SecProbe.io

CORRESP
1
filename1.htm

  APPLIANCE RECYCLING CENTERS OF AMERICA,
  INC.

  7400 Excelsior Blvd. Minneapolis, MN 55426-4517

  TELEPHONE: (952) 930-9000

  FACSIMILE: (952) 930-1800

June 17, 2005

Mr. Michael Moran

Branch Chief

Securities and Exchange Commission

Division of Corporation Finance

Mail Stop 03-08

Washington, D.C.  20549

  Re:

  Appliance Recycling Centers of America, Inc.

  Comment Letter dated May 25, 2005

  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 Mr. Moran:

We have received your comment letter dated May 25, 2005, with
respect to the above-referenced filings by Appliance Recycling Centers of
America, Inc.  Your letter requested
a response within 10 business days.  On June 8,
2005 we contacted Dave Irving, Staff Accountant, to request an additional 10
business days to complete our responses to your comments and he granted us the
requested extension.

As requested, we are providing the following responses and supplemental
information.  To facilitate your review
of our responses, we have set forth below the full text of each comment,
followed by our response thereto.

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

1

liabilities or contingencies at the
balance sheet date.  Also, tell us if
these sites historically required environmental remediation.

Response:  As
of the balance sheet date we do not have any environmental remediation
liabilities or contingencies.  Also,
these sites have not required any environmental remediation in the past.  We have many processes and procedures in
place to prevent any leaks or spills of any hazardous materials that we handle
in the recycling of appliances.  Some of
these include:

a.               A Corporate Risk and Training Manager.

b.              Specific processes and procedures for
handling all hazardous materials.

c.               Emergency response procedures if a spill or
leak should occur.

d.              Employee screening, hiring and
certifications.

e.               Permits and licenses required for each
location by federal, state and local laws.

f.                 Reporting of hazardous materials handling to
the appropriate legal authorities.

g.              Periodic audits of subcontractors who provide
services for handling hazardous materials for us.

Even with all of the above in place, there is no
guarantee that a hazardous spill or leak could not occur.  However, since we have no history of a hazardous
spill or leak we have no basis to calculate a liability.

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.

Response:  In
future filings we will present a more robust discussion as to why these are
critical accounting policies.  Following
are examples of our anticipated discussions:

Revenue recognition:  We recognize retail revenues when the
consumer pays for the appliance with cash, check or credit card.  We recognize recycling revenue when we
collect and process a unit under our recycling contracts.  We recognize byproduct revenue when we
receive payment from the scrap metal processor, and when we ship CFCs to a
recycler.

We
also sell extended warranty agreements to consumers who purchase
appliances.  We retain the obligation to
provide the warranty service for a small number of these agreements.  In these cases, we collect funds at the time
the consumer purchases the extended warranty agreement and recognize revenue

2

over the term of the warranty contract, which is usually 12 months.  On the remaining extended warranty agreements
that we sell, we are not responsible for the service costs since the third
party service provider is responsible for them.
In these cases, we recognize revenue at the time of sale, in an amount
equal to the sale price paid by the consumer, less a commission payable by us
to the third party service provider.
Revenue from the sale of extended warranty agreements is included in
retail revenues.

We
include shipping and handling charges to customers in retail revenues.  The payment of the shipping and handling
charges to customers is deposited in our bank accounts within 48 hours.  The shipping and handling costs that we incur
related to the shipping and handling charges are included in cost of revenues.

The
application of our revenue recognition policy does not involve significant
uncertainties and is not subject to accounting estimates or assumptions having
significant sensitivity to change.

Product warranty:
Our warranty
policy states that we will repair or replace defective units at no cost to our
customers.  We are an authorized service
provider for Whirlpool, Maytag, Frigidaire and GE.  After we provide service to our customers who
purchased an appliance from us, we submit a service reimbursement claim to the
appliance manufacturer to cover the costs incurred.  There are a small number of warranties that
we offer that we are responsible for the cost of the service call.  We analyze this information to determine what
our potential future expense will be and record a liability.  Our product warranty policy contains
uncertainties because management must estimate the potential future expense for
those service calls that are not covered under the authorized service provider
agreements with the appliance manufacturers.
However, we do not believe the uncertainties relating to management’s
estimates would have a material effect on our results of operations.

Trade receivables:  We
invoice our recycling customers for recycling services with 30 day payment
terms.  Historically we have had very few
write-offs of uncollectible invoices.  We
also invoice the appliance manufacturers for credits due to us as a result of
appliances we receive that do not meet the requirements of our agreement with
them.  Some of these receivables have
been written-off when credits have not been received from the
manufacturer.  Management must apply
judgment in determining if any of these receivables will become
uncollectible.  This estimate is used to
calculate the allowance for doubtful accounts for these receivables.

Inventories:  We value our inventories of
appliances at the lower of cost, first-in, first-out (FIFO), or market and
establish an inventory reserve, which represents management’s estimate as to
the realizability of our appliance inventory.
This inventory reserve contains uncertainties since management must make
assumptions and apply judgments regarding inventory aging and adjustments to
market.  In making these assumptions and
judgments, management reviews historical aging information and margin
analyses.  Management’s estimates and the
adequacy of our inventory reserve could be affected by changes in the market
for appliances, including price changes by manufacturers, and such changes
could have material effect on our results of operations.

Property and equipment:
Management estimates the life of property and equipment based on the use
of the item.  Management estimates the
life of leaseholds based on the underlying lease and/or useful life.

Income taxes:  Deferred tax assets are reduced
by a valuation allowance when, in the opinion of our management, it is more
likely than not that some portion or all of the deferred tax assets will not be
realized.  In establishing a valuation
allowance, management must estimate whether and when we will have future
taxable income that can be reduced by deferred tax assets.

Stock-based compensation:
Currently, we use the Black-Scholes option pricing model to determine
the pro-forma compensation costs presented in Note 1 of our financial
statement.  This pricing model requires
management to estimate if and when options granted will be exercised.  In determining this estimate, management
reviews historical performance of the Company’s stock and stock option
exercises.

3

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.

Response:  In
future filings we will include additional narrative discussion regarding
increases in revenues and also quantify the increases by reason.  The increase in retail revenues of 20.2% or
$7,042,000 for 2004 compared to 2003 was a result of same-store sales increase
of 10% or approximately $2,798,000, new stores operating in 2004 with sales of
approximately $3,666,000, and approximately $578,000 from stores that were
opened during 2003 but could not be included in the same-store calculation.

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.

Response:  In
future filings, we will quantify, in dollars, to the extent possible the
incremental impact of each individual business reason on the overall change
between periods in key financial data or indicators.

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.

Response:  We
will expand our disclosure in future filings to disclose that cost of goods
sold includes all costs other then Selling, General and Administrative
Expenses.  Cost of goods sold includes
all costs related to the purchase of inventory, including freight, costs
related to the receiving and distribution of inventory, and costs related to
the delivery and service of the inventory after it is sold to the consumer. The
costs included in Selling, General and Administrative Expenses on page 22 were
the general and administrative costs related to the opening of the combination
retail store/warehouse distribution center.
Since we do include all

4

costs related to our distribution network in cost
of goods sold, our gross margins are comparable to others.

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.

Response:  In
future filings we will expand in our disclosure to discuss how our debt
covenants may impact our plans to open new stores in 2005 and thereafter.  Our current line requires that we meet certain
financial covenants, provides payment penalties for noncompliance and
prepayment, limits the amount of other debt we can
incur, limits the amount of spending on fixed assets, and limits payments of
dividends.  Our plans for adding new
stores in 2005 and thereafter may be impacted by these covenants, particularly
the limit on the amount of spending on fixed assets and financial covenants.
Our expansion plans reflect management’s judgment that we will be able to
comply with the debt covenants or obtain amendments or waivers of such
covenants from our lender.

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.

Response: Below is the Consolidated Statement of
Shareholders’ Equity from our 2004 10-K with more detailed information.  Note 8 to our financial statements provides information on the warrant agreements with the
company.  These warrant agreements may
include an option for a cashless exercise transaction of the warrant to common
stock.  In future filings we will provide
this type of detail.

5

APPLIANCE RECYCLING CENTERS OF AMERICA, IN