SecProbe.io

CORRESP
1
filename1.htm

November 22, 2010

VIA EDGAR

United States Securities and
Exchange Commission

Division of Corporate
Finance

100 F Street NE, Mail Stop
3720

Washington, DC 20549

Attn: H. Christopher Owings,
Assistant Director

Re:                               Appliance
Recycling Centers of America, Inc.

Form 10-K for Fiscal
Year Ended January 2, 2010 filed on March 18, 2010

Definitive Proxy Statement
on Schedule 14A filed on April 1, 2010

Forms 10-Q for Fiscal
Quarters Ended April 3, 2010 and July 3, 2010 filed on May 18,
2010 and August 16, 2010

File No. 000-19621

Dear Mr. Owings:

On behalf of Appliance
Recycling Centers of America, Inc. (the “Company” or “we”), this letter is
submitted in response to the comments set forth in your letter to me dated November 2,
2010.  For your convenience, we have set
forth below each of your numbered comments, followed by our response.

We intend to file an
amendment to our Annual Report on Form 10-K for the fiscal year ended January 2,
2010, to respond to comments 5, 11, 12 and 13 below.  In future filings, we will revise our
disclosures as described herein to address other concerns raised in your
letter.  Prior to the filing of the
amendment to the Form 10-K, the Company respectfully requests that the
Staff review this letter and advise us as to whether it has an additional
comments.

Form 10-K for Fiscal
Year Ended January 2, 2010

Management’s Discussion and
Analysis of Financial Condition and Results of Operations, page 22

1.               Please expand this section
to elaborate on known material trends and uncertainties that will have, or are
reasonably likely to have, a material impact on your net sales or income from
continuing operations or result in your liquidity decreasing or increasing in
any material way.  In doing so, please
provide additional information about the quality and variability of your
earnings and cash flows so that investors can ascertain the likelihood of the
extent past performance is indicative of future performance.  In addition, please discuss in reasonable detail:

·                  economic or
industry-wide factors relevant to your company, and

·                  material
opportunities, challenges and risks in short and long term and the actions you
are taking to address them.

See Item 303(a) of
Regulation S-K and SEC Release No. 33-8350.

Company Response: We will expand
our Management’s Discussion and Analysis in future filings to include the
following with respect to known material trends and uncertainties, the quality
and variability of our earnings and cash flows for the applicable periods, relevant
economic or industry-wide factors relevant to our Company, and opportunities
and challenges and actions we are taking as a Company to address them:

Our business, like that of many
retailers, is seasonal for our retail segment.
Historically, the fourth quarter is our weakest quarter in terms of both
revenue and earnings.  We believe this is
primarily because the fourth quarter includes various holidays and consumers
tend to focus less on purchasing major household appliances.

Similarly, revenues and earnings
in our recycling segment are also impacted by seasonal variances, with the
later part of the first quarter and both the second and third quarters for

the recycling segment generally
having higher levels of revenue and earnings.
This seasonality is primarily due to our customers supporting more
marketing and advertising during the spring and summer months of the year.  Additionally, some of our recycling customers
only have seasonal programs operating from April to September.

Since the second half of 2009, we
have heightened our focus on carefully managing our expenses.  We have also temporarily halted any plans to
open any new retail stores in 2010 but have instead focused on improving
profitability within our existing stores.
We are accomplishing this by focusing on our operating costs, including
overhead, and by evaluating the cost and ongoing effectiveness of our marketing
programs.

We reduced our corporate general
and administrative expenses by $1.0 million in 2009 as a result establishing
process improvements, implementing salary reductions and headcount
eliminations.  These cost-cutting
initiatives are intended to be permanent with the exception of the salary
reductions.  As a result of implementing
salary reductions in June 2009 we reduced compensation expense by $0.6
million in 2009.

Along with the cost-cutting
efforts related to corporate general and administrative expenses, we also
implemented various cost reduction initiatives in our retail segment.  This included closing one underperforming
factory outlet store in Georgia and a second factory outlet store in Texas by
choosing not to renew the lease.  We
recorded a lease termination charge of $0.3 million in October 2009 as a
result of closing our factory outlet store in Georgia, which effectively offset
our 2009 expense savings.  We expect to
save approximately $0.8 million in 2010 as a result of closing the factory
outlet stores in Georgia and Texas.  After
a thorough analysis, other cost-cutting efforts were taken including the
reorganization of our factory outlet store management and employee compensation
and the reduction of various other costs with an expected annual savings of
$1.5 million.  We believe these
initiatives will be sustainable into 2010 and beyond.   In
2010, we plan to evaluate our marketing expenses and our overall advertising
and brand message.

We monitor country-specific
economic factors such as retail trends, consumer confidence, manufacturing by
the major appliance companies, sales of existing homes and mortgage interest
rates as key indicators of industry demand, particularly in our retail segment.

Competition in the home appliance
industry is intense in all markets we serve.
This includes competition from not only independent retailers in the
four markets we serve but also intense competition from such major retailers as
Sears, Best Buy, Home Depot and Lowes.

We believe the outlook for our
recycling segment remains strong in 2010 and beyond.  Electric utility companies throughout the
United States continue to support and add appliance recycling programs as part
of their broader demand side management energy efficiency programs.  We believe we will be able to continue to
expand our recycling customer base as a result.

Results of Operations, page 24

2.               Please expand your
discussion under results of operations for all periods to quantify each factor
you cite as impacting your operations.
For example, you disclose that the
decrease in recycling revenues for 2009 was due primarily to a planned volume
reduction for one contract in California and lower recycling volumes on other
contracts, combined with a later-than-anticipated start and a lower level or
sign-ups from a major utility’s annual appliance replacement program in 2009,
without quantifying the impact attributed to each component.  Also describe unusual or infrequent events,
significant economic changes, and significant components of revenue and
expenses.  For example, your discussion
of the decrease in recycling revenues for 2009 does not explain why there are
lower recycling volumes on your contracts, a later-than-anticipated start and a
lower level of sign-ups.  See Item 303(a)(3) of
Regulation S-K.

Company Response: We will expand
our Management’s Discussion and Analysis in future filings to include the
following with respect to quantifying each factor impacting our operations for
the applicable periods and describing any unusual or infrequent events,
significant economic changes and significant components of revenues and
expenses relevant to our Company and actions we are taking as a Company to
address them:

2

In 2009, we experienced a 33.7%
decline in volumes related to a major electric utility’s recycling contract in
California compared to 2008.  The
reduction in volume was the result of losing 25% of the territory under the
contract and lower volume from the utility’s participants.  We expected the decrease in volume under the
contract and anticipate renegotiating this contract in 2010 to increase our
volume of recycled appliances.
Additionally in 2009, the appliance replacement program volume sponsored
by a California utility decreased 38.7% compared to 2008.  The decrease in volume was the result of a
delay in completing and servicing the contract along with a decrease in
customer enrollment.  We anticipate a
continued decrease in volume in 2010.  We
plan to renew the appliance replacement program contract in 2010 with the
expectation that the volume will increase in 2011.

Liquidity and Capital
Resources, page 27

3.               Please disclose the specific
terms of material debt covenants in your debt agreement.  Also disclose the required ratios as well as
the actual ratios as of each reporting date to allow investors to understand
how much cushion there is between these ratios.
See Sections I.D. and IV.C of SEC Interpretive Release No. 33-8350.

Company Response: We have
expanded the Company’s disclosures of covenants contained in its General Credit
and Security Agreement entered into on August 30, 1996, as amended, (the “Credit
Agreement”) in its Form 10-Q for the fiscal quarter ended October 2,
2010, filed on November 15, 2010,
with the applicable portions of following disclosure:

The Company has two financial
covenants within its Credit Agreement:

1)             A
minimum profitability covenant that requires the Company to report $1 of net
income for all quarterly periods between Q1 2008 and Q4 2010.

2)             A
minimum annual tangible net worth covenant that requires the Company to report
an annual tangible net worth of $2,900,000 plus the annual net income, if
applicable, for fiscal years 2008 and 2009 and $3,000,000 plus the annual net
income, if applicable, for fiscal year 2010.

The following table illustrates
the Company’s covenant compliance for 2008 through 2010:

  Covenant/Period

  Actual

  Required

  Waiver

  Received

  Outstanding

  Amount

  Profitability

  Q1
  2008

  $

  117,000

  $

  1

  n/a

  n/a

  Q2
  2008

  $

  837,000

  $

  1

  n/a

  n/a

  Q3
  2008

  $

  1,141,000

  $

  1

  n/a

  n/a

  Q4
  2008

  $

  (1,735,000

  )

  $

  1

  Yes

  $

  14,527,000

  Q1
  2009

  $

  (1,962,000

  )

  $

  1

  Yes

  $

  11,381,000

  Q2
  2009

  $

  (411,000

  )

  $

  1

  Yes

  $

  12,361,000

  Q3
  2009

  $

  416,000

  $

  1

  n/a

  n/a

  Q4
  2009

  $

  (1,381,000

  )

  $

  1

  Yes

  $

  12,419,000

  Q1
  2010

  $

  102,000

  $

  1

  n/a

  n/a

  Q2
  2010

  $

  719,000

  $

  1

  n/a

  n/a

  Q3
  2010

  $

  885,000

  $

  1

  n/a

  n/a

  Tangible
  Net Worth

  Fiscal
  Year 2008

  $

  4,083,000

  $

  3,260,000

  n/a

  n/a

  Fiscal
  Year 2009

  $

  3,241,000

  $

  2,900,000

  n/a

  n/a

The Company will update the form
of the disclosure above in future filings.

3

4.               Please disclose the
financial covenants that you were not in compliance with and describe the
waiver you received from the lender.
Disclose whether you are currently in compliance with your debt
agreement.

Company Response: As noted in the
Company’s response to comment No. 3 above, the Company expanded its
disclosures of covenants contained in its Credit Agreement in its Form 10-Q
for fiscal quarter ended October 2, 2010, filed on November 15,
2010.  The Company will update the form
of disclosure included in response to comment No. 3 in future filings.

5.               Please identify the lender
and the date of your debt agreement.  We
also note that your line of credit was increased from $16 million to $18
million on February 5, 2008.  Please
tell us where you have filed the exhibit for this amendment to your debt
agreement.

Company Response: On August 30,
1996, the Company entered into a General Credit and Security Agreement, as
amended, (the “Credit Agreement”) with Spectrum Commercial Services that
provides the Company with an $18 million line of credit.  As discussed in the Company’s Management’s
Discussion and Analysis and Note 9 to the financial statements, the Credit
Agreement was amended on February 5, 2008 to increase the maximum
borrowings from $16 million to $18 million.
The Company has not filed amendments 18 through 26 of its Credit
Agreement as Exhibits, but will do so as indicated below.

The Company will identify the
lender and original date of the Credit Agreement in future filings, beginning
with its Form 10-Q for the fiscal quarter ended October 2, 2010,
filed on November 15, 2010.  Upon
resolution of all the Staff’s comments, the Company will amend its Form 10-K
for the fiscal year ended January 2, 2010, filed on March 18, 2010 to
include the Exhibits related to Amendments 18 through 26 under its Credit
Agreement.

Note 3. Significant
Accounting Policies, page 41

Depreciation and
Amortization Expense, page 42

6.               You state that depreciation
and amortization expense related to building and equipment from your recycling
centers is presented in cost of revenues.
With a view to enhance the disclosures, please also disclose the amount
of such expenses classified within cost of revenues.

Company Response: The Company
will expand its disclosures of depreciation and amortization expense in future
filings in accordance with the Staff’s comment to include disclosure for the
periods being reported consistent with the following:

Depreciation and amortization
included in cost of revenues was $350,000 and $428,000 for the fiscal years
ended January 2, 2010 and January 3, 2009, respectively.

Note 6. Investments, page 46

7.               Please explain to us and
disclose how you reasonably determined the October 21, 2009 recycling
agreement you entered in to
be an intangible asset.

Company Response: As part of our Appliance Recycling and Sales
Agreement with General Electric whereby General Electric has agreed to sell us
recyclable appliances, the Company issued a fully vested, nonforfeitable stock
warrant to General Electric.  General
Electric is not required to perform any additional services to retain the stock
warrant.  The Company applied FASB ASC
505-50-45-1 at the measurement date of October 21, 2009 in concluding that
an asset had been received in return for the fully vested, nonforfeitable stock
warrant issued in connection with the agreement with General Electric.

4

Note 9. Line of Credit, page 47

8.               Please reconcile for us the
amount of outstanding borrowings on your line of credit on the face of the
balance sheet to your disclosures on the total line and the unused borrowing
capacity as disclosed here.

Company Response: Below is a
reconciliation of the Company’s outstanding borrowings to the unused borrowing
capacity under its $18 million Credit Agreement:

  Available
  borrowing from 80% of eligible accounts receivable

  $

  2,304,000

  Available
  borrowing from eligible inventory (1)

  10,356,000

  Less:
  reserve for unpaid financing authorizations (2)

  (185,000

  )

  Gross
  availability — net of reserve for unpaid financing authorizations (3)

  12,475,000

  Less:
  outstanding loan balance

  (12,419,000

  )

  Net
  availability (unused borrowing capacity)

  $

  56,000

(1)         Eligible
inventory is determined by the lesser of 50% of Non-Whirlpool inventory less
than one year old and 80% of Whirlpool inventory less than one year old OR
$12,000,000.

(2)         The
reserve for unpaid financing authorizations is determined by multiplying the
unpaid Non-Whirlpool financing authorization by 50% and multiplying the unpaid
Whirlpool financing authorizations by 20%.

(3)         The
gross availability is calculated by taking the lesser of the Gross
availability, net of reserve for unpaid financing authorizations OR $18,000,000
less the total