Mail Stop 03-08
May 25, 2005
Linda A. Koenig
Chief Financial Officer
Appliance Recycling Centers of America, Inc.
7400 Excelsior Boulevard
Minneapolis, Minnesota 55426-4517
Re: Appliance Recycling Centers of America, Inc.
Form 10-K for the Fiscal Year Ended January 1, 2005
Form 10-Q for the Fiscal Quarter Ended April 2, 2005
File No. 0-19621
Dear Ms. Koenig:
We have reviewed the above referenced filings and have the
following comments. We have limited our review to only your
financial statements and related disclosures and do not intend to
expand our review to other portions of your documents. Where
indicated, we think you should revise your documents in response
to
these comments in future filings. If you disagree, we will
consider
your explanation as to why our comment is inapplicable or a
revision
is unnecessary. Please be as detailed as necessary in your
explanation. In some of our comments, we may ask you to provide
us
with information so we may better understand your disclosure.
After
reviewing this information, we may raise additional comments.
Please understand that the purpose of our review process is
to
assist you in your compliance with the applicable disclosure
requirements and to enhance the overall disclosure in your filing.
We look forward to working with you in these respects. We welcome
any questions you may have about our comments or any other aspect
of
our review. Feel free to call us at the telephone numbers listed
at
the end of this letter.
Form 10-K for the Fiscal Year Ended January 1, 2005
Item 7. Management`s Discussion and Analysis of Financial
Condition
and Results of Operations, page 16
General
1. We note you operate four processing and recycling centers.
Additionally, you state in the business section that, "under some
circumstances we may be subject to contingent liabilities because
we
handle hazardous materials." Tell us if you have any
environmental
remediation liabilities or contingencies at the balance sheet
date.
Also, tell us if these sites historically required environmental
remediation.
Critical Accounting Policies, page 17
2. In future filings, revise your disclosures to present a more
robust discussion as to why these are critical accounting
policies.
Such disclosure should supplement, not duplicate, the description
of
accounting policies that are already disclosed in the notes to the
financial statements. The disclosure should provide greater
insight
into the quality and variability of information regarding
financial
condition and operating performance. The discussion in MD&A
should
present your analysis of the uncertainties involved in applying a
principle at a given time or the variability that is reasonably
likely to result from its application over time.
* Discuss why management believes the accounting policy is
critical;
* Discuss how accurate your estimates and assumptions have been in
the past, how much they have changed in the past and whether they
are
likely to change in the future;
* Include quantitative disclosure of your sensitivity to change
based
on other outcomes that are reasonably likely to occur and that
would
have a material effect on the company.
Refer to Item V of Release Nos. 33-8350/34-48960.
Results of Operations, page 19
3. In future filings, revise your disclosure to provide a
narrative
discussion of the extent to which material financial statement
increases are attributable to increases in prices or to increases
in
the volume or amount of goods or services being sold or to the
introduction of new products or services. For example, we note
that
retail revenues increased $7.0 million from 2003 to 2004 and that
same-store sales for 2004 increased 10%. Please revise your
disclosure to state the revenues in 2004 and 2003 that came from
same-store sales, and the revenues that came from new stores. See
Item 303(a)(3)(iii) of Regulation S-K.
4. In future filings, in circumstances where you describe more
than
one business reason for a significant change between periods in
key
financial data or indicators, please quantify, in dollars, to the
extent possible the incremental impact of each individual business
reason on the overall change. For example, in your discussion of
the
increase in gross profit, quantify the impact of changes in the
material factors contributing to the increase in gross profit
percentage.
5. We note your disclosure on page 22 that some distribution
center
costs are included in selling, general and administrative expense.
Please expand your disclosure here and in the notes to the
financial
statements to describe the costs included in costs of sales.
Indicate specifically whether you include purchasing and receiving
costs, inspection costs, internal transfer costs and other costs
of
your distribution network. For those costs excluded, such as the
distribution center costs, please tell us why the costs are
excluded
and disclose:
* The line item that the excluded costs are included in, for
example,
selling, general and administrative, and the amounts included in
each
line item for each period presented; and,
* In MD&A disclose that your gross margins may not be comparable
to
others, since some entities include the costs related to their
distribution network in cost of goods sold and others like you
exclude all or a portion of them from gross margin, including them
instead in a line item such as selling, general and administrative
expenses.
Liquidity and Capital Resources, page 23
6. Please expand your disclosure in future filings to discuss how
your debt covenants impact your plans to open up new stores in
2005
and thereafter. See Item IV of Release Nos. 33-8350/34-48960.
Item 8. Financial Statements and Supplemental Data, page 26
Consolidated Statement of Shareholders` Equity, page 30
7. Please include a separate column that reconciles the number of
shares held in common stock and details the activity during each
period presented. Reference is made to APB 12. We note from the
shares outstanding on the consolidated balance sheet that you
issued
1,772,000 shares of common stock in 2004. It is not evident on
the
consolidated statement of stockholders` equity and consolidated
statement of cash flows, that all common stock issuances have been
reflected in the periods presented. For example, in Note 8 you
discuss warrant exercises during 2004 totaling 606,000 shares of
common stock. The consolidated statement of stockholders` equity
and
consolidated statement of cash flows list proceeds of only $18,000
from the exercise of warrants. Please clarify for us and include
in
your response all common stock issuances, stock option exercises
and
warrant exercises herein.
Note 1. Nature of Business and Significant Accounting Policies,
page
32
Software development costs, page 34
8. Tell us, and disclose in future filings, the total amount of
capitalized software developed for internal use included in
property,
plant and equipment. Additionally, tell us, and expand your
disclosure in future filings to describe how you have considered
SOP
98-1 and EITF 00-2 in the capitalization of software costs.
Please
include the stage of software development, the anticipated service
date, the eventual use of the software and how the type of costs
incurred qualifies for capitalization under these standards.
Item 9A. Controls and Procedures, page 44
9. Tell us in greater detail the nature of the material weakness
identified in your disclosure and when the material weakness first
began. In this regard, also tell us the specific steps that the
company has taken, if any, to remediate the material weakness and
whether the company believes that the material weakness still
exists
at the end of the period covered by the report.
10. We note that your chief executive officer and chief financial
officer certified, in their Rule 13a-14 certifications, that based
on
their knowledge, "the financial statements, and other financial
information included in this report, fairly present in all
material
respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in
this
report." Given the material weakness discussed, disclose why you
believe the financial statements for the fiscal period covered by
your reports fairly present in all material respects your
financial
condition, results of operations and cash flows.
* * * *
Please send us your response to these comments within 10
business days or tell us when you will provide us with a response.
Please furnish a cover letter keying your responses to our
comments
and provide any requested supplemental information. Please file
your
response letter on EDGAR. Please understand that we may have
additional comments after reviewing your responses to our
comments.
We urge all persons who are responsible for the accuracy and
adequacy of the disclosure in the filing to be certain that the
filing includes all information required under the Securities
Exchange Act of 1934 and that they have provided all information
investors require for an informed investment decision. Since the
company and its management are in possession of all facts relating
to
a company`s disclosure, they are responsible for the accuracy and
adequacy of the disclosures they have made.
In connection with responding to our comments, please
provide,
in writing, a statement from the company acknowledging that:
* the company is responsible for the adequacy and accuracy of the
disclosure in the filing;
* staff comments or changes to disclosure in response to staff
comments do not foreclose the Commission from taking any action
with
respect to the filing; and
* the company may not assert staff comments as a defense in any
proceeding initiated by the Commission or any person under the
federal securities laws of the United States.
In addition, please be advised that the Division of
Enforcement
has access to all information you provide to the staff of the
Division of Corporation Finance in our review of your filing or in
response to our comments on your filing.
You may contact Dave Irving, Staff Accountant, at (202) 551-
3321 or, in his absence, to Donna Di Silvio, at (202) 551-3202, if
you have questions regarding comments on the financial statements
and
related matters. Please contact me at (202) 551-3841 with any
other
questions.
Sincerely,
Michael Moran
Branch Chief
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Ms. Linda A. Koenig
Appliance Recycling Centers of America, Inc.
May 25, 2005
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