primary competition for contracts with
existing or new customers to come from entrepreneurs entering the appliance
recycling business, energy management consultants, current recycling companies,
major waste hauling companies, 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.
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.
<PAGE>
The Company's appliance recycling centers are subject to various
federal, state and local laws, regulations and licensing requirements relating
to the collection, processing and recycling of household appliances.
Requirements for registrations, permits and licenses vary among the Company's
market areas. The Company's centers are registered with the EPA as hazardous
waste generators and are licensed, where required, by appropriate state and
local authorities. The Company has agreements with approved and licensed
hazardous waste companies for transportation and disposal of PCBs from its
centers.
The 1990 Amendments to the Clean Air Act provide for the phaseout of
the production of CFCs over a period of years. Effective July 1, 1992, the Act
prohibited the venting of CFCs in the course of maintaining, servicing,
repairing or disposing of an appliance. The Act also requires the recovery of
CFC refrigerants from appliances prior to their disposal or delivery for
recycling. In 1995, the venting of CFC substitute refrigerants was also
prohibited.
In 1992, Congress adopted the Energy Policy Act of 1992 to encourage
energy efficiency. Requirements under this act establish, among other things,
mandatory energy performance standards that affect the manufacture and sale of
major household appliances. Another component of this act allows for
deregulation of the nation's energy providers, including the electric utility
industry. The ultimate impact of deregulation on the electric utility industry
is yet unknown; therefore, there can be no assurance that the Company will be
able to continue certain of its current operations in a deregulated environment.
Company management believes that further government regulation of
the appliance recycling industry could have a positive effect on the Company's
business; however, there can be no assurance what course future regulation 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, 1999, the Company had 118 full-time employees, of whom
approximately 60 percent were involved in the collection, transportation and
processing of appliances at the Company's centers and approximately 40 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 and equipment owned by the Company
currently secure outstanding loans of the Company.
The Company generally leases the other facilities it operates. The
Company usually attempts to negotiate lease terms that correspond to the term of
the principal contract or contracts in connection with which the center is to be
operated. The Company's recycling centers typically range in size from 12,000
<PAGE>
to 40,000 square feet. The Company's retail stores have been typically 2,500 to
5,000 square feet. With the move toward larger retail stores, future stores are
anticipated to be 30,000 to 40,000 square feet.
The Company believes that the facilities and equipment at each of
its centers are adequate to meet its anticipated needs for the near term and
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.
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
MARKET FOR COMMON STOCK
The Company's Common Stock began trading on the OTC Bulletin Board September 8,
1998. Prior to that time, the Common Stock traded as follows: on the Nasdaq
SmallCap Market from February 26, 1997 to September 7, 1998; on the Nasdaq
National Market from January 8, 1993 to February 25, 1997; on the Nasdaq
SmallCap Market from January 7, 1991 to January 7, 1993; and on the local
over-the-counter market prior thereto. The following table sets forth, for the
periods indicated, the high and low closing bid quotations for the Common Stock,
as reported by the Nasdaq SmallCap Market and the OTC Bulletin Board, as
applicable. The table gives effect to the one-for-four reverse stock split
effective February 21, 1997.
<PAGE>
HIGH LOW
---- ---
1997
First Quarter....................... $ 4 $ 2
Second Quarter...................... 3 3/8 2 3/8
Third Quarter....................... 3 1/4 2 1/2
Fourth Quarter...................... 4 1/4 2 1/8
1998
First Quarter....................... $ 2 3/4 $ 1 1/2
Second Quarter...................... 4 2
Third Quarter....................... 3 3/4
Fourth Quarter...................... 1 1/8 1/2
On March 12, 1999, the last reported sale price of the Common Stock
was $0.63 per share. As of March 12, 1999, there were approximately 1,775
beneficial holders of the Company's Common Stock.
The Common Stock trades under the symbol "ARCI."
During 1998, the Company issued 100,000 unregistered shares and
893,750 warrants to purchase shares.
During February 1999, the Company issued 1,030,000 unregistered
shares, and 83,000 warrants to purchase shares.
In May 1998, the Company sold in a private placement 100,000 shares
of Common Stock at a price of $2.00 per share. The sale, which represented
approximately 8% of the Common Stock outstanding after such sale, was made to an
institutional investor. The proceeds were used for additional working capital.
In July 1998, the Company issued 12% subordinated promissory notes
in the principal amount of $275,000, plus an aggregate of 68,750 warrants to
purchase the Company's Common Stock at $2.25 per share, subject to adjustment.
The notes were repaid in September 1998.
In September 1998, the Company entered into a loan agreement with a
lender resulting in gross proceeds of $3.5 million. The loan also provides for
non-voting attendance at board meetings. The Company issued to the lender, in
connection with the loan, a warrant to purchase 700,000 shares of Common Stock
at $2.50 per share, which price was adjustable under certain circumstances,
including the issuance of stock at or below $2.00 per share As a result of the
February 1999 stock issuance described below, the current exercise price of this
warrant is $0.60 per share. If exercised in full, this warrant would represent
approximately 24% of the Common Stock after such exercise. The Company also
issued to an investment banker associated with this transaction a warrant to
purchase 125,000 shares of Common Stock at $2.50 per share, subject to
adjustment. The portion of the gross loan proceeds ascribed to the
aforementioned warrants in conjunction with debt was $307,000.
<PAGE>
In February 1999, the Company sold in a private placement 1,030,000
shares of Common Stock at a price of $0.50 per share. The sale represented
approximately 45% of Common Stock outstanding after such sale. The Company paid
$31,500 of the proceeds and issued warrants to purchase 83,000 shares of Common
Stock at $0.50 per share, subject to adjustment, to an investment banker as a
placement fee. The remaining proceeds were used to repay certain indebtedness,
to purchase inventory and for other general corporate purposes.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial information set forth below should be read in
conjunction with "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Item 8. Financial Statements and
Supplementary Data."
<TABLE>
<CAPTION>
Fiscal Years Ended 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------
(In thousands, except
per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
Total revenues $ 13,612 $ 11,979 $ 14,030 $ 16,241 $ 20,327
- -------------------------------------------------------------------------------------------------
Gross profit $ 3,981 $ 4,990 $ 2,744 $ 5,630 $ 8,360
- -------------------------------------------------------------------------------------------------
Operating income (loss) $ (2,744) $ (489) $ (6,899) $ (1,538) $ 1,753
- -------------------------------------------------------------------------------------------------
Net income (loss) $ (3,056) $ (748) $ (7,269) $ (943) $ 877
- -------------------------------------------------------------------------------------------------
Basic and diluted income
(loss) per common share $ (2.55) $ (0.66) $ (6.53) $ (0.90) $ 0.82
- -------------------------------------------------------------------------------------------------
Weighted average number
of common shares outstanding 1,200 1,137 1,114 1,052 1,071
- -------------------------------------------------------------------------------------------------
BALANCE SHEET
Working capital (deficit) $ (471) $ (1,959) $ (1,671) $ 3,503 $ 4,700
- -------------------------------------------------------------------------------------------------
Total assets $ 8,843 $ 8,569 $ 9,992 $ 15,890 $ 16,912
- -------------------------------------------------------------------------------------------------
Long-term liabilities $ 4,965 $ 1,633 $ 1,711 $ 2,084 $ 2,741
- -------------------------------------------------------------------------------------------------
Shareholders' equity $ 816 $ 3,365 $ 4,113 $ 10,188 $ 10,932
- -------------------------------------------------------------------------------------------------
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS FOR THE FISCAL YEARS 1998, 1997 AND 1996
OVERVIEW
The Company's 1998 fiscal year (1998) ended January 2, 1999, its
1997 fiscal year (1997) ended January 3, 1998 and its 1996 fiscal year (1996)
ended December 26, 1996.
The Company generates revenues from three sources: retail revenues,
recycling revenues and byproduct revenues. Retail revenues are sales of
appliances, extended warranty sales and delivery fees. Recycling revenues are
fees charged for the disposal of appliances. Byproduct revenues are sales of
materials generated from processed appliances. 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.
<PAGE>
In 1998, the Company focused on increasing its sales of Whirlpool
products in its retail stores. The increase in total revenues was due to an
increase in retail sales offset by decreases in both recycling revenues and
byproduct revenues. In 1998, same-store sales for its reconditioned and
distressed appliance business increased by 108%. Retail revenues accounted for
57.6% of total revenues in 1998.
REVENUES
The Company's total revenues for 1998 were $13,612,000 compared to
$11,979,000 in 1997.
Retail revenues increased to $7,835,000 in 1998 from $4,149,000 in
1997. The increase was primarily due to increased sales of Whirlpool product.
Same-store retail sales for 1998 increased 108% (a sales comparison of 10 stores
open for full years in both 1998 and 1997). The Company operated 11 stores
throughout 1998. In December 1998, the Company decided to withdraw from a market
and close one center and two retail stores in 1999. Also, the Company decided to
close a retail store in another market as of December 31, 1998.
In 1998, the Company entered into a contract with Whirlpool
Corporation to acquire its distressed appliances (including "scratch and dent"
units with only cosmetic imperfections) from distribution centers serving the
Midwest and certain western states.
Recycling revenues decreased to $4,842,000 in 1998 from $6,274,000
in 1997. The decrease was primarily due to lower volume of appliances related to
the contract with Southern California Edison Company ("Edison"). Edison
accounted for approximately 29% of the Company's total revenues for 1998 and 38%
for 1997. The Company is anticipating that it will have a program with Edison
for 1999. Edison recently received budget approval from the California Public
Utilities Commission for a 1999 program. The Company is currently in final
contract negotiations with Edison and believes its 1999 recycling revenues level
is dependent on such an agreement and the resulting volume of appliances from
such arrangement.
Byproduct revenues decreased to $935,000 in 1998 from $1,556,000 in
1997. The decrease was primarily due to lower sales of reclaimed
chlorofluorocarbons due to fewer refrigerators being recycled and lower scrap
revenue due to a decrease in scrap prices.
The Company's total revenues for 1997 were $11,979,000 compared to
$14,030,000 in 1996.
Retail revenues decreased to $4,149,000 in 1997 from $5,148,000 in
1996. The decrease was primarily due to a reduction in the number of the
Company's retail stores to 13 in 1997 from 26 in the fourth quarter of 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
six stores open for the full years 1997 and 1996) increased 19% in 1997.
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 Edison contract.
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.
<PAGE>
In 1997, the Company entered into pilot program agreements with
Whirlpool Corporation to purchase Whirlpool's distressed, discontinued and
returned products.
GROSS PROFIT
The Company's overall gross profit decreased to 29.2% in 1998 from
41.7% in 1997. The decrease was primarily due to retail revenues, which have a
lower gross profit than recycling revenues, being a higher percentage of total
revenues and a decrease in recycling revenues related to the Edison contract.
Gross profit as a percentage of total revenues for future periods can be
affected favorably or unfavorably by numerous factors, including the volume of
appliances recycled from the expected Edison contract, the volume of Whirlpool
products sold during the period and the price and volume of byproduct revenues.
The Company expects gross profit percentages to continue to decline as retail
revenues become a higher percentage of total revenues.
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
under-performing recycling centers and retail stores in the fourth quarter of
1996 and increased operating efficiencies in the remaining centers.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were 45.2% of sales in
1998 compared to 45.7% and 68.7% in 1997 and 1996, respectively. Selling,
general and administrative expenses increased to $6,152,000 in 1998 from
$5,479,000 in 1997, a 12.3% increase. Selling expenses increased to $2,028,000
in 1998 from $1,498,000 in 1997. The increase in selling expenses was primarily
due to an increase in sales commissions and advertising and costs associated
with opening an additional retail store in 1998. General and administrative
expenses increased to $4,124,000 in 1998 from $3,981,000 in 1997. The increase
in general and administrative expenses was primarily due to increased expenses
related to temporary personnel costs.
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 in 1997 from $6,368,000 in
1996. The decrease was primarily due to operating fewer recycling centers in
1997 compared to 1996 and incurring lower costs associated with the closed
markets.
In June 1998, the Company took a one-time charge of $518,000 related
to a loss on impaired equipment associated with the Company's decision to
curtail the appliance shredding operation of its recycling business located
primarily at the Company's Minneapolis center. Also, in December 1998, the
Company took a one-time charge of $55,000 related to a loss on impaired assets
associated with the Company's decision to withdraw from a market and close one
center and two retail stores in 1999.
INTEREST EXPENSE
Interest expense increased to $601,000 in 1998 from $347,000 in
1997. The increase was primarily due to a higher average borrowed amount
outstanding in 1998 compared to 1997.
Interest expense increased slightly in 1997 compared to 1996 due to
a higher average borrowed amount outstanding in 1997 than 1996.
<PAGE>
INCOME TAXES AND NET OPERATING LOSSES
As of its 1998 and 1997 year-ends, the Company recorded a valuation
allowance of $4,190,000 and $2,952,000, respectively, against its net deferred
tax assets due to the uncertainty of their realization. The realization of
deferred tax assets is dependent upon sufficient future taxable income during
the periods when deductible temporary differences and carryforwards are expected
to be available to reduce taxable income.
The Company has net operating losses of approximately $8,114,000 at
January 2, 1999, which are available to reduce taxable income and in turn income
taxes payable in future years. These carryforwards may be subject to certain
limitations under the provisions of the Internal Revenue Code, Section 382,
which relate to a 50 percent change in control over a three-year period. In
addition, any future changes of control may result in the expiration of a
portion of the carryforwards before they can be used and are also dependent upon
the Company attaining profitable operations in the future. 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 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 2, 1999, the Company had a working capital deficit of
$471,000 compared to a working capital deficit of $1,959,000 at January 3, 1998.
Cash and cash equivalents increased to $14,000 at January 2, 1999 from $13,000
at January 3, 1998. Net cash used in operating activities was $3,078,000 in 1998
compared to net cash provided by operating activities of $308,000 in 1997. The
increase in cash used in operating activities was primarily due to an increase
in the Company's net loss net of a one-time non-cash expense for impaired
assets, plus an increase in inventories.
Net cash used in investing activities was $18,000 in 1998 compared
to $467,000 in 1997. The decrease in net cash used in investing activities in
1998 from 1997 was due to higher proceeds from selling excess equipment in 1998
and cash used for the purchase of the minority interest in the California
subsidiary in 1997.
Net cash provided by financing activities was $3,097,000 compared to
net cash used in financing activities of $108,000 in 1997. The increase in cash
provided by financing activities was primarily due to net proceeds from
long-term obligations received in 1998 offset by a decrease in net borrowings
under the line of credit and increased payments on long-term obligations. In
September 1998, the Company entered into a loan agreement with a lender
resulting in gross proceeds of $3.5 million.
The Company's capital expenditures were approximately $289,000 in
1998 and $299,000 in 1997. The 1998 and 1997 capital expenditures were primarily
related to building improvements. The Company did not have any material purchase
commitments for assets as of January 2, 1999.
As of January 2, 1999, the Company had a $2.0 million line of credit
with a lender. The interest rate as of January 2, 1999 was 12.75%. The amount of
borrowings available under the line of
<PAGE>
credit is based on a formula using receivables and inventories. The line of
credit has a stated maturity date of August 30, 1999, if not renewed, and
provides that the lender may demand payment in full of the entire outstanding
balance of the loan at any time. The line of credit is secured by substantially
all the Company's assets, is guaranteed by the President of the Company and
requires minimum monthly interest payments of $5,625 regardless of the
outstanding principal balance. The Lender is also secured by an inventory
repurchase agreement with Whirlpool Corporation. 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
2, 1999, the Company's unused borrowing capacity was $65,000 and at March 1,
1999 was $335,000.
In May 1998, the Company sold 100,000 shares of its Common Stock in
a private placement at a price of $2.00 per share. The sale was made to an
institutional investor. The proceeds were used for additional working capital.
In June 1998, the Company entered into a ten-year, 9.88% mortgage
loan with a bank for $250,000. The proceeds from the mortgage loan were used to
remodel one of its retail stores.
In July 1998, the Company issued 12% subordinated promissory notes
plus 68,750 warrants to purchase the Company's Common Stock at $2.25 per share
for $275,000. The loan proceeds were used to purchase inventory and provide
additional working capital. The notes were repaid in September 1998 with part of
the proceeds of the September 1998 loan (as defined below).
In September 1998, the Company entered into a loan agreement with a
lender resulting in gross proceeds of $3.5 million ("September 1998 Loan"). The
maturity date for the loan is September 30, 2005 and the annual interest rate is
13%. The loan is secured by all the Company's personal property and all of its
real estate, and provides for non-voting attendance at board meetings. The
Company issued to the lender, in connection with the loan, a warrant to purchase
700,000 shares of Common Stock at $2.50 per share, which price was adjustable
under certain circumstances, including the issuance of stock at or below $2.00
per share. As a result of the February 1999 stock issuance described below, the
current price of this warrant is $0.60 per share. The Company also issued to an
investment banker, in connection with the September 1998 Loan, a warrant to
purchase 125,000 shares of Common Stock at $2.50 per share and paid a placement
fee of $180,000. The Company used the proceeds to repay certain indebtedness
(including approximately $1,500,000 of outstanding indebtedness), to finance
inventory and for other general corporate purposes. The portion of the gross
loan proceeds ascribed to the aforementioned warrants in conjunction with debt
was $307,000.
In February 1999, the Company sold in a private placement 1,030,000
shares of Common Stock at a price of $0.50 per share. The Company paid $31,500
of the proceeds and issued warrants to purchase 83,000 shares of Common Stock at
$0.50 per share, subject to adjustment, to an investment banker as a placement
fee. The remaining proceeds were used to repay certain indebtedness, to purchase
inventory and for other general corporate purposes.
The Company believes, based on anticipated revenues from the
expected Edison contract, the anticipated sales per retail store and the
anticipated gross profit, that its cash balance, anticipated funds generated
from operations, its current line of credit if renewed in August 1999, and the
proceeds from the sale of its Common Stock in February 1999 will be sufficient
to finance its operations and capital expenditures through December 1999. 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 three centers and eight
<PAGE>
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 (common or preferred stock) or other securities. There can be no
assurance that such additional sources of financing will be available or
available on terms satisfactory to the Company or permitted by the Company's
current lenders.
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 will not have a
material adverse impact on the Company's operations. 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 has determined it has no exposure to contingencies
related to the Year 2000 Issue for products it has sold.
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 September 30, 1999. 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 expected to be approximately
$250,000 in 1999. To date, the Company has incurred and expensed approximately
$10,000 related to the assessment of, and preliminary efforts in connection
with, its Year 2000 Project and development of a remediation plan. The Company's
cost and estimates to complete the Year 2000 Project include the estimated costs
and time associated with accessing the impact of a third party's Year 2000
Issue, and are based on presently available information.
The Company has initiated communications with all of its significant
suppliers and large customers to determine the extent to which the Company is
vulnerable to those third parties' failure to remediate their own Year 2000
Issue. However, there can be no guarantee that the systems of other companies on
which the Company's systems rely will be timely converted, or that a failure to
convert by another company, or a conversion that is incompatible with the
Company's systems, would not have material adverse effect on the Company.
At this time, the Company believes that its most reasonable likely
worst case scenario is that the Company could experience delays in receipt of
inventory and/or key customers could experience a delay in accounts receivable
payments to the Company. In the event that either of these scenarios occur,
management believes that it would not have a long-term material adverse effect
on the Company's financial condition and results of operations.
The Company does intend to prepare contingency plans so that the
Company's critical business processes can be expected to continue to function on
January 1, 2000 and beyond. The Company's contingency plans are expected to
address modification of the Company's systems and components as well as overall
business operating risks. These plans are intended to mitigate both internal
risks as well as potential risks in the supply chain of the Company's suppliers
and customers, and will likely include identifying and securing alternative
supplies of inventory and sources of financing. The Company intends to begin
working on a contingency plan in early 1999 and to have it substantially
finalized by September 1999.
<PAGE>
The costs of the project and the date by which the Company plans to
complete the Year 2000 modifications and contingency plans 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 this annual report regarding the Company's
future operations, performance and results, and anticipated liquidity discussed
herein are forward-looking and therefore are subject to certain risks and
uncertainties, including those discussed herein. 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 stores reach profitability, costs and expenses being
realized at higher than expected levels, the continued ability to purchase
product from Whirlpool at acceptable prices, the Company's ability to secure an
adequate supply of used appliances for resale, the continued availability of the
Company's current line of credit, the renewal of the contract with Edison for
1999 and the ability and timing of Edison to deliver units under its expected
contract with the Company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Description
-----------
Independent Auditor's Report
Consolidated Balance Sheets as of January 2, 1999
and January 3, 1998
Consolidated Statements of Operations for the three years
ended January 2, 1999
Consolidated Statements of Shareholders' Equity for the three years
ended January 2, 1999
Consolidated Statements of Cash Flows for the three years
ended January 2, 1999
Notes to Consolidated Financial Statements
<PAGE>
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 2, 1999 and
January 3, 1998, and the related consolidated statements of operations,
shareholders' equity, and cash flows for each of the years in the three year
period ended January 2, 1999. 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 2, 1999 and January 3,
1998, and the results of their operations and their cash flows for each of the
years in the three year period ended January 2, 1999, in conformity with
generally accepted accounting principles.
McGLADREY & PULLEN, LLP
Minneapolis, Minnesota
February 19, 1999
<PAGE>
APPLIANCE RECYCLING CENTERS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 2, January 3,
1999 1998
- --------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 14,000 $ 13,000
Accounts receivable, net of allowance of
$18,000 and $35,000, respectively
(Notes 4 and 10) 498,000 765,000
Inventories, net of reserves of $40,000
and $20,000, respectively (Note 4) 1,979,000 694,000
Other current assets 100,000 140,000
------------ ------------
Total current assets $ 2,591,000 $ 1,612,000
------------ ------------
PROPERTY AND EQUIPMENT, AT COST (Notes 4, 5 and 11)
Land $ 2,103,000 $ 2,103,000
Buildings and improvements 3,957,000 3,955,000
Equipment 3,597,000 5,461,000
------------ ------------
$ 9,657,000 $ 11,519,000
Less accumulated depreciation 3,876,000 4,807,000
------------ ------------
Net property and equipment $ 5,781,000 $ 6,712,000
------------ ------------
OTHER ASSETS $ 319,000 $ 55,000
GOODWILL, NET OF AMORTIZATION OF $38,000
AS OF JANUARY 2, 1999 152,000 190,000
------------ ------------
Total assets $ 8,843,000 $ 8,569,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Line of credit (Note 4) $ 1,081,000 $ 1,513,000
Current maturities of long-term obligations (Note 5) 79,000 101,000
Accounts payable 1,202,000 1,136,000
Accrued expenses (Note 6) 700,000 821,000
------------ ------------
Total current liabilities $ 3,062,000 $ 3,571,000
LONG-TERM OBLIGATIONS, LESS CURRENT MATURITIES (Note 5) 4,965,000 1,633,000
------------ ------------
Total liabilities $ 8,027,000 $ 5,204,000
------------ ------------
COMMITMENTS (Note 7)
SHAREHOLDERS' EQUITY (Notes 3, 4, and 9)
Common Stock, no par value; authorized 10,000,000
shares; issued and outstanding 1,237,000 shares
and 1,137,000 shares, respectively $ 10,857,000 $ 10,350,000
Accumulated deficit (10,041,000) (6,985,000)
------------ ------------
Total shareholders' equity $ 816,000 $ 3,365,000
------------ ------------
Total liabilities and shareholders' equity $ 8,843,000 $ 8,569,000
============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
APPLIANCE RECYCLING CENTERS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the fiscal year ended
- ----------------------------------------------------------------------------------------------------------------
JANUARY 2, January 3, December 28,
1999 1998 1996
-----------------------------------------------------
<S> <C> <C> <C>
REVENUES (Note 10)
Retail revenues $ 7,835,000 $ 4,149,000 $ 5,148,000
Recycling revenues 4,842,000 6,274,000 6,785,000
Byproduct revenues 935,000 1,556,000 2,097,000
------------- ------------- -------------
Total revenues $ 13,612,000 $ 11,979,000 $ 14,030,000
COST OF REVENUES 9,631,000 6,989,000 11,286,000
------------- ------------- -------------
Gross profit $ 3,981,000 $ 4,990,000 $ 2,744,000
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (Note 2) 6,152,000 5,479,000 9,643,000
LOSS ON IMPAIRED ASSETS (Note 11) 573,000 -- --
------------- ------------- -------------
Operating loss $ (2,744,000) $ (489,000) $ (6,899,000)
OTHER INCOME (EXPENSE)
Other income 319,000 134,000 122,000
Interest income 1,000 8,000 37,000
Interest expense (601,000) (347,000) (294,000)
------------- ------------- -------------
Loss before provision for (benefit of) income
taxes and minority interest $ (3,025,000) $ (694,000) $ (7,034,000)
PROVISION FOR (BENEFIT OF) INCOME TAXES (Note 8) 31,000 (31,000) 235,000
------------- ------------- -------------
Loss before minority interest $ (3,056,000) $ (663,000) $ (7,269,000)
MINORITY INTEREST IN NET INCOME OF SUBSIDIARY -- 85,000 --
------------- ------------- -------------
Net loss $ (3,056,000) $ (748,000) $ (7,269,000)
============= ============= =============
BASIC AND DILUTED LOSS PER COMMON SHARE $ (2.55) $ (0.66) $ (6.53)
============= ============= =============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES 1,200,000 1,137,000 1,114,000
============= ============= =============
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
APPLIANCE RECYCLING CENTERS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Retained Accumulated
Earnings Other
(Accumulated Comprehensive
Common Stock Deficit) Income (Loss) Total
-------------------- -------- ------------- -----
Shares Amount
------ ------
<S> <C> <C> <C> <C> <C>
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
Comprehensive loss:
Net loss -- -- (7,269,000) -- --
Other comprehensive income:
Foreign currency translation
adjustment -- -- -- 21,000 --
Comprehensive loss -- -- -- -- (7,248,000)
- --------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 28, 1996 1,137,000 $ 10,350,000 $ (6,237,000) $ -- $ 4,113,000
Net loss -- -- (748,000) -- (748,000)
- --------------------------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 3, 1998 1,137,000 $ 10,350,000 $ (6,985,000) $ -- $ 3,365,000
Issuance of Common Stock
(Note 9) 100,000 200,000 -- -- 200,000
Proceeds ascribed to warrants issued
in conjunction with long-term debt
(Note 9) -- 307,000 -- -- 307,000
Net loss -- -- (3,056,000) -- (3,056,000)
- --------------------------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 2, 1999 1,237,000 $ 10,857,000 $(10,041,000) $ -- $ 816,000
==========================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
APPLIANCE RECYCLING CENTERS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the fiscal year ended
- ---------------------------------------------------------------------------------------------------------------------
JANUARY 2, January 3, December 28,
1999 1998 1996
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (3,056,000) $ (748,000) $ (7,269,000)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization 704,000 1,027,000 2,477,000
Minority interest in net income of subsidiary -- 85,000 --
Common Stock issued for services -- -- 30,000
Gain on sale of equipment (266,000) (80,000) (118,000)
Deferred income taxes -- -- 650,000
Loss on impaired assets 573,000 -- --
Change in current assets and liabilities, net of effects
from acquisition of Universal Appliance Company, Inc.,
and Universal Appliance Recycling, Inc. in 1996:
Receivables 238,000 391,000 510,000
Inventories (1,285,000) (250,000) 37,000
Other current assets 40,000 106,000 88,000
Refundable income taxes 29,000 371,000 (294,000)
Accounts payable 66,000 (255,000) (327,000)
Accrued expenses (121,000) (339,000) 87,000
Income taxes payable -- -- (13,000)
------------ ------------ ------------
Net cash provided by (used in)
operating activities $ (3,078,000) $ 308,000 $ (4,142,000)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment $ (289,000) $ (299,000) $ (1,285,000)
Purchase of minority interest in California subsidiary -- (275,000) --
Cash acquired in 1996 business acquisition -- -- 26,000
Proceeds from disposals of property and equipment 271,000 107,000 415,000
Payments for non-compete agreements -- -- (110,000)
------------ ------------ ------------
Net cash used in investing activities $ (18,000) $ (467,000) $ (954,000)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (payments) under line of credit $ (432,000) $ 123,000 $ 1,390,000
Payments on long-term obligations (408,000) (231,000) (1,412,000)
Proceeds and tax benefit from stock options exercises -- -- 55,000
Proceeds from long-term obligations 3,718,000 -- 17,000
Proceeds ascribed to warrants issued in conjunction
with long-term debt obligations 307,000 -- --
Deferred financing costs (288,000) -- --
Proceeds from issuance of Common Stock 200,000 -- 700,000
------------ ------------ ------------
Net cash provided by (used in)
financing activities $ 3,097,000 $ (108,000) $ 750,000
------------ ------------ ------------
Effect of foreign currency exchange rate
changes on cash and cash equivalents $ -- $ -- $ 21,000
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents $ 1,000 $ (267,000) $ (4,325,000)
CASH AND CASH EQUIVALENTS
Beginning 13,000 280,000 4,605,000
------------ ------------ ------------
Ending $ 14,000 $ 13,000 $ 280,000
============ ============ ============
</TABLE>
<PAGE>
APPLIANCE RECYCLING CENTERS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the fiscal year ended
- ---------------------------------------------------------------------------------------------------------------
JANUARY 2, January 3, December 28,
1999 1998 1996
---------- ---------- ------------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for (receipts of):
Interest $ 562,000 $ 346,000 $ 285,000
Income taxes 2,000 (399,000) (103,000)
========== ========== ==========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES
Long-term obligations incurred on purchase
of equipment $ -- $ 27,000 $ --
========== ========== ==========
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.
<PAGE>
APPLIANCE RECYCLING CENTERS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS: Appliance Recycling Centers of America, Inc. and
subsidiaries (the "Company") 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 reconditioned appliances through a chain of Company-owned stores
under the names "Encore(R) Recycled Appliances" and "Appliance$mart(R)." 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 instrument:
CASH EQUIVALENTS, ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE: Due to
their short-term maturities, the carrying amounts approximate fair
value.
SHORT- AND LONG-TERM DEBT: The fair value of short- and long-term debt
has been estimated based on discounted cash flows using interest rates
being offered for similar debt having the same or similar remaining
maturities and collateral requirements.
No separate comparison of fair values versus carrying values is presented for
the aforementioned financial instruments since their fair values are not
significantly different than their balance sheet carrying amounts. In addition,
the aggregate fair values of the financial instruments would not represent the
underlying value of the Company.
FISCAL YEAR: The Company's 1998 fiscal year (1998) ended January 2, 1999, its
1997 fiscal year (1997) ended January 3, 1998 and its 1996 fiscal year (1996)
ended December 26, 1996. The fiscal years 1998 and 1996 include 52 weeks. The
fiscal year 1997 includes 53 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 appliance extended warranty arrangements and recognizes it
over the terms of the warranty contracts. The Company accrues the estimated cost
of initial warranty arrangements at the time of the appliance sale.
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), or
market.
Inventories consisted of the following:
1998 1997
- -------------------------------------------------------------------------------
Finished goods $1,830,000 $605,000
Work-in-process-
unrefurbished units 189,000 109,000
Less reserves (40,000) (20,000)
---------- --------
$1,979,000 $694,000
========== ========
DEFERRED FINANCING COSTS: In connection with financing transactions in 1998
under notes payable arrangements, the Company incurred $288,000 of costs which
have been recorded in other assets and are being amortized using the straight
line method over the terms of the related debt.
GOODWILL: The Company was an 80% shareholder in its California subsidiary, and
accordingly, recorded the minority shareholder's interest in the subsidiary's
net
<PAGE>
income. During the fourth quarter of 1997, the Company purchased all of the
minority shareholder's stock in the California subsidiary. This transaction
resulted in the Company 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
ACCOUNTING FOR LONG-LIVED ASSETS: The Company reviews its property, equipment
and goodwill periodically to determine potential impairment by comparing the
carrying value of the long-lived assets with the estimated future net
undiscounted cash flows expected to result from the use of the assets, including
cash flows from disposition. Should the sum of the expected future net cash
flows be less than the carrying value, the Company recognizes an impairment loss
at that date. An impairment loss is measured by comparing the amount by which
the carrying value exceeds the fair value (estimated discounted future cash
flows or appraisal of assets) of the long-lived assets. In 1998, the Company
recorded a loss on impairment of certain assets (See Note 11).
ADVERTISING EXPENSE: Advertising is expensed as incurred.
INCOME TAXES: Deferred taxes are provided on an asset and liability method
whereby deferred tax assets are recognized for deductible temporary differences
and operating loss and tax credit carryforwards, and deferred tax liabilities
are recognized for taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and liabilities and their tax
basis. Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or all of
the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates on the
date of enactment.
BASIC AND DILUTED NET LOSS PER SHARE: Basic per-share amounts are computed,
generally, by dividing net income or loss by the weighted-average number of
common shares outstanding. Diluted per-share amounts assume the conversion,
exercise or issuance of all potential common stock instruments unless their
effect is antidilutive, thereby reducing the loss or increasing the income per
common share.
As described in Note 9, at January 2, 1999, and January 3, 1998, the Company had
stock options and warrants outstanding to purchase a total of 1,038,000 and
93,000 shares of Common Stock, respectively. 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.
REPORTING COMPREHENSIVE INCOME: As of January 1, 1998, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 130, REPORTING
COMPREHENSIVE INCOME. SFAS No. 130 establishes new rules for the reporting and
display of comprehensive income and its components. SFAS No. 130 requires
unrealized gains or losses, which prior to adoption were reported separately in
shareholders' equity, to be included in other comprehensive income. For the
Company, reporting comprehensive income would be equivalent to reporting
operating results in the statement of operations for the years ended January 2,
1999 and January 3, 1998. Comprehensive income for the year ended December 28,
1996 is presented in the consolidated statements of shareholders' equity.
SEGMENT INFORMATION: Effective January 1, 1998, the Company adopted Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 requires that a
company report financial and descriptive information about its reportable
operating segments, defined as those components of an enterprise about which
separate financial information is available and is evaluated regularly by
management in deciding how to allocate resources and in assessing performance.
The adoption of SFAS No. 131 did not affect the Company's results of operations
or financial position. The Company believes that it has one operating segment,
although certain separate financial information by retail store, or retail store
and recycling center, is available to management. The Company is managed as a
unit. Specifically, it does not measure profit or loss or maintain assets
separately for its products/revenue sources (reconditioned appliance sales,
appliance recycling and recycling services for utilities).
ESTIMATES: The preparation of financial statements in conformity with generally
accepted accounting principles
<PAGE>
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
In December 1998, the Company decided to withdraw from the under-performing St.
Louis, Missouri market. The Company closed its recycling center and two retail
stores in February 1999. For the year ended January 2, 1999, the Company
incurred expenses of approximately $130,000 which included the write-off of
leasehold improvements of approximately $55,000 and inventory and the accrual of
remaining lease payments and other costs of approximately $75,000.
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 an expected Southern
California Edison Company contract, the anticipated sales per retail store and
the anticipated gross profit, that its cash balance, anticipated funds generated
from operations, its current line of credit if renewed, and the proceeds from
the sale of its Common Stock in February 1999 will be sufficient to finance its
operations and capital expenditures through December 1999. 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 three recycling
centers and eight stores in operation. If revenues are lower than anticipated or
expenses are higher than anticipated or the line of credit cannot be maintained,
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 lenders.
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
Washington D.C./Baltimore, Maryland market and closed the center and three
retail locations. Accordingly, the related goodwill and non-compete agreements
were written off in the fourth quarter of 1996.
NOTE 4. LINE OF CREDIT
At January 2, 1999, the Company had a $2.0 million line of credit with a lender.
The interest rate as of January 2, 1999 was 12.75%. The amount of borrowings
available under the line of credit is based on a formula using receivables and
inventories. The line of credit has a stated maturity date of August 30, 1999
unless renewed and provides that the lender may demand payment in full of the
entire outstanding balance of the loan at any time. The line of credit is
secured by substantially all the Company's assets, is guaranteed by the
President of the Company and requires minimum monthly interest payments of
$5,625 regardless of the outstanding principal balance. The lender is also
secured by an inventory repurchase agreement with Whirlpool Corporation. 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 on
dividends. At January 2, 1999 the Company's unused borrowing capacity under this
line was $65,000.
<PAGE>
NOTE 5. LONG-TERM OBLIGATIONS
Long-term obligations consisted of the following:
1998 1997
- --------------------------------------------------------------------------
9.00% mortgage, due in
monthly installments of
$11,411, including
interest, balance due
February 2004,
secured by land
and building $ 911,000 $ 962,000
8.75% mortgage, due
in monthly installments
of $7,027, including
interest, balance due
January 2003, secured
by land and building 678,000 700,000
13.00% note payable,
monthly interest
payments of $37,917
until September 2000,
monthly principal and
interest payments of
$52,259 beginning
September 2000, balance
due September 2005,
secured by equipment,
land and building 3,203,000 --
9.88% mortgage, due in
monthly installments of
$3,286, including interest,
balance due September
2008, secured by land
and building 231,000 --
Other 21,000 72,000
---------- ----------
$5,044,000 $1,734,000
Less current maturities 79,000 101,000
---------- ----------
$4,965,000 $1,633,000
========== ==========
The future annual maturities of long-term obligations are as follows:
Fiscal year
- -----------
1999 $ 79,000
2000 134,000
2001 271,000
2002 305,000
2003 867,000
Thereafter 3,388,000
----------
$5,044,000
==========
NOTE 6. ACCRUED EXPENSES
Accrued expenses were as follows:
1998 1997
- --------------------------------------------------------------------------
Compensation $139,000 $ 167,000
Warranty 157,000 74,000
Lease contingencies
and closing costs 124,000 289,000
Other 280,000 291,000
-------- ------------
$700,000 $ 821,000
======== ============
NOTE 7. COMMITMENTS
OPERATING LEASES: The Company leases certain of its recycling center facilities
and equipment 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.
At January 2, 1999, the Company had $69,000 accrued for the remaining settlement
of these leases.
In December 1998, the Company decided to withdraw from the St. Louis, Missouri
market. The Company accrued approximately $42,000 for the remaining lease
payments on these leases.
Minimum rental commitments under noncancelable operating leases as of January 2,
1999 were as follows:
Fiscal Year
- -----------
1999 $ 510,000
2000 431,000
2001 241,000
2002 199,000
2003 199,000
----------
$1,580,000
==========
Rent expense for the fiscal years ended January 2, 1999, January 3, 1998 and
December 28, 1996 was $482,000, $433,000 and $1,585,000, respectively.
<PAGE>
NOTE 8. INCOME TAXES
The provision for (benefit of) income taxes consisted of the following:
1998 1997 1996
- -------------------------------------------------------------------------------
Current:
Federal $ -- $ -- $(415,000)
State 31,000 (31,000) --
Deferred -- -- 650,000
------- -------- ---------
$31,000 $(31,000) $ 235,000
======= ======== =========
A reconciliation of the Company's income tax expense (benefit) with the federal
statutory tax rate is shown below:
1998 1997 1996
- -------------------------------------------------------------------------------
Income tax
benefit at
statutory rate $ (1,049,000) $ (236,000) $ (2,462,000)
State taxes, net
of federal
tax effect (192,000) (26,000) (208,000)
Permanent
differences 34,000 74,000 110,000
Change in valuation
allowance 257,000 (289,000) 235,000
Effect of NOL
with no current
tax benefit 981,000 446,000 2,560,000
------------ ---------- ------------
$ 31,000 $ (31,000) $ 235,000
============ ========== ============
The tax effects of principal temporary differences are as follows:
1998 1997
- -------------------------------------------------------------------------------
Deferred tax assets:
Net operating loss
carryforwards $ 3,300,000 $ 2,319,000
Loss on asset impairment 658,000 429,000
Federal and state tax credits 250,000 250,000
Accrued expenses 236,000 246,000
----------- ----------
Gross defered tax assets $ 4,444,000 $ 3,244,000
----------- ----------
Deferred tax liability:
Accelerated tax depreciation (254,000) (292,000)
Valuation allowance (4,190,000) (2,952,000)
----------- -----------
Net deferred tax assets $ -- $ --
=========== ===========
At January 2, 1999, the Company recorded a valuation allowance of $4,190,000
against deferred tax assets to reduce the total to an amount management believes
is appropriate. Realization of deferred tax assets is dependent upon sufficient
future taxable income during the periods when deductible temporary differences
and carryforwards are expected to be available to reduce taxable income.
At January 2, 1999, the Company had net operating loss carryforwards consisting
of the following:
Expiration Amount
- ---------- ------
2011 $4,515,000
2012 $1,115,000
2018 $2,484,000
These carryforwards may be subject to certain limitations under the provisions
of the Internal Revenue Code, Section 382, which relate to a 50 percent change
in control over a three-year period. In addition, any future changes of control
may result in the expiration of a portion of the carryforwards before they can
be used and are also dependent upon the Company attaining profitable operations
in the future.
NOTE 9. SHAREHOLDERS' EQUITY
STOCK OPTIONS: 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 to ten years from
the date of grant and vest over a period of six months to 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:
1998 1997
- --------------------------------------------------------------------------------
Net loss:
As reported $(3,056,000) $(748,000)
Pro forma $(3,136,000) $(847,000)
Basic and diluted loss
per share:
As reported $ (2.55) $ (0.66)
Pro forma $ (2.61) $ (0.75)
- --------------------------------------------------------------------------------
<PAGE>
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:
1998 1997
- --------------------------------------------------------------------------------
Expected dividend yield -- --
Expected stock price volatility 83.22% 50.43%
Risk-free interest rate 5.50% 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 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
Granted 78,000 $ 1.50
Cancelled (27,000) $13.22
- --------------------------------------------------------------------------------
Outstanding at
January 2, 1999 144,000 $ 5.37
================================================================================
The weighted average fair value per option of options granted during 1998, 1997
and 1996 was $0.85, $0.96 and $4.92 respectively.
The following tables summarize information about stock options outstanding as of
January 2, 1999:
OPTIONS OUTSTANDING
Weighted
Average Weighted
Range of Number Remaining Average
Exercise Options Contractual Exercise
Prices Outstanding Life in Years Price
- --------------------------------------------------------------------------------
$45.52 2,000 1.9 $ 45.52
$17.50 22,000 2.6 $ 17.50
$10.52 to $12.76 10,000 4.5 $ 10.58
$2.38 to $3.00 32,000 5.8 $ 2.60
$0.75 to $2.06 78,000 6.9 $ 1.50
-------
144,000
=======
OPTIONS EXERCISABLE
Range of Number Weighted
Exercise Options Average
Prices Exercisable Exercise Price
- --------------------------------------------------------------------------------
$45.52 2,000 $45.52
$17.50 21,000 $17.50
$10.52 to $12.76 10,000 $10.58
$2.38 to $3.00 16,000 $2.60
------
49,000 $12.37
======
The following table summarizes options exercisable for stock options outstanding
as of January 2, 1998 and December 26, 1996:
1997 1996
- --------------------------------------------------------------------------------
Number of options
exercisable 40,000 45,000
Weighted average
exercise price $19.44 $31.77
WARRANTS: In July 1998, the Company issued 12% subordinated promissory notes in
the principal amount of $275,000, plus an aggregate of 68,750 warrants to
purchase the Company's Common Stock at $2.25 per share.
In September 1998, the Company entered into a loan agreement with a lender
resulting in gross proceeds to the Company of $3.5 million. In connection with
this loan, the Company issued the lender a warrant to purchase 700,000 shares of
Common Stock at an adjustable exercise price, which is currently $0.60 per
share. The Company also issued to an investment banker associated with this
transaction, a warrant to purchase 125,000 shares of Common Stock at $2.50 per
share.
The portion of the gross loan proceeds ascribed to the aforementioned warrants
issued in conjunction with debt was $307,000 as determined using the
Black-Scholes method.
PREFERRED STOCK: In April 1998, the Company's shareholders approved an amendment
to the Company's Articles of Incorporation authorizing two million shares of
Preferred Stock of the Company ("Preferred Stock") which may be issued from time
to time in one or more series having such rights, powers, preferences and
designations as the Board of Directors may determine.
PRIVATE PLACEMENT: In May 1998, the Company sold in a private placement, 100,000
shares of Common Stock at a price of $2.00 per share. The sale, which
represented approximately 8% of the Common Stock outstanding
<PAGE>
after such sale, was made to an institutional investor. The proceeds were used
for additional working capital.
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.
NOTE 10. MAJOR CUSTOMERS AND SUPPLIERS
MAJOR CUSTOMER:
Net revenues include sales to one major customer as follows:
1998 1997 1996
- --------------------------------------------------------------------------------
REVENUE PERCENTAGE:
Customer 28.8% 37.8% 22.1%
As of January 2, 1999, the receivable from this customer on the Company's
balance sheet was $208,000.
MAJOR SUPPLIER:
The Company purchases substantially all of its scratch and dent (distressed)
appliances from one original equipment manufacturer under a contractual
arrangement. Management believes that should this arrangement be terminated
other original equipment manufacturers would be available for alternate sources
of supply.
NOTE 11. LOSS ON IMPAIRED ASSETS
In June 1998, the Company elected to curtail its appliance shredding operation
and intensify its strategic focus on appliance retailing. As a result, the
Company recorded a $518,000 loss on impaired equipment. In addition, as
discussed in Note 2, the Company also recorded an impairment loss of $55,000 in
December 1998 related to withdrawing from an under-performing market.
NOTE 12. SUBSEQUENT EVENT
In February 1999, the Company sold in a private placement 1,030,000 shares of
Common Stock at a price of $0.50 per share. The Company paid $31,500 of the
proceeds and issued warrants to purchase 83,000 shares of Common Stock at $0.50
per share, subject to adjustment, to an investment banker as a placement fee.
The remaining proceeds were used to repay certain indebtedness, to purchase
inventory and for other general corporate purposes.
<PAGE>
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 2, 1999, 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 1999 Annual Meeting of Shareholders
to be held April 29, 1999, 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 1999
Annual Meeting of Shareholders to be held April 29, 1999, other than the
subsections captioned Report of the 1998 Compensation and Benefits Committee and
Performance Graph, is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial
owners and management is set forth under Beneficial Ownership of Common Stock in
the Company's definitive Proxy Statement for its 1999 Annual Meeting of
Shareholders to be held April 29, 1999, 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 1999 Annual Meeting
of Shareholders to be held April 29, 1999, 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
See Index to Financial Statements under Item 8 of this report.
2. FINANCIAL STATEMENT SCHEDULES
To the Board of Directors
Appliance Recycling Centers of America, Inc.
Minneapolis, Minnesota
Our report on the consolidated financial statements of Appliance
Recycling Centers of America, Inc. and subsidiaries is included
in this Form 10-K. In connection with our audits of such
financial statements, we have also audited the related financial
statement schedule listed immediately following. This financial
schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audit.
In our opinion, the financial statement schedule referred to
above, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material
respects, the information required to be included therein.
McGLADREY & PULLEN, LLP
Minneapolis, Minnesota
February 19, 1999
Schedule II - Valuation and qualifying accounts
Accounts Receivable Inventory
Allowance Allowance
---------------------------------------------------------------
Balance, December 30, 1995 $ -- $ --
Additional allowance 90,000 --
Write-off of accounts receivable (6,000) --
---------------------------------------------------------------
Balance, December 28, 1996 $ 84,000 $ --
Additional allowance 60,000 20,000
Write-off of accounts receivable (109,000) --
---------------------------------------------------------------
Balance, January 3, 1998 $ 35,000 $ 20,000
Additional allowance 50,000 20,000
Write-off of accounts receivable (67,000) --
---------------------------------------------------------------
BALANCE, JANUARY 2, 1999 $ 18,000 $ 40,000
---------------------------------------------------------------
<PAGE>
3. EXHIBITS
See Index to Exhibits in 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 22, 1999 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 22, 1999
- ------------------------ Chief Executive Officer
Edward R. Cameron
/s/ Kent S. McCoy Chief Financial Officer March 22, 1999
- ------------------------ (Principal Accounting Officer)
Kent S. McCoy
/s/ George B. Bonniwell Director March 22, 1999
- ------------------------
George B. Bonniwell
/s/ Duane S. Carlson Director March 22, 1999
- ------------------------
Duane S. Carlson
/s/ Harry W. Spell Director March 22, 1999
- ------------------------
Harry W. Spell
/s/ Marvin Goldstein Director March 22, 1999
Marvin Goldstein
<PAGE>
INDEX TO EXHIBITS
Exhibit
No. Description
+3.1 Restated Articles of Incorporation of Appliance Recycling Centers of
America, Inc.
+3.2 Amended and Restated Bylaws of Appliance Recycling Centers of
America, Inc.
*10.1 Amended Appliance Recycling Centers of America, Inc. Restated 1989
Stock Option Plan [filed as Exhibit 19.3 to the Company's Form 10-Q
for the quarter ended June 30, 1993 (File No. 0-19621) and
incorporated herein by reference].
10.2 Agreement dated December 17, 1992, between Appliance Recycling
Centers of America, Inc. and TCF Savings Bank [filed with the
Company's Form 8-K, dated December 17, 1992 (File No. 0-19621) and
incorporated herein by reference].
10.3 Agreement dated January 19, 1994, between Appliance Recycling
Centers of America, Inc. and Standard Insurance Corporation [filed
as Exhibit 10.29 to the Company's Form 10-K for the year ended
December 31, 1993 (File No.0-19621) and incorporated herein by
reference].
10.4 Line of credit dated August 30, 1996, between Appliance Recycling
Centers of America, Inc. and Spectrum Commercial Services, a
division of Lyons Financial Services, Inc. [filed as exhibit 10.15
to the Company's Form 10-Q for the quarter ended September 28, 1996
(File No. 0-19621) and incorporated herein by reference].
10.5 Amended line of credit dated November 8, 1996, between Appliance
Recycling Centers of America, Inc. and Spectrum Commercial Services,
a division of Lyons Financial Services, Inc. [filed as exhibit 10.16
to the Company's Form 10-Q for the quarter ended September 28, 1996
(File No. 0-19621) and incorporated herein by reference].
*10.6 1997 Stock Option Plan and Amendment [filed as Exhibits 28.1 and
28.2 to the Company's Registration Statement on Form S-8
(Registration No. 333-28571) and incorporated herein by reference].
10.7 Amended line of credit dated February 12, 1998 between Appliance
Recycling Centers of America, Inc. and Spectrum Commercial Services,
a division of Lyons Financial Services, Inc., Amended Revolving Note
and Amended Guarantor Acknowledgements [filed as Exhibit 10.10 to
the Company's Form 10-K for year ended January 3, 1998 (File No.
0-19621) and incorporated herein by reference].
10.8 Agreement dated February 13, 1998 between Western Bank and Appliance
Recycling Centers of America, Inc. [filed as Exhibit 10.11 to the
Company's Form 10-K for the year ended January 3, 1998 (File No
0-19621) and incorporated herein by reference].
*10.9 Amendment, effective April 24, 1997, to 1989 Stock Option Plan
[filed as Exhibit 28.2 to the Company's Post-Effective Amendment No.
1 (June 5, 1997) to Registration Statement on Form S-8 (Registration
No. 33-68890) and incorporated herein by reference].
<PAGE>
10.10 Reverse Logistics Master Service Agreement between Whirlpool
Corporation and Appliance Recycling Centers of America, Inc. [filed
as Exhibit 10 to the Company's Form 10-Q for the quarter ended July
4, 1998 (File No. 0-19621) and incorporated herein by reference].
10.11 Loan Agreement between Medallion Capital, Inc. and Appliance
Recycling Centers of America, Inc. dated September 10, 1998 [filed
as Exhibit 10.1 to the Company's Form 10-Q for the quarter ended
October 3, 1998 (File No. 0-19621) and incorporated herein by
reference].
10.12 Promissory note of the Company to Medallion Capital, Inc. in the
principal amount of $3,500,000 due September 30, 2005 [filed as
Exhibit 10.2 to the Company's Form 10-Q for the quarter ended
October 3, 1998 (File No. 0-19621) and incorporated herein by
reference].
10.13 Security Agreement of the Company [filed as Exhibit 10.3 to the
Company's Form 10-Q for the quarter ended October 3, 1998 (File No.
0-19621) and incorporated herein by reference].
+10.14 Warrant of the Company in favor of Medallion Capital, Inc. for
700,000 shares of the Company's Stock [corrected copy].
+10.15 Amendment to the line of credit dated September 10, 1998 between
Appliance Recycling Centers of America, Inc. and Spectrum Commercial
Services, a division of Lyons Financial Services, Inc., Amendment to
General Credit and Security Agreement and Amended Guarantor
Acknowledgement.
+10.16 Amendment to the line of credit dated September 17, 1998 between
Appliance Recycling Centers of America, Inc. and Spectrum Commercial
Services, a division of Lyons Financial Services, Inc., Amendment to
General Credit and Security Agreement, Amended Guarantor
Acknowledgement and Amended and Restated Revolving Note.
+ 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(a)3 of this Form
10-K.
+ Filed herewith.
EXHIBIT 3.1
RESTATED ARTICLES OF INCORPORATION
OF
APPLIANCE RECYCLING CENTERS OF AMERICA, INC.
The undersigned, Edward R. Cameron, President of Appliance Recycling
Centers of America, Inc., a corporation subject to the provisions of Chapter
302A, Minnesota Statutes, hereby certifies that the following resolutions were
duly adopted by the Board of Directors of the Corporation on the 5th day of
March, 1999:
RESOLVED, that the Corporation's existing Restated Articles of
Incorporation, as amended to date, are hereby restated in their
entirety, but without any changes thereto, as follows:
RESTATED ARTICLES OF INCORPORATION
OF
APPLIANCE RECYCLING CENTERS OF AMERICA, INC.
ARTICLE 1. NAME
The name of the Corporation is Appliance Recycling Centers of America,
Inc.
ARTICLE 2. REGISTERED OFFICE
The location and post office address of the Corporation's registered
office in the State of Minnesota shall be 7400 Excelsior Boulevard, Minneapolis,
Minnesota 55426.
ARTICLE 3. AUTHORIZED SHARES
The total number of shares of capital stock which the corporation shall
have authority to issue is twelve million (12,000,000) shares, of which ten
million (10,000,000) shares shall be Common Stock, without par value, and two
million (2,000,000) shares shall be preferred stock.
The Preferred Stock may be issued from time to time in one or more
series. The Board of Directors is expressly authorized, in the resolution or
resolutions providing for the issuance of any wholly unissued series of
Preferred Stock to fix, state and express the powers, rights, designations,
preferences, qualifications, limitations and restrictions thereof, including
without limitation: the par value; the rate of dividends upon which and the
times at which dividends of shares of such series shall be payable and the
preference, if any, which such dividends shall have relative to dividends on
shares of any other class or classes or any other series of stock of the
corporation; whether such dividends shall be cumulative or noncumulative, and if
cumulative, the date or dates from which dividends on shares of such series
shall be cumulative; the voting rights, if any, to be provided for shares of
such series; the rights, if any, which the holders of
1
<PAGE>
shares of such series shall have in the event of any voluntary or involuntary
liquidation, dissolution or winding up of the affairs of the corporation; the
rights, if any, which the holders of shares of such series shall have to convert
such shares into or exchange such shares for shares of stock of the corporation,
and the terms and conditions, including price and rate of exchange of such
conversion or exchange; and the redemption rights (including sinking fund
provisions), if any, for shares of such series; and such other powers, rights,
designations, preferences, qualifications, limitations and restrictions as the
Board of Directors may desire to so fix. The Board of Directors is also
expressly authorized to fix the number of shares constituting such series and to
increase or decrease the number of shares of any series prior to the issuance of
shares of that series and to increase or decrease the number of shares of any
series subsequent to the issuance of shares of that series, but not to decrease
such number below the number of shares outstanding. In case the number of shares
of any series shall be so decreased, the shares constituting such decrease shall
resume the status which they had prior to the adoption of the resolution
originally fixing the number of shares of such series.
ARTICLE 4. NO CUMULATIVE VOTING
There shall be no cumulative voting by the shareholders of the
Corporation.
ARTICLE 5. NO PREEMPTIVE RIGHTS
The shareholders of the Corporation shall not have preemptive rights.
ARTICLE 6. DIRECTOR LIABILITY
A director of the Corporation shall not be personally liable to the
Corporation or its shareholders for monetary damages for breach of fiduciary
duty as a director, except for (i) liability based on a breach of the director's
duty of loyalty to the Corporation or its shareholders; (ii) liability for acts
or omissions not in good faith or that involve intentional misconduct or a
knowing violation of law; (iii) liability based on the payment of an improper
dividend or an improper repurchase of the Corporation's stock under Section
302A.559 of the Minnesota Business Corporation Act or on violations of federal
or state securities laws; (iv) liability for any act or omission occurring prior
to the date this Article was originally effective. If Chapter 302A, the
Minnesota Business Corporation Act, is amended to authorize the further
elimination or limitation of the liability of directors, then the liability of a
director of the Corporation in addition to the limitation on personal liability
provided herein, shall be limited to the fullest extent permitted by the amended
Chapter 302A, the Minnesota Business Corporation Act. Any repeal or modification
of this Article by the shareholders of the Corporation shall be prospective only
and shall not adversely affect any limitation on the personal liability of a
director of the Corporation existing at the time of such repeal or modification.
RESOLVED FURTHER, that the President of the Corporation is hereby
authorized and directed to make, execute and file for record with the
Secretary of State of the State of Minnesota, Restated Articles of
Incorporation, setting forth the foregoing restated articles of
incorporation, and to pay all fees and charges in connection therewith,
all as required by law.
2
<PAGE>
IN WITNESS WHEREOF, the undersigned has signed these Restated Articles
of Incorporation as of the 5th day of March, 1999.
/s/ EDWARD R. CAMERON
Edward R. Cameron, President
3
EXHIBIT 3.2
AMENDED AND RESTATED BYLAWS
OF
APPLIANCE RECYCLING CENTERS OF AMERICA, INC.
ARTICLE 1.
OFFICES
1.1. Registered Office. The registered office of the corporation shall be
7400 Excelsior Boulevard, Minneapolis, Minnesota 55426. The Board of Directors
shall have authority to change the registered office of the corporation from
time to time, and any such change shall be registered by the Secretary with the
Secretary of State of Minnesota.
1.2. Offices. The corporation may have such other offices, including its
principal business office, either within or without the State of Minnesota, as
the Board of Directors may designate or as the business of the corporation may
require from time to time.
ARTICLE 2.
SHAREHOLDERS
2.1. Regular Meeting. Regular meetings of the shareholders of the
corporation, shall be held at the principal business office of the corporation,
or at such place as is designated by the Board of Directors at which time the
shareholders, voting as provided in the Articles of Incorporation, shall elect a
Board of Directors for the ensuing year, and shall transact such other business
as shall properly come before them.
2.2. Frequency of Regular Meetings. Regular meetings which may also be
referred to as annual meetings of shareholders may be called at any time by a
majority of the Board of Directors. If a regular meeting of shareholders has not
been held during the immediately preceding thirteen (13) months, a shareholder
or shareholders holding three percent (3%) or more of all voting shares may
demand a regular meeting of shareholders by written notice of demand given to
the Chief Executive Officer or Secretary of the corporation within thirty (30)
days after receipt of the demand by one of those officers, the Board shall cause
a regular meeting of shareholders to be called and held on notice no later than
ninety (90) days after receipt of the demand, all at the expense of the
corporation.
2.3. Special Meetings. Special meetings of the shareholders may be called
by the Secretary at any time upon request of the Chief Executive Officer, or two
of the members of the Board of Directors, or upon a written request of
shareholders holding ten percent (10%) or more of the capital stock entitled to
vote. The written request shall be given to the Chief Executive Officer and
shall contain the purpose of the meeting. Notice shall be given in accordance
with the provisions of Section 2.7 hereof.
<PAGE>
2.4. Quorum. The holders of a majority of the shares outstanding and
entitled to vote, represented either in person or by proxy, shall constitute a
quorum for the transaction of business. The shareholders present at a duly
called or held meeting, at which a quorum of the shareholders is present, may
continue to transact business until adjournment notwithstanding the withdrawal
of enough shareholders to leave less than a quorum. In case a quorum is not
present at any meeting, those present shall have the power to adjourn the
meeting from time to time, without notice or other announcement at the meeting,
until the requisite number of voting shares shall be represented; any business
may be transacted at such reconvened meeting which might have been transacted at
the meeting which was adjourned.
2.5. Voting. At each meeting of the shareholders, every shareholder having
the right to vote shall be entitled to vote in person or by proxy duly appointed
by an instrument in writing subscribed by such shareholder. Each shareholder
shall have one (1) vote for each share having voting power standing in his name
on the books of the corporation. Upon the demand of any shareholder, the vote
for director, or the vote upon any question before the meeting shall be by
ballot. All elections shall be had and all questions decided by a majority vote
of the number of shares entitled to vote and represented at any meeting at which
there is a quorum, except in such cases as shall otherwise be required or
permitted by statute, the Articles of Incorporation, these Bylaws or by
agreement approved by a majority of all shareholders.
2.6. Voting of Shares by Certain Holders. Shares standing in the name of
another corporation may be voted by such officer, agent or proxy as the articles
or bylaws of such corporation may prescribe, or in the absence of such
provision, as that corporation's board of directors may prescribe. Shares under
control of a personal representative, administrator, guardian, conservator,
attorney-in-fact, or other similar person may be voted by that person, either in
person or by proxy, without registration of those shares in the name of that
person. Shares under the control of a trustee in bankruptcy or a receiver may be
voted by the trustee or receiver if authority to do so is contained in an
appropriate order of the court by which the trustee or receiver was appointed. A
shareholder whose shares are pledged may vote those shares until the shares are
registered in the name of the pledgee. Shares held by a trust shall be
registered in the name of a trustee, as trustee for the trust, and may be voted
by that named trustee in person or by proxy.
2.7. Notice of Meeting. There shall be mailed to each shareholder shown by
the books of the corporation to be a holder of record of voting shares, at his
address as shown by the books of the corporation, a notice setting out the time
and place of the regular meeting or any special meeting, which notice shall be
mailed at least ten (10) days prior thereto. Every notice of any special meeting
shall state the purpose or purposes of the proposed meeting, and the business
transacted at any special meetings shall be confined to purposes stated in the
call. Notice thereof may be waived in writing either before, at, or after such
meeting.
2.8. Proxies. At all meetings of shareholders, a shareholder may vote by
proxy executed in writing by the shareholder or by his duly authorized
attorney-in-fact. Such proxies shall be filed with the Secretary of the
corporation before or at the time of the meeting. No proxy shall be valid after
eleven (11) months from the date of its execution, unless otherwise provided in
the proxy.
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<PAGE>
2.9. Record Date. The Board of Directors may fix in advance a date, not
exceeding sixty (60) days preceding the date of any of the aforesaid events, as
a record date for the determination of shareholders entitled to notice of and to
vote at any such meeting and any adjournment thereof, or to receive any such
dividend or allotment of rights, or to exercise the rights in respect to any
change, conversion or exchange of capital stock or to give such consent, and in
such case only such shareholders on the record date so fixed shall be entitled
to notice of and to vote at such meeting and any adjournment thereof, or to
receive such dividend or allotment of rights, or to exercise such rights, or to
give such consent, as the case may be, notwithstanding any transfer of any stock
on the books of the corporation after any such record date so fixed. If the
stock transfer books are not closed and no record date is fixed for such
determination of the shareholders of record, the date on which notice of the
meeting is mailed, or the date of adoption of a resolution of the Board of
Directors declaring a dividend, allotment of rights, change, conversion or
exchange of capital stock or to give such consent, whichever is earlier, shall
be the record date for such determination of shareholders. The determination of
shareholders entitled to vote at the meeting as called shall apply to any
adjournment of such meeting except when the date of determination or the closing
of the stock transfer book is more than ninety (90) days prior to such adjourned
meeting, in which event a new meeting must be called.
2.10. Presiding Officer. The appropriate officers of the corporation shall
preside over all meetings of the shareholders; provided, however, that in the
absence of an appropriate corporate officer at any meeting of the shareholders,
the meeting shall choose any person present to act as presiding officer of the
meeting.
2.11. Conduct of Meetings of Shareholders. Subject to the following,
meetings of shareholders generally shall follow accepted rules of parliamentary
procedure:
a. The chairman of the meeting shall have absolute authority over
matters of procedure and there shall be no appeal from the ruling of the
chairman. If the chairman, in his absolute discretion, deems it advisable
to dispense with the rules of parliamentary procedure as to any one meeting
of shareholders or part thereof, the chairman shall so state and shall
clearly state the rules under which the meeting or appropriate part thereof
shall be conducted.
b. If disorder should arise which prevents continuation of the
legitimate business of the meeting, the chairman may quit the chair and
announce the adjournment of the meeting; and upon his so doing, the meeting
is immediately adjourned.
c. The chairman may ask or require that anyone not a bona fide
shareholder or proxy leave the meeting.
2.12. Order of Business. The suggested order of business at the annual
meeting of shareholders, and so far as possible at all other meetings of the
shareholders, shall be:
a. Reading and disposal of any unapproved minutes.
b. Annual reports of all officers and committees.
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<PAGE>
c. Election of directors.
d. Unfinished business.
e. New business.
f. Adjournment.
2.13. Inspectors of Election. The Board of Directors in advance of any
meeting of shareholders may appoint inspectors to act at such meeting or any
adjournment thereof. If inspectors of election are not so appointed, the officer
or person acting as chairman of any such meeting may, and on the request of any
shareholder or his proxy, shall make such appointment. In case any person
appointed as inspector shall fail to appear or act, the vacancy may be filled by
appointment made by the Board of Directors in advance of the meeting, or at the
meeting by the officer or person acting as chairman. The inspectors of election
shall determine the number of shares outstanding, the voting power of each, the
shares represented at the meeting, the existence of a quorum, the authenticity,
validity and effect of proxies, receive votes, ballots, assents or consents,
hear and determine all challenges and questions in any way arising and announce
the result, and do such acts as may be proper to conduct the election or vote
with fairness to all shareholders.
a. No inspector whether appointed by the Board of Directors or by the
officer or person acting as chairman need be a shareholder.
ARTICLE 3.
DIRECTORS
3.1. General Powers. The property, affairs, and business of the corporation
shall be managed by the Board of Directors.
3.2. Number. The number of directors shall be two (2) but the number of
directors may be increased or diminished by a majority vote of the board of
directors.
3.3. Qualifications and Term of Office. Directors need not be shareholders
or residents of the State of Minnesota. Directors shall be elected by the
shareholders at a regular meeting for an indefinite term until the next regular
meeting of shareholders and until a successor shall have been elected and
qualified. Each of the directors of the corporation shall hold office until the
regular meeting next following or closely coinciding with the expiration of his
term of office and until his successor shall have been elected and shall
qualify, or until he shall resign, or shall have been removed as provided by
statute.
3.4. Quorum. A majority of the Board of Directors shall constitute a quorum
for the transaction of business; provided, however, that if any vacancies exist
by reason of death, resignation or otherwise, a majority of the remaining
directors shall constitute a quorum for the conduct of business. If less than a
quorum is present at any meeting, a majority of the directors present may
adjourn the meeting from time to time without further notice.
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<PAGE>
3.5. Regular Meetings. As soon as practical after each regular meeting of
shareholders, the Board of Directors shall meet for the purposes of
organization, choosing the officers of the corporation and for the transaction
of other business at the place where the shareholders meeting is held or at the
place where regular meetings of the Board of Directors are held. No notice of
such meeting need be given. Such first meeting may be held at any other time and
place which shall be specified in a notice given as hereinafter provided for
special meetings or in a consent and waiver of notice signed by all the
directors.
Other regular meetings of the Board of Directors shall be held from
time to time at such time and place as may from time to time be fixed by
resolution adopted by a majority of the whole Board of Directors. Unless notice
shall be waived by all directors entitled to notice, notice shall be given in
the same manner as prescribed for notice of special meetings.
3.6. Special Meetings. Special meetings of the Board of Directors may be
held at such time and place as may from time to time be designated in the notice
or waiver of notice of the meeting. Special meetings of the Board of Directors
may be called by the Chief Executive Officer, or by any director. Unless notice
shall be waived by all directors entitled to notice, notice of the special
meeting shall be given by the Secretary, who shall give at least twenty-four
(24) hours notice thereof to each director by mail, telegraph, telephone, or in
person.
3.7. Electronic Communications. A Board of Directors meeting may be had
entirely or partially by any means of communication through which the directors
may simultaneously hear each other, provided notice is given of the meeting
pursuant to Section 3.9 and there are a sufficient number of participants to
constitute a quorum.
3.8. Absent Director. A director may give advance written consent or
opposition to a proposal to be acted on at a board of directors meeting. Such
written consent or opposition does not constitute presence for purposes of
determining the existence of a quorum. Written consent or opposition shall be
counted as a vote on the proposal if the proposal acted on is substantially the
same or has substantially the same effect as the proposal to which the director
has consented or objected.
3.9. Notice. Unless notice is waived by all directors entitled to notice, a
regular meeting of the Board of Directors may be called by giving ten (10) days
notice to all directors. A special meeting of the Board of Directors may be
called by giving at least twenty-four (24) hours notice to all directors. Notice
may be given by mail, telegraph, telephone, or in person. If given by mail such
notice shall be deemed given when deposited in the United States mails. Notice
by mail may not be used if the meeting is called less than four (4) days from
the date of notice. The notice must specify the date, time and place of the
meeting, and if a special meeting, the purpose of the meeting.
3.10. Manner of Acting. The act of a majority of the directors present at a
meeting at which a quorum is present shall be the act of the Board of Directors.
3.11. Compensation. Directors and any members of any committee of the
corporation contemplated by these Bylaws or otherwise provided for by resolution
of the Board of Directors, shall receive such compensation therefor as may be
determined from time to time by resolution
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<PAGE>
of the Board of Directors. Nothing herein contained shall be construed to
preclude any director from serving the corporation in any other capacity and
receiving proper compensation therefor.
3.12. Salaries. Salaries and other compensation of all officers of the
corporation shall be fixed by the Board of Directors, which action may be taken
informally without the benefit of written resolutions. Nothing herein contained
shall be construed to preclude any officer from serving the corporation as a
director, consultant or in any other capacity and receiving proper compensation
therefor.
3.13. Executive Committee. A two-thirds (2/3) majority vote of the Board of
Directors present at a meeting may pass a resolution establishing committees
having the authority of the Board to the extent provided in the resolution. A
committee shall consist of three or more persons who need not be members of the
Board. A majority of the committee present at a meeting shall constitute a
quorum for the purpose of transacting business. In all other respects committees
shall conduct meetings in the same manner prescribed for the Board of Directors.
Committees shall be subject at all times to the control and direction of the
Board.
3.14. Vacancies. A director may resign at any time by giving written notice
of same to the Board of Directors, or to the President. Such resignation shall
be effective upon receipt unless a later date is specified in the notice. If at
any time and for any reason, including the creation of a new directorship, a
vacancy occurs in the Board of Directors, the remaining directors of the Board,
though less than a quorum, may elect a successor to fill such vacancy, or the
Board may leave the vacancy unfilled until the next regular meeting of the
shareholders, or until an intervening special meeting of the shareholders is
called and held for the purpose of electing a successor. A director elected to
fill the vacancy shall hold his office for the unexpired term of his
predecessor, or until his successor is duly elected and qualified.
3.15. Order of Business. The meetings shall be conducted in accordance with
Roberts Rules of Order, Revised, and the suggested order of business at any
meeting of the directors shall be:
a. Roll call.
b. Proof of due notice of meeting, or unanimous consent, or unanimous
presence and declaration by president.
c. Reading and disposal of any unapproved minutes.
d. Reports of officers and committees.
e. Election of officers.
f. Unfinished business.
g. New Business.
h. Adjournment.
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<PAGE>
3.16. Informal Action by Directors. Any action required to be taken at a
meeting of the directors, or any other action which may be taken at a meeting of
the directors, may be taken without a meeting and notice thereof if a consent in
writing, setting forth the action so taken, shall be signed by all of the
directors entitled to vote with respect to the subject matter set forth.
ARTICLE 4.
OFFICERS
4.1. Number. The officers of the corporation may include a Chief Executive
Officer, a Chief Financial Officer, and such other officers as may from time to
time be chosen by the Board of Directors. Any number of offices may be held by
one person.
4.2. Election, Term of Office and Qualifications. At any regular meeting of
the Board of Directors, the board may elect a Chief Executive Officer, a Chief
Financial Officer, and such other officers and assistant officers as may be
deemed advisable. Such officers shall hold office until their successors are
elected and qualify; provided, however, that any officer may be removed with or
without cause by the affirmative vote of a majority of the whole Board of
Directors.
4.3. The Chief Executive Officer. The Chief Executive Officer, who may also
be referred to as the President shall: (a) have general active management of the
business of the corporation; (b) when present, preside at all meetings of the
Board and of the shareholders; (c) see that all orders and resolutions of the
Board are carried into effect; (d) sign and deliver in the name of the
corporation any deeds, mortgages, bonds, contracts or other instruments
pertaining to the business of the corporation, except in cases in which the
authority to sign and deliver is required by law to be exercised by another
person or is expressly delegated by the articles or bylaws or by the Board to
some other officer or agent of the corporation; (e) maintain records of and,
whenever necessary, certify all proceedings of the Board and the shareholders;
and (f) perform other duties prescribed by the Board. The Chief Executive
Officer may also be referred to as the President.
4.4. Assistant Executive Officers. Each assistant executive officer shall
have such powers and shall perform such duties as may be prescribed by the Board
of Directors. In the event of absence or disability of the Chief Executive
Officer, an assistant executive officer shall succeed to his powers and duties
in the order in which they are elected or as otherwise prescribed by the Board
of Directors. The Assistant Executive Officers may also be referred to as Vice
Presidents.
4.5. Secretary. The Secretary shall be secretary of and shall attend all
meetings of the shareholders and Board of Directors. The Secretary shall act as
clerk thereof and shall record all the proceedings of such meetings in the
minute book of the corporation. The Secretary shall give proper notice of
meetings of shareholders and directors. The Secretary shall keep the seal of the
corporation, if any, and shall affix the same to any instrument requiring it and
shall attest the seal by his signature. The Secretary shall, with the Chief
Executive Officer or Chief Financial Officer, acknowledge all certificates for
shares of the corporation and shall perform such other duties as may be
prescribed from time to time by the Board of Directors.
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<PAGE>
4.6. Chief Financial Officer. The Chief Financial Officer, who may also be
referred to as the Treasurer, shall: (a) keep accurate financial records for the
corporation; (b) deposit all money, drafts, and checks in the name of and to the
credit of the corporation in the banks and depositories designated by the Board;
(c) endorse for deposit all notes, checks, and drafts received by the
corporation as ordered by the Board, making proper vouchers therefor; (d)
disburse corporate funds and issue checks and drafts in the name of the
corporation, as ordered by the Board; (e) render to the Chief Executive Officer
and the Board, whenever requested, an account of all transactions by the Chief
Financial Officer and of the financial condition of the corporation; and (f)
perform other duties prescribed by the Board or by the Chief Executive Officer.
The Chief Financial Officer may also be referred to as the Treasurer.
4.7. Assistant Officers. In the event of absence or disability of any
officer, assistants to such officers shall succeed to the powers and duties of
the absent officer in the order in which they are elected or as otherwise
prescribed by the Board of Directors until such principal officer shall resume
his duties or a replacement elected by the Board of Directors. Such assistant
officers shall exercise such other powers and duties as may be delegated to them
from time to time by the Board of Directors, but they shall be subordinate to
the principal officer they are designated to assist.
4.8. Officers Shall Not Lend Corporate Credit. Except for the proper use of
the corporation, no officer of this corporation shall sign or endorse in the
name or on behalf of this corporation, or in his official capacity, any
obligations for the accommodation of any other party or parties, nor shall any
check, note, bond, stock certificate or other security or thing of value
belonging to this company be signed by any officer or director as collateral for
any obligation other than valid obligations of this corporation.
ARTICLE 5.
INDEMNIFICATION
5.1. Authority of the Board of Directors. The corporation acting through
its Board of Directors or as otherwise provided in this bylaw, shall exercise as
fully as may be permitted from time to time by the statutes and decisional law
of the State of Minnesota or by any other applicable rules or principles of law
its power to indemnify any person who was or is a party or is threatened to be
made a party to any threatened, pending or completed action, suit, or
proceeding, wherever brought, whether civil, criminal, administrative, or
investigative, by reason of the fact that he is or was a director, officer,
employee, or agent of the corporation, or is or was serving at the request of
the corporation, as a director, officer, employee, or agent of another
corporation, partnership, joint venture, trust, or other enterprise, against
expenses, including attorneys' fees, judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding.
5.2. Standard for Indemnification. Any person described in Section 5.1 may
be indemnified by the corporation if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceedings, had no
reasonable cause to believe his conduct was unlawful.
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<PAGE>
5.3. No Presumptions Resulting From Termination of Actions. The
determination of any action, suit, or proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, have reasonable cause to believe that his conduct was unlawful.
5.4. Mandatory Indemnification. To the extent that any such person has been
successful on the merits or otherwise in defense of any action, suit, or
proceeding referred to in this bylaw, or in defense of any claim, issue, or
matter within this bylaw, he shall be indemnified against expenses, including
attorneys' fees, actually and reasonably incurred by him in connection
therewith.
5.5. Determination. Any indemnification under Section 5.1, unless ordered
by a court, shall be made by the corporation only as authorized in the specific
case upon a determination that indemnification of the director, officer,
employee, or agent is proper in the circumstances because he has met the
applicable standard of conduct set forth in Section 5.2. Such determination
shall be made (1) by the Board of Directors by a majority vote of a quorum
consisting of directors who are not parties to such action, suit, or proceeding,
or (2) if such a quorum is not obtainable, or, even if obtainable in a quorum of
disinterested directors so directs, by independent legal counsel in a written
opinion, or (3) by a majority vote of disinterested shareholders.
5.6. Advance Payment. The expenses incurred in defending a civil or
criminal action, suit, or proceeding may be paid by the corporation in advance
of the final disposition of such action, suit, or proceeding as authorized by
the Board of Directors in the manner provided in Section 5.5 upon receipt of an
undertaking by or on behalf of the director, officer, employee, or agent to
repay such amount unless it shall ultimately be determined that he is entitled
to be indemnified by the corporation as authorized in this bylaw.
5.7. Continuance of Indemnification. The indemnification provided by this
bylaw shall continue as to a person has ceased to be a director, officer,
employee, or agent and shall inure to the benefit of the heirs, executors, and
administrators of such a person.
5.8. Not Exclusive Remedy. The indemnification provided by this bylaw shall
not exclude any other right to which an officer may be entitled under any
agreement, vote of stockholders or disinterested directors, or otherwise, both
as to action in his official capacity and as to action in another capacity while
holding such office, and shall not imply that the corporation may not provide
lawful indemnification not expressly provided for in this bylaw. Nothing
contained in this bylaw shall effect any rights to indemnification to which
corporate personnel other than directors and officers may be entitled by
contract or otherwise under law.
5.9. Insurance. The corporation may purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee, or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against him
and incurred by him in any such capacity, provided, that no indemnification
shall be
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<PAGE>
made under any policy of insurance for any act which could not be indemnified by
the corporation under this bylaw.
5.10. Notice of Indemnification. If, under this bylaw, any expenses or
other amounts are paid by way of indemnification, otherwise than by Court order
or action by the shareholders, the corporation shall, not later than the next
annual meeting of shareholders unless such meeting is held within three (3)
months from the date of such payment, and in any event, within fifteen (15)
months from the date of such payment, mail to its shareholders of record at the
time entitled to vote for the election of directors a statement specifying the
persons paid, the amounts paid, and the nature and status of the litigation or
threatened litigation at the time of such payment.
ARTICLE 6.
SHARES AND THEIR TRANSFER
6.1. Certificates of Stock. There shall be no uncertificated shares of
stock. Every owner of stock of the corporation shall be entitled to a
certificate, to be in such form as the Board of Directors prescribes, certifying
the number of shares of stock of the corporation owned by him. The certificates
for such stock shall be numbered in the order in which they shall be issued and
shall be signed in the name of the corporation by the Chief Executive Officer,
and by the Secretary or any other proper officer of the corporation authorized
by the Board of Directors. A record shall be kept of the name of the person,
firm or corporation owning the stock represented by each such certificate, the
number of shares represented by each such certificate, and the respective issue
date thereof, and in the case of cancellation, the respective dates of
cancellation. Every certificate surrendered to the corporation for exchange or
transfer shall be cancelled and no other certificate or certificates shall be
issued in exchange for any existing certificates until such existing certificate
shall have been so cancelled except in cases provided for in Section 6.5 of this
Article 6.
6.2. Facsimile Signature. Where any certificate is manually signed by a
transfer agent, a transfer clerk or by a registrar appointed by the Board of
Directors to perform such duties, a facsimile or engraved signature of the
president and Secretary or other proper officer of the corporation authorized by
the Board of Directors may be inscribed on the certificate in lieu of the actual
signature of such officer. The fact that a certificate bears the facsimile
signature of an officer who has ceased to hold office shall not affect the
validity of such certificate if otherwise validly issued.
6.3. Establishment and Issuance of Shares. Subject to the provisions of the
Articles of Incorporation and as provided by law, the Board of Directors is
authorized to designate and cause to be issued, classes and series of shares of
the corporation, with designated voting rights, preferences, and other
characteristics, at such times and for such consideration as the Board of
Directors may determine.
6.4. Transfer of Shares. Transfer of shares on the books of the corporation
may be authorized only by the shareholder named in the certificate, or by the
shareholder's legal representative, or duly authorized attorney-in-fact, and
upon surrender for cancellation of the certificate or certificates for such
shares. The shareholder in whose name shares of stock stand
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<PAGE>
on the books of the corporation shall be deemed the owner thereof for all
purposes as regards the corporation; provided, that when any transfer of shares
shall be made as collateral security, and not absolutely, such facts, if known
to the Secretary of the corporation, or to the transfer agent, shall be so
expressed in the entry of transfer.
6.5. Lost Certificates. Any shareholder claiming a certificate of stock to
be lost or destroyed shall make an affidavit or affirmation of that fact in such
form as the Board of Directors may require, and shall, if the directors so
require, give the corporation a bond of indemnity in form and with one or more
sureties satisfactory to the Board, in an amount determined by the Board of
Directors not exceeding double the value of the stock represented by such
certificate to indemnify the corporation, against any claim that may be made of
such certificate; whereupon a new certificate may be issued in the same tenor
and for the same number of shares as the one alleged to have been destroyed or
lost.
6.6. Treasury Stock. Treasury stock shall be held by the corporation
subject to disposal by the Board of Directors, in accordance with the Articles
of Incorporation and these Bylaws, and shall not have voting rights nor
participate in dividends.
6.7. Inspection of Books by Shareholders. Upon written demand shareholders
shall for any purpose, as provided by statute, be permitted to examine and copy
the share register; records of shareholder and Board proceedings; the articles
of incorporation and amendments; the bylaws and amendments; reports made to
shareholders within the last three (3) years; voting trust agreements; a
statement of names and addresses of its Directors and principal officers; and
financial statements prepared for distribution to the shareholders or to a
government agency as a matter of public record. Shareholders shall for any
proper purpose and upon written demand be permitted to examine and copy other
corporate records.
6.8. Transfer Agent and Registrar. The Board of Directors may appoint one
or more Transfer agents or transfer clerks, and may require all certificates for
shares to bear the signature or signatures of any of them.
ARTICLE 7.
DIVIDENDS, DISTRIBUTIONS, ETC.
7.1. Dividends. Subject to the Provisions of the Articles of Incorporation,
these bylaws, and the applicable laws, the Board of Directors may declare a
distribution in the form of a dividend whenever, and in such amounts as, in its
opinion, the condition and the affairs of the corporation shall render it
advisable.
7.2. Other Distributions, Reserves. Subject to the provisions of the
Articles of Incorporation and of these bylaws, the Board of Directors in its
discretion may purchase or acquire any of the shares of the capital stock of
this corporation in accordance with law, or any of its bonds, debentures, notes,
scrip or other securities or evidences of indebtedness, or from time to time may
set aside from its net assets or net profits such sum or sums as it, in its
absolute discretion, may think proper as a reserve fund to meet contingencies,
or for the purpose of maintaining or increasing the property or business of the
corporation or for any other purpose it may think conducive to the best
interests of the corporation.
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<PAGE>
ARTICLE 8.
FINANCIAL AND PROPERTY MANAGEMENT
8.1. Fiscal Year. The fiscal year of the corporation shall be set by the
Board of Directors.
8.2. Audit of Books and Accounts. The books and accounts of the corporation
shall be audited at such times as may be ordered by the Board of Directors.
8.3. Contracts. The Board of Directors may authorize any officer or
officers, agent or agents, to enter into any contract or execute and deliver any
instrument in the name of and on behalf of the corporation, and such authority
may be general or confined to specific instances.
8.4. Checks. All checks, drafts, or other orders for the payment of money,
notes, or other evidences of indebtedness issued in the name of the corporation
shall be signed by the treasurer or such other officer or officers, agent or
agents of the corporation and in such manner as shall from time to time be
determined by resolution of the Board of Directors.
8.5. Deposits. All funds of the corporation not otherwise employed shall be
deposited from time to time to the credit of the corporation in such banks,
trust companies, or other depositories as the Board of Directors may select.
8.6. Voting Securities Held by Corporation. The Chief Executive Officer or
other agent designated by the Board of Directors shall have full power and
authority on behalf of the corporation to attend, act and vote at any meeting of
security holders of other corporations in which this corporation may hold
securities. At such meeting the Chief Executive Officer, or such other agent,
shall possess and exercise any and all rights and powers incident to the
ownership of such securities which the corporation might possess and exercise.
ARTICLE 9.
WAIVER OF NOTICE
9.1. Requirement of Waiver in Writing. Whenever any notice whatever is
required to be given by these Bylaws or the Articles of Incorporation of the
corporation or any of the corporate laws of the State of Minnesota, a waiver
thereof in writing, signed by the person or persons entitled to said notice,
either before, at, or after the time stated therein, shall be deemed equivalent
thereto. Attendance by a director at a meeting of the Board of Directors or
attendance by a shareholder at a meeting of the shareholders shall constitute a
waiver of the notice of said meeting.
ARTICLE 10.
AMENDMENTS
10.1. Action by Board of Directors. The Board of Directors of the
corporation is expressly authorized to make bylaws of the corporation and from
time to time to alter or repeal bylaws so made. In so acting, the Board of
Directors may do so only upon vote of a majority of
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<PAGE>
the entire Board of Directors then in office and present at any meeting called
for that purpose, provided that notice of such proposed amendment shall have
been given to the directors in the notice of such meeting. Such authority in the
Board of Directors is subject to the powers of the voting shareholders to enact,
change or repeal such bylaws by majority vote of the shareholders to enact,
change or repeal such bylaws by majority vote of the shareholders present and
represented at any annual meeting or at any special meeting called for that
purpose, and the Board of Directors shall not make or alter any bylaws fixing
the number, qualifications or term of office of members of the Board.
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[Corrected Copy] Exhibit 10.14
[to Form 10-K]
Exhibit 1.4 to the
Loan Agreement
dated September 10, 1998
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933 (THE "1933 ACT") OR UNDER THE SECURITIES LAWS OF ANY
STATE. THEY MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF FOR VALUE
EXCEPT PURSUANT TO REGISTRATION OR OPERATION OF LAW WITHOUT AN OPINION OF
COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH TRANSFER MAY LAWFULLY BE MADE
WITHOUT REGISTRATION UNDER THE STATE SECURITIES LAWS AND/OR THE 1933 ACT.
APPLIANCE RECYCLING CENTERS OF AMERICA, INC.
STOCK PURCHASE WARRANT
700,000 SHARES
OF COMMON STOCK
For value received MEDALLION CAPITAL, INC., a Licensee under the Small
Business Investment Act of 1958 ("Investor"), or its assigns, is entitled to
subscribe for and purchase, upon written notice given any time prior to the
later of September 10, 2007 or two years after the repayment in full of the Note
dated September 10, 1998 issued to Investor, 700,000 shares (subject to
adjustment as provided below) of the no par Common Stock, fully paid and
nonassessable, of APPLIANCE RECYCLING CENTERS OF AMERICA, INC., a Minnesota
corporation (the "Company"), at the price of $2.50 per share (subject to
adjustment as provided below, the "Warrant Price"), subject to the terms and
conditions set forth below.
1. LOAN AGREEMENT. This Warrant is issued pursuant to, and is subject
to all of the terms and conditions of the Loan Agreement between the Company and
Investor, dated September 10, 1998 (the "Loan Agreement").
2. METHOD OF EXERCISE: TRANSFER AND EXCHANGE.
A. CASH EXERCISE. The holder may exercise the purchase right represented
by this Warrant, by surrendering this Warrant, properly endorsed, together
with a written request specifying the number of shares to be purchased and
the purchase price in cash or by check, at the principal office of the
Company. Thereupon, this Warrant shall be deemed exercised and the person
exercising this Warrant shall be deemed to have become a holder of record
of shares of Common Stock (or other securities or property to
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<PAGE>
Exhibit 1.4 to the
Loan Agreement
dated September 10, 1998
which such person is entitled under the terms of this Warrant upon such
exercise). Certificates for the shares of stock purchased shall be
delivered to the holder within 14 days after such exercise. Unless this
Warrant has expired, a new Warrant representing the balance of shares not
issued under this Warrant shall also be issued to the holder.
B. NET EXERCISE. In lieu of paying the Warrant Price to exercise this
Warrant pursuant to Section 2(A) above, the holder may elect to receive
shares of Common Stock equal to the value of this Warrant (or of any
portion thereof remaining unexercised) by surrender of this Warrant at the
principal office of the Company together with notice of such election, in
which event the holder shall be deemed to have become a holder of record of
shares of Common Stock (or other securities or property to which such
person is entitled under the terms of this Warrant in lieu thereof)
computed using the following formula:
X = Y (A-B)
-------
A
Where X = the number of shares of common stock to be issued to the
holder.
Y = the number of shares of common stock purchasable under this
Warrant (at the date of such calculation).
A = the fair market value of one share of the Company's common
stock (at the date of such calculation).
B = Warrant exercise price (as adjusted to the date of such
calculation).
For purposes of this Section 2(B), fair market value of one share of the
Company's common stock shall mean:
(i) The average of the closing bid price of the Common Stock on the
over-the-counter market (or closing sale price if the common stock is
listed on the Nasdaq National Market or a national exchange), as published
in The Wall Street Journal or any other reputable publication, for the ten
(10) trading days prior to the date of determination of fair market value;
or
(ii) If the common stock is not traded over-the-counter or on an
exchange, the per share fair market value of the common stock shall be as
determined by agreement of the Company and the holder of this Warrant, or
if they cannot agree, by an independent appraiser selected in good faith by
the Company's Board of Directors and reasonably acceptable to the
exercising holder of this Warrant (the cost of such appraisal shall be
borne by the Company).
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<PAGE>
Exhibit 1.4 to the
Loan Agreement
dated September 10, 1998
C. TRANSFER. Subject to the terms and provisions of this Warrant and
Article Six of the Loan Agreement, the holder may transfer this Warrant and its
rights, in whole or in part, by surrendering this Warrant at the principal
office of the Company, properly endorsed, and paying any necessary governmental
tax or transfer Charge. Upon any partial transfer, the Company shall deliver to
the holder an appropriate new Warrant certificate. Each holder of this Warrant
agrees that when this Warrant is endorsed in blank, it shall be deemed
negotiable and the holder may be treated by the Company and all other persons
dealing with this Warrant as the absolute owner having the right to transfer of
ownership on the books of the Company, any notice to the contrary
notwithstanding. However, until the transfer is recorded on the books, the
Company may treat the registered holder as the owner.
D. EXCHANGE. This Warrant is exchangeable at the principal office of the
Company for Warrants for the purchase of the some aggregate number of shares of
Common Stock, each new Warrant to represent the right to purchase the number of
shares of Common Stock, as the holder designates at the time of exchange. All
Warrants issued on transfers or exchanges shall be dated the date hereof and
shall be identical to this Warrant except as to the number of shares of Common
Stock issuable.
3. STOCK FULLY PAID; RESERVATION OF SHARES. The Company covenants that all
shares which may be issued upon the exercise by this Warrant will be fully paid
and nonassessable and free from all taxes, liens and charges. The Company
further covenants that during the time this Warrant may be exercised, the
Company will at all times have authorized and reserved the number of shares of
its Common Stock issuable upon exercise of this Warrant.
4. ADJUSTMENT OF PURCHASE PRICE AND NUMBER OF SHARES. The number and kind
of securities purchasable upon the exercise of this Warrant and the Warrant
Price shall be subject to adjustment upon the happening of the following events:
A. CONSOLIDATION, MERGER OR RECLASSIFICATION. If the Company
consolidates or merges into any other corporation, or sells, transfers or
disposes of all or substantially all the property, assets, business and/or
goodwill of the Company to another corporation, or in any manner changes
the securities to be purchased upon the exercise of this Warrant,
appropriate provisions shall be made in writing to protect the holder of
this Warrant against dilution of the holder's interest and rights. A new
Warrant evidencing any changes necessary to protect the holder shall be
issued by the Board of Directors.
B. SUBDIVISION OR COMBINATION OF SHARES. In case of subdivision of
shares, the Warrant price shall be proportionately reduced and the number
of shares purchasable upon the exercise of this Warrant proportionately
increased. In the case of combination of shares, the Warrant Price shall be
proportionately increased and the number of shares purchasable upon the
exercise of this Warrant proportionately decreased.
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<PAGE>
Exhibit 1.4 to the
Loan Agreement
dated September 10, 1998
C. CERTAIN DIVIDENDS AND DISTRIBUTIONS. If the Company takes a record of
the holders of its Common Stock for the purpose of:
(i) STOCK DIVIDENDS. Entitling them to receive a dividend payable in,
or other distribution of, Common Stock, then the Warrant Price shall be
adjusted to that price determined by multiplying the Warrant Price in
effect immediately prior to the record date by a fraction; the numerator
of which shall be the total number of shares of Common Stock outstanding
immediately prior to the record date, and the denominator of which shall
be the total number of shares of Common Stock outstanding (including for
this purpose fractions of shares which would have been distributed in
connection with such dividend or distribution had cash not been paid or
script issued in lieu thereof) immediately after the dividend or
distribution. The number of shares purchasable upon the exercise of this
Warrant shall be adjusted to that number determined by multiplying the
number of shares purchasable upon the exercise of this Warrant
immediately prior to the record date by a fraction, the numerator of
which shall be the Warrant Price adjusted as aforesaid and the
denominator of which shall be the Warrant Price immediately prior to the
record date; or
(ii) LIQUIDATING DIVIDENDS, ETC. Making a distribution of its assets
to the holders of its Common Stock as a dividend in liquidation or
partial liquidation or by way of return of capital or other than as a
dividend payable out of the Company's earnings during the current and
prior fiscal quarter, the holders of this Warrant shall, upon its
exercise, be entitled to receive, in addition to the number of shares of
Common Stock receivable, a sum equal to the amount of assets as would
have been payable to them as owners of that number of shares of Common
Stock this Warrant represents had this Warrant been exercised
immediately prior to the record date for such distribution.
D. ADJUSTMENT FOR LOW PRICED ISSUANCE OF SHARES. In the event that at
any time after this Warrant is issued and while it remains outstanding, the
Company issues more then an aggregate of 500,000 shares of Common Stock for
a consideration (however paid) of $2.00 per share or less, then the Warrant
Price shall be reduced to a per share amount equal to 120% of the lowest
price per share at which the Company issues Common Stock after issuance of
the 500,000 shares which are referred to earlier in this sentence. In
computing whether the Company has issued 500,000 shares of Common Stock so
as to trigger the provisions of this paragraph, there shall be included the
number of shares of Common Stock which become subject, through the issuance
by the Company while this Warrant is outstanding, of any rights or
securities which are exercisable, exchangeable or convertible into shares
of Common Stock for an exercise, exchange or conversion price of less than
$2.00 per share, except for Common Stock issued or
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<PAGE>
Exhibit 1.4 to the
Loan Agreement
dated September 10, 1998
issuable upon exercise of options or warrants to purchase Common Stock
currently outstanding or as contemplated to be issued to John White as set
forth on the Disclosure Schedule to Loan Agreement, which Common Stock
shall not be considered in computing such number; and if any such rights or
securities expire before they are exercised, exchanged or converted, then
upon such expiration such rights or securities shall be considered never to
have been issued for purposes of determining whether or not the provisions
of this paragraph have been triggered.
E. TREASURY SHARES EXCLUDED. The number of shares of Common Stock at any
time outstanding shall not include any shares then directly or indirectly
owned by the Company.
F. OTHER ACTION AFFECTING COMMON STOCK. In the event the Company shall
take any action affecting its Common Stock, other than an action described
in subsections A through C, which would have a materially adverse effect
upon the rights of the holder of this Warrant, the Warrant Price and the
number of shares of Common Stock purchasable shall be adjusted in such
manner and at such time as the Board of Directors may in good faith
determine to be equitable under the circumstances to protect the interests
of the holder of this Warrant.
5. NOTICE OF ADJUSTMENTS. Whenever any Warrant Price and/or the number of
shares of Common Stock purchasable is to be adjusted pursuant to Section 4, the
Company shall promptly provide to the holder of this Warrant, a certificate
signed by its President and by its Treasurer or Secretary setting forth the
event requiring the adjustment, the amount of the adjustment, the method by
which such adjustment was calculated (including a description of the basis on
which the Company's Board of Directors made any determination), and the Warrant
Price or Prices and number of shares of Common Stock purchasable after giving
effect to such adjustment. Except as hereinafter provided, no adjustment of the
Warrant Price hereunder shall be made if such adjustment results in a change in
the Warrant Price then in effect of less than five cents ($.05). Any adjustment
of less than five cents ($.05) shall be carried forward and shall be made at the
time of and together with any subsequent adjustment which, together with any
adjustment or adjustments so carried forward, amounts to five cents ($.05) or
more. However, upon the exercise of this Warrant, the Company shall make all
necessary adjustments (to the nearest cent) not theretofore made to the Warrant
Price up to and including any date upon which this Warrant is exercised.
6. NOTICES OF RECORD DATE, ETC. In the event the Company takes a record of
the holders of any class of its securities concerning any proposed capital
reorganization, reclassification, recapitalization, transfer of substantially
all the assets of the Company, consolidation, merger, voluntary or involuntary
dissolution, liquidation or winding-up, then the Company shall mail to each
holder of a Warrant a notice specifying (i) the date on which any
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<PAGE>
Exhibit 1.4 to the
Loan Agreement
dated September 10, 1998
record is to be taken, (ii) the date on which any reorganization,
reclassification, recapitalization, transfer, consolidation, merger,
dissolution, liquidation or winding-up is to take place, (iii) the proposed
terms thereof, and (iv) if applicable, the time as of which the holders or
record of Common Stock (or other securities) shall be entitled to exchange their
shares of Common Stock (or other securities) for securities or other property.
The notice shall be mailed at least 15 days prior to the earlier of the date
referred to in (i) or (ii) above. If any right to subscribe for or purchase
securities is offered to the holders of Common Stock, the holder of a Warrant
shall similarly receive rights with respect to any shares purchasable under the
Warrant to the same extent as if the Warrant had been duly exercised.
7. REGISTRATION RIGHTS. This Warrant shall have all of the registration
rights that are contained in Article Six of the Loan Agreement, whether or not
the indebtedness under the Loan Agreement has been repaid.
Dated and delivered on September 10, 1998.
APPLIANCE RECYCLING CENTERS OF AMERICA, INC.
By: /s/ Edward R. Cameron, Pres.
----------------------------------------------
Edward R. Cameron
President
By: /s/ Kent S. McCoy
----------------------------------------------
Chief Financial Officer
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EXHIBIT 10.15
FOURTH AMENDMENT
TO
GENERAL CREDIT AND SECURITY AGREEMENT
THIS AGREEMENT, dated as of September 10, 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 800, 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 and No/100ths Dollars ($2,000,000).
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) Nine
Hundred Thousand and No/100ths Dollars ($900,000.00)
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.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
SPECTRUM COMMERCIAL SERVICES APPLIANCE RECYCLING CENTERS
OF AMERICA, INC.
By /s/ Steven Lowenthal By /s/ Edward R. Cameron
---------------------------------------- ------------------------------
Steven I. Lowenthal, Senior Vice President Its President
<PAGE>
GUARANTOR ACKNOWLEDGMENT
The undersigned (collectively the "Guarantor") has entered into certain
Guaranties of various dates (collectively the "Guaranty;" capitalized terms not
otherwise defined herein being used herein as therein defined), pursuant to
which each 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
Revolving Note dated as of August 30, 1996 between the Borrower and SCS as
subsequently amended (as so amended the "Original Loan Agreement").
Each Guarantor hereby acknowledges that it has received a copy, of: (a)
the Fourth 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 Guarantor hereby:
(a) agrees and acknowledges that:
(i) the Guaranty applicable to the Guarantor shall be of an
UNLIMITED AMOUNT, including without limitation all of Lender's
fees, costs, expenses and attorneys' fees incurred in enforcing the
Guarantee; and
(b) confirms that:
(i) by the Guaranty, the Guarantor continues to guarantee the
full payment and performance of all 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 remains in full force and effect,
enforceable against the Guarantor in accordance with its terms.
/s/ Edward R. Cameron
-----------------------------------
ARCA-MARYLAND INC. Edward R. Cameron
Guarantor
By /s/ Edward R. Cameron
----------------------------------
Its President
APPLIANCE RECYCLING CENTERS ARCA OF ST. LOUIS, INC.
OF AMERICA-CALIFORNIA, INC.
By /s/ Edward R. Cameron By /s/ Edward R. Cameron
---------------------------------- --------------------------------
Its President Its President
Accepted and Agreed to this 4th day of June, 1998
SPECTRUM COMMERCIAL SERVICES
By: /s/ Steven I. Lowenthal
---------------------------------
Its Senior Vice President
EXHIBIT 10.16
FIFTH AMENDMENT TO
GENERAL CREDIT AND SECURITY AGREEMENT
THIS AGREEMENT, dated as of September 17, 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. Paragraph 5 of the Credit Agreement which is entitled
"Interest" is hereby deleted and replaced with the following:
INTEREST. Borrower agrees to pay interest on the outstanding
principal amount of the Note at the close of each day at a fluctuating rate per
annum (computed on the basis of actual number of days elapsed and a year of 360
days) which is at all times equal to Five Percent (5%) in excess of the Prime
Rate; each chance in such fluctuating rate caused by a change in the Prime Rate
to occur simultaneously with the change in the Prime Rate; 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 $5,625.00 regardless of the amount of
loans, Advances or other credit extensions that actually may have been
outstanding during the month. Interest accrued through the last day of each
month will be due and payable to Lender on the next Monthly Payment Date,
commencing October 1, 1996. Interest shall also be payable on the Maturity Date
or on any earlier Termination Date. Interest accrued after the Maturity Date or
earlier Termination Date shall be payable on Demand. Interest may be charged to
Borrower's loan account as an Advance at Lender's option, whether or not
Borrower then has the right to obtain an Advance pursuant to the terms of this
Agreement. Notwithstanding the foregoing, after an Event of Default, this Note
shall bear interest until 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 $7,700.00 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.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
SPECTRUM COMMERCIAL SERVICES APPLIANCE RECYCLING CENTERS
OF AMERICA, INC.
By /s/ Steven Lowenthal By /s/ Edward R. Cameron
-------------------------------------------- ----------------------------
Steven I. Lowenthal, Senior Vice President Its President
-1-
<PAGE>
GUARANTOR ACKNOWLEDGMENT
The undersigned (collectively the "Guarantor") has entered into certain
Guaranties of various dates (collectively the "Guaranty;" capitalized terms not
otherwise defined herein being used herein as therein defined), pursuant to
which each 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
Revolving Note dated as of August 30, 1996 between the Borrower and SCS as
subsequently amended and/or restated (as so amended the "Original Loan
Agreement").
Each Guarantor hereby acknowledges that it has received a copy of: (a)
the Fifth Amendment to General Credit and Security Agreement dated as of the
date hereof (the "Loan Agreement") between the Borrower and SCS amending and
restating the Original Loan Agreement:
Each Guarantor hereby confirms that:
(i) by the Guaranty, the Guarantor continues to guarantee
the full payment and performance of all 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 remains in full force and effect,
enforceable against the Guarantor in accordance with its terms.
/s/ Edward R. Cameron
------------------------------
ARCA-MARYLAND, INC. Edward R. Cameron
Guarantor
By /s/ Edward R. Cameron
-----------------------------
Its President
APPLIANCE RECYCLING CENTERS ARCA OF ST. LOUIS, INC.
OF AMERICA-CALIFORNIA, INC.
By /s/ Edward R. Cameron By /s/ Edward R. Cameron
----------------------------- ----------------------------
Its President Its President
Accepted and Agreed to this 17th day of September, 1998
SPECTRUM COMMERCIAL SERVICES
By /s/ Edward R. Cameron
-----------------------------
Its President
-2-
<PAGE>
THIRD AMENDED AND RESTATED REVOLVING NOTE
$2,000,000.00 September 17, 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 and 00/100 Dollars ($2,000,000.00), 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 $5,625 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 $7,700 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
-1-
<PAGE>
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 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 it may have been subsequently, amended and/or
restated; 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
-2-
<PAGE>
may offset or charge 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 Second
Amended and Restated Revolving Note dated as of June 4, 1998 made by the
undersigned payable to the order of Lender in the original principal amount of
$2,900,000.00.
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 /s/ Edward R. Cameron
--------------------------------------
Edward R. Cameron
President
-3-
EXHIBIT 21.1
APPLIANCE RECYCLING CENTERS OF AMERICA, INC.
SUBSIDIARIES AS OF JANUARY 2, 1999
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%
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANT'S
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), and on Form S-8 (commission file No. 333-28571) of our
report dated February 19, 1999 with respect to the consolidated financial
statements of Appliance Recycling Centers of America, Inc., and subsidiaries
appearing in this Annual Report on Form 10-K for the year ended January 2, 1999.
McGLADREY & PULLEN, LLP
Minneapolis, Minnesota
March 26, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-START> JAN-04-1998
<PERIOD-END> JAN-02-1999
<CASH> 14,000
<SECURITIES> 0
<RECEIVABLES> 498,000
<ALLOWANCES> 0
<INVENTORY> 1,979,000
<CURRENT-ASSETS> 100,000
<PP&E> 9,657,000
<DEPRECIATION> 3,876,000
<TOTAL-ASSETS> 8,843,000
<CURRENT-LIABILITIES> 3,062,000
<BONDS> 0
0
0
<COMMON> 10,857,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 8,843,000
<SALES> 13,612,000
<TOTAL-REVENUES> 13,612,000
<CGS> 9,631,000
<TOTAL-COSTS> 9,631,000
<OTHER-EXPENSES> (319,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 601,000
<INCOME-PRETAX> (3,025,000)
<INCOME-TAX> 31,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,056,000)
<EPS-PRIMARY> (2.55)
<EPS-DILUTED> (2.55)
</TABLE>
