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




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                            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



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                    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


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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



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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


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