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U. S. Securities and Exchange Commission
Washington, D.C.
Form 10-KSB
(Mark One)
/ X / ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (Fee Required)
For the fiscal year ended March 31, 1996.
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1943 (No fee required)
For the transition period from _______________ to ________________.
Commission File Number 0-20924
RECONDITIONED SYSTEMS, INC.
(Name of small business issuer in its charter)
Arizona 86-0576290
(State or other jurisdiction (IRS Employer Identification Number)
of incorporation or organization)
444 West Fairmont, Tempe, Arizona 85282
(Address of principal executive offices, including zip code)
602-968-1772
(Issuer's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
Common stock, no par value
Class A Common Stock Warrants
Class B Common Stock Warrants
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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___
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will 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-KSB or any
amendment to this Form 10-KSB. ( X )
The issuer's revenues for the year ended March 31, 1996 were $7,971,697.
As of June 30, 1996, the aggregate market value of the Common Stock (based on
the closing bid price as quoted on the Nasdaq Small Cap Market on that date)
held by non-affiliates of the Registrant was approximately $200,000.
As of June 30, 1996, the number of outstanding shares of the Registrant's Common
Stock, Class A Warrants, and Class B Warrants was 1,620,500, 250,000, and
250,000, respectively.
Portions of the Registrant's definitive Proxy Statement, dated July 15, 1996,
for the 1996 Annual Meeting of Stockholders to be held August 5, 1996, are
incorporated herein by reference into Part III of this Report.
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ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Reconditioned Systems, Inc. ("RSI" or the "Company") reconditions and markets
modular office workstations consisting of panels, work surfaces, file drawers,
book and binder storage and integrated electrical components ("workstations").
The Company specializes in reconditioning and marketing workstations originally
manufactured by Haworth, Inc. ("Haworth"). RSI purchases used workstations from
manufacturers, dealers, brokers, and end-users throughout the United States
through competitive bids or directly negotiated transactions. After purchasing
used workstations, the Company transports them to its manufacturing facility in
Tempe, Arizona where it disassembles and inventories the workstations by
component parts, stores and, upon receipt of purchase orders, reconditions and
reassembles the workstations. The Company sells the reconditioned workstations
throughout the United States to dealers and end-users.
There are more than 50 manufacturers of new workstations in the United States.
Steelcase, Inc. ("Steelcase"), Herman Miller, Inc. ("Herman Miller"), and
Haworth constitute the dominant manufacturers, controlling approximately 65% of
the market for new workstations. Steelcase, Herman Miller, and Haworth have each
created a unique system for connecting panels, power and telecommunications
raceways, resulting in virtually no interchangability between their respective
products. Due to the lack of interchangability of parts for workstations of
these dominant manufacturers, the Company has generally specialized in
reconditioning and marketing workstations originally manufactured by just one of
the dominant manufacturers. The Company elected to specialize in reconditioning
and marketing workstations originally manufactured by Haworth as a result of the
extensive experience of the Company's founders with Haworth workstations.
The Company was formed as an Arizona corporation in March, 1987 by Edward J.
Cain, Robert L. Campbell, and Charles R. Johnson. Prior to forming the Company,
Messrs. Cain and Campbell organized and operated Facilitec, Inc. ("Facilitec"),
an Arizona corporation that engages in the business or marketing new office
workstations, office furniture, and other office furnishings. Among the lines of
new office furnishings that Facilitec offers, it is the exclusive Haworth
dealership for the greater Phoenix, Arizona area. As a result of their
experience in the new office furnishings market, Messrs. Cain and Campbell
believed that there was a substantial and growing market for reconditioned
workstations and decided to form the Company with Mr. Johnson to pursue those
opportunities.
In order to expand its product line and its geographical presence, the Company
raised $2,500,000 in December, 1992 from an initial public offering of its
Common Stock and embarked on an aggressive expansion program. On March 31, 1993,
the Company acquired Corporate Upholstery, Inc. ("CUI"), during June, 1993, the
Company opened RSI Integrated Parts, Inc. ("RSIIP"), and on August 3, 1993, the
Company acquired RSI of Minnesota, Inc. (formerly Facility Options Group, Inc.
or "FOG"). CUI was headquartered in Livonia, Michigan and, at the time of the
acquisition, specialized in marketing and reconditioning Steelcase workstations.
RSIIP was formed to supply clone component parts for Haworth and Herman Miller
workstations to other reconditioners across the United States and was
headquartered in Tempe, Arizona near the Company's primary reconditioning plant
and executive offices. FOG was headquartered in Eden Prarie, Minnesota and
specialized in marketing and reconditioning Haworth workstations.
Due to numerous difficulties, the Company initiated a major restructuring
program during the year ended March 31, 1995. This restructuring program, which
was completed during the quarter ended September 30, 1995, resulted in the
closing of CUI, RSIIP, and FOG. In addition, Messrs. Cain, Campbell, and Johnson
resigned as officers of the Company. Currently, Wayne R. Collignon is the
Company's
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President and Chief Executive Officer and Dirk D. Anderson is the Company's
Chief Financial Officer. See "Business-Acquistions" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
The Company has now completed its restructuring and has downsized to its
original form. RSI is currently operating out of one location in Tempe, Arizona
and is specializing in marketing and reconditioning Haworth workstations. Over
the past several years, the Company's core operations have generated annual
sales between $4 million and $6 million and have been profitable.
To expand these core operations, the Company believes it must have available
working capital and must diversify its markets. Under management's current plan,
diversification will be sought through opening low-cost sales offices or
obtaining other local representation in markets such as Tucson, San Diego,
Orange County, Las Vegas, Salt Lake City, Denver, and other cities throughout
the western United States. Management believes that entrance into these markets
will be attainable due to the fact that the Company is one of the largest
Haworth reconditioners in the western United States and has a competitive
advantage in some of these markets because its reconditioning services are much
more comprehensive than those provided by the smaller reconditioners that make
up a majority of the competition in these markets. In addition, the Company's
ability to expand geographically may be aided by the fact that Haworth, unlike
Steelcase and Herman Miller, is not directly in the reconditioning business.
However, no assurance can be given that the Company will have adequate working
capital to support its desired growth, that the Company will be able to
diversify geographically, or that the Company's remaining operations will
continue to be profitable.
The Company's executive offices are located at 444 West Fairmont, Tempe, Arizona
85282 and its telephone number is 602-968-1772.
PRINCIPAL LINE OF BUSINESS
The Company's principal line of business is the sale of reconditioned Haworth
workstations. Historically, these sales have accounted for approximately 80% of
the Company's revenues.
The Company purchases used Haworth workstations from manufacturers, dealers,
brokers, and end-users and transports them to its manufacturing facility in
Tempe, Arizona where it disassembles and inventories the workstations by
component parts, stores, and, upon receipt of purchase orders, reconditions and
reassembles the workstations. The reconditioning process includes sanding,
painting, laminating, and reupholstering. Certain parts of the used Haworth
workstations the Company purchases are damaged beyond repair and must be
replaced with new parts purchased from Haworth, clone parts which the Company
purchases from various vendors, and new parts which the Company manufactures
from raw materials. The Company markets these reconditioned Haworth workstations
throughout the United States. Orders received by the Company range from as few
as one workstation to as many as several hundred workstations. However, orders
for more than fifty workstations are rare because the manufacturers of new
workstations offer deeper discounts on orders of this size, which makes it more
difficult for the Company to offer its reconditioned workstations at a lower
price than the new workstations.
The Company believes that workstations offer advantages over the traditional
desk, free standing file, and permanent dry wall dividers common to historical
office layouts since workstations enable businesses to house more people in a
given space than traditional structures and are easier to move and reconfigure.
In addition, the Company believes its reconditioned Haworth workstations offer
an
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advantage over much of its competition because they are higher quality than the
new workstations that are available in the same price range.
OTHER LINES OF BUSINESS
The Company derives certain revenues outside of its principal line of business.
Other lines of business in which the Company engages include: brokering "as is"
used workstations, selling new office furniture produced by other manufacturers
(primarily desks, files, and chairs), installing workstations, and
reconditioning product already owned by customers. Historically, these other
lines of business have accounted for approximately 20% of the Company's
revenues.
INVENTORY AND SOURCES OF SUPPLY
The Company purchases used Haworth workstations throughout the United States
through competitive bids or private negotiations with new workstations
manufacturers and dealers, used workstation brokers, and end-users. The Company
then transports the used Haworth workstations to its facility in Tempe, Arizona
where it disassembles, inventories by component part, and stores the used
Haworth workstation components until purchase orders are received which require
the various component parts. The Company also maintains inventories of new
workstation components purchased from Haworth through a member of Haworth's
dealership network (such as Facilitec), clone workstation components, and raw
materials used in the reconditioning process. These raw materials include items
such as fabric, particle board, laminate, and paint.
The Company carries a very limited amount of work in process and finished goods
inventory since it generally does not initiate the reconditioning process until
a purchase order has been received and since the reconditioning process rarely
takes more than a couple of days due to the relatively small size of most
orders. However, a significant portion of the labor related to the
reconditioning process is completed at the time the used Haworth workstations
are originally received and disassembled, and as a result, the value of this
labor is capitalized and added to the value of the Company's inventory.
The Company currently has sufficient amounts of inventory to meet its
anticipated demand. However, because there is not a principal supplier of used
Haworth workstations and the supply is based upon end-user decisions regarding
disposal of or enhancement to existing furniture, there can be no assurance that
the Company will be able to purchase adequate levels of inventory in the future
at competitive prices. Because the Company's principal line of business is the
sale of reconditioned Haworth workstations, any unavailability of adequate
levels of inventory at competitive prices would have a material adverse effect
on the Company's business, operating results, and financial condition.
RECONDITIONING PROCESS
The Company's reconditioning process for used Haworth workstations includes
sanding, painting, laminating, and reupholstering. The reconditioning process
also includes replacing certain components with new components purchased from
Haworth, clone components purchased from various vendors, or new components
manufactured by the Company from raw materials. The Company's facility in Tempe,
Arizona includes all of the equipment required to recondition workstations,
including closed and open paint booths, a paint drying booth, sanding equipment,
saws, and laminating equipment.
The reconditioned Haworth workstations that the Company sells generally consist
of panels, worksurfaces, pedestals, overhead storage units, lateral file storage
units, task lights, and electrical raceways. Typically, the Company reconditions
all of these items with the exception of worksurfaces,
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which it manufactures because the labor charges to repair used worksurfaces is
typically greater than the cost to manufacture them using raw materials such as
particle board, backer, laminate, and t-molding. Components that are often
damaged and need to be replaced with new or clone components include panel top
caps, panel glides, shelf ends for overhead storage units, and task lights. The
Company markets certain auxiliary items such as chairs, file cabinets, and
desks, but it purchases these items new from other manufacturers rather than
purchasing them used and reconditioning them.
The Company's facility has been designed to facilitate the natural flow of used
Haworth workstation components and raw materials in order to streamline the
reconditioning process through disassembly, storage, reconditioning, and
shipping. Storage capacity is maximized by utilizing narrow aisle storage. The
Company believes that its current facility will be able to handle any increase
in volume as a result of its plan to increase its distribution channels. Any
such volume increase will, however, create the need for additional laborers and
may create the need for a second shift.
COMPETITION
In purchasing used Haworth workstations, the Company competes with used
workstation brokers and other entities that recondition Haworth workstations.
Even though the Company may not be the highest bidder for an end-user's used
Haworth workstations, it may still have the opportunity to purchase them at a
slightly higher cost if the highest bidder was a used workstation broker who is
simply trying to make a small profit without actually taking possession of the
used Haworth workstations. The Company attempts to procure the used Haworth
workstations directly from end-users so as to avoid the middleman (used
workstation brokers) and to obtain these used Haworth workstations at the lowest
possible cost.
The market for workstations is highly competitive. The Company competes with new
workstation manufacturers and their dealers, and other reconditioners in the
sale of its reconditioned Haworth workstations. New workstation manufacturers
and their dealers have certain competitive advantages over the Company including
established distribution channels and marketing programs, substantial financial
strength, long-term customers, ready access to all component parts, and the fact
that if everything is equal (price, lead-time, etc.), most people would choose
new workstations over reconditioned workstations. The Company has certain
competitive advantages over new workstation manufacturers and their dealers. On
orders of 50 workstations or less, the Company's pricing is usually
significantly less than pricing on new "Grade A" workstations ("Grade A"
workstations are considered to be those workstations manufactured by Haworth,
Herman Miller, and Steelcase) and the quality of the Company's reconditioned
Haworth workstations exceeds that of new "Grade B" workstations. In addition,
the Company can produce and install fully reconditioned Haworth workstations
within two to three weeks as compared to standard lead-times of approximately
six to eight weeks for the new workstation manufacturers. The Company believes
that its reconditioning services are more comprehensive than most other
reconditioners. This results in a competitive advantage for the Company because
it has the ability to produce more reconditioned workstations and higher quality
reconditioned workstations than most other reconditioners.
There are no significant barriers to entry into the markets served by the
Company. Nevertheless, an increase in competition from existing competitors or
the entry of new competitors could have a material adverse effect on the
Company's business, operating results and financial condition. There can be no
assurance that the Company will be able to compete sucessfully in the future
with existing or new competitors.
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DISTRIBUTION
The Company markets its products on a wholesale basis to new workstation
dealerships, design firms, and installation companies throughout the United
States. The Company also markets on a retail basis to end-users in Arizona and
throughout the country. The Company's sales have been approximately 50% within
Arizona and 50% in other parts of the United States for the past several years.
The Company employs two full-time salespeople who concentrate on telemarketing
and servicing its out-of-state sales and five full-time salespeople who
concentrate on local retail sales in the greater Phoenix, Arizona area. In
addition, the Company opened a new sales office in Tucson, Arizona during early
May, 1996 and employs one full-time salesperson at that location.
The Company's sales in the greater Phoenix, Arizona area have been between $2
million and $3 million during the past few fiscal years. The Company believes
that it should be able to increase its distribution by achieving these type of
sales numbers in other western cities that have at least as large of a market
for its products. The Company believes that it has the ability to enter markets
such as Southern California, Northern California, Las Vegas, Salt Lake City, and
Denver because its reconditioning services are more comprehensive than most
other reconditioners. The Company intends to enter these markets by either
opening local sales offices, aligning itself with a local new workstation
dealership, or obtaining independent sales representatives in these markets.
However, no assurance can be given that the Company will be able to increase its
distribution by effectively entering new markets.
PERSONNEL
The Company currently has approximately 50 employees of whom approximately 30
are production personnel directly involved in the reconditioning process, five
are in the installation department, ten are in the sales and design department,
and five are administrative personnel. The Company believes that its ability to
grow and attain its desired profitability levels depends on its ability to
attract and retain highly qualified personnel. There can be no assurance that
the Company will be successful in attracting and retaining such personnel.
The Company has employment agreements, which include severance benefits, with
certain of its executive officers. See Item 10 - Executive Compensation. None of
the Company's personnel are covered by a collective bargaining agreement and the
Company has never suffered a work stoppage. The Company considers its relations
with employees to be excellent.
ENVIRONMENTAL REGULATIONS
The Company's operations are subject to a variety of federal, state, and local
environmental laws and regulations including those governing air quality, water
quality, and hazardous materials. The Company's principal environmental concerns
relate to the handling and disposal of paints, solvents, and related materials
in connection with product finishes and composite fabrication. The Company
contracts with various independent waste disposal companies for services. The
Company may be exposed to certain environmental liabilities which may or may not
be covered by the insurance of the independent contractors naming the Company as
additional insured or by the Company's own insurance.
The Company believes that it has been operating in substantial compliance in all
material respects with existing environmental laws and regulations. The Company
cannot predict the nature, scope or effect of legislation or regulatory
requirements that could be imposed or how existing or future laws or regulations
will be administered or interpreted with respect to products or activities to
which they have not previously been applied. Compliance with more stringent laws
or regulations, or more vigorous
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enforcement policies or regulatory agencies, could require substantial
expenditures by the Company and could adversely affect its business, financial
condition and results of operations.
RELATIONSHIP WITH FACILITEC
The Company has maintained in the past, and anticipates that it will maintain in
the future, certain business relationships with Facilitec, the Haworth
dealership for the greater Phoenix, Arizona area that is owned and operated by
certain of the Company's founders.
The Company occasionally sells reconditioned Haworth workstations and components
to Facilitec in a similar manner and at similar prices as the Company sells to
other new workstation dealers throughout the country. In addition, the Company
purchases new Haworth component parts and used workstations from Facilitec at
pricing which is consistent with that charged by dealerships to other
reconditioners. See Item 12 - Certain Relationships and Related Transactions.
ACQUISITIONS
Subsequent to its initial public offering which was completed during December,
1992, the Company made two acquisitions. On March 31, 1993, the Company acquired
CUI. At the time of the acquisition, CUI had facilities in Livonia, Michigan and
Toledo, Ohio and specialized in reconditioning and marketing Steelcase office
furniture. On August 3, 1993, the Company acquired FOG. At the time of the
acquisition, FOG operated out of a single facility in Eden Prarie, Minnesota and
specialized in reconditioning and marketing Haworth workstations.
The Company acquired CUI for $1,273,289, comprised of $300,000 in cash, notes in
the amount of $300,000, 120,000 shares of restricted common stock redeemable by
the Company for $600,000, and acquisition costs of $73,289. Subsequently, the
Company issued an additional 81,300 shares of restricted common stock to one of
the former owners of CUI in exchange for his agreement to relinquish his right
to require the Company to redeem 108,000 shares of his common stock for
$540,000. The Company acquired FOG for 100,000 contingent shares of restricted
common stock, assumed liabilities in excess of assets of $218,191, and incurred
acquisition costs of $154,225. 70,000 of the 100,000 contingent shares of common
stock were issued as of March 31, 1996, and the remaining 30,000 were canceled
when FOG was closed (see below).
Subsequent to the acquisition of CUI and FOG the Company experienced significant
operating difficulties. Substantial losses were incurred by CUI and RSIIP (a
business started by the Company during July, 1993) during the years ended March
31, 1994 and 1995, and during the three months ended June 30, 1995. As a result
of these losses, the Company's financing relationship deteriorated and during
the period from August, 1994 to July, 1995, the Company's line of credit was
reduced from $1,250,000 to $500,000. The combination of the losses and the
credit line reductions put a significant strain on the Company's cash flow and
required the Company to restructure and downsize. The restructuring began by
closing RSIIP and downsizing CUI to a sales office with no on-site
reconditioning capabilities. During August, 1995, continuing cash flow pressures
caused the Company to completely close CUI and FOG. See Item 6 - Management's
Discussion and Analysis of Operations and Item 7 Note 11 to the Consolidated
Financial Statements.
The Company has now completed its restructuring and has downsized to its
original form, a Haworth reconditioner operating out of one location in Tempe,
Arizona. The Company's present strategy is to achieve growth by increasing its
marketing efforts and distribution channels. Accordingly, the Company is not
currently pursuing any acquisition possibilities.
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ITEM 2. PROPERTIES:
The Company presently leases a 50,000 square foot facility in Tempe, Arizona
that houses its corporate offices, its reconditioning operations, and most of
its warehouse space. The Company also leases 4,000 square feet of additional
warehouse space in Phoenix, Arizona. The current lease on the Tempe facility
expires March, 2001, and the current lease on the Phoenix facility expires
December 31, 1996.
The Company owns substantially all of its equipment, including its office and
its reconditioning equipment. The Company's equipment has been assigned as
collateral for amounts borrowed under loan agreements with the National Bank of
Arizona and Norwest Business Credit, Inc.
ITEM 3. LEGAL PROCEEDINGS:
The Company is not party to any litigation other than routine litigation
incidental to the business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
No matter was submitted to a vote of the stockholders during the quarter ended
March 31, 1996.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
From the effective date of the Company's initial public offering, December 18,
1992, through April 19, 1993, the Company's units (consisting of two shares of
Common Stock, no par value, one Class A Common Stock Purchase Warrant, and one
Class B Common Stock Purchase Warrant) traded on the Nasdaq Small Cap Market.
Effective April 19, 1993, the Common Stock and Class A and Class B Warrants
commenced trading separately and the units ceased trading. Effective August 31,
1995 the Company's Class A Common Stock Purchase Warrants were delisted by
Nasdaq due to an insufficient number of market makers for this security. In
addition, Nasdaq has informed the Company that its Common Stock and its Class B
Common Stock Purchase Warrants are not in compliance with certain of Nasdaq's
listing requirements and that if this non-compliance is not cured, these
securities will also be delisted. The Company is seeking shareholder approval of
a corporate reorganization and reverse stock split that may have the effect of
curing the current deficiencies, although no assurance can be given that the
Company will be successful in retaining its Nasdaq listing. The Common Stock is
currently traded under the symbol "RESY" and the Class B Common Stock Purchase
Warrants are currently traded under the symbol "RESYZ".
A Class A Common Stock Purchase Warrant entitles the holder to purchase one
share of the Company's Common Stock at a price of $5.50 per share until June 30,
1996, at which time the warrants expired. A Class B Common Stock Purchase
Warrant entitles the holder to purchase one share of the Company's Common Stock
at a price of $6.50 per share until June 30, 1997, at which time the warrant
will expire. The warrants require the Company to maintain an effective
registration statement for the term of the warrants. Holders of warrants
residing in states where such shares are not qualified or registered or
otherwise exempt from such requirements may be denied the right to exercise
those warrants. The warrants were originally scheduled to expire on June 18,
1994 and June 18, 1995, respectively, but were extended to the above dates in
order to preserve what the Company's Board of Directors believes is a
cost-effective method of raising additional capital, if required.
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The following table sets forth the high and low closing bid price, as reported
by the Nasdaq Small Cap Market, in dollars per share or warrant for the quarters
then ended:
<TABLE>
<CAPTION>
Common Stock Class A Warrants Class B Warrants
--------------- ------------------- ----------------
<S> <C> <C> <C>
Date Low High Low High Low High
June, 1994 4 1/2 4 3/4 1/16 1/4 1/2 5/8
September, 1994 3 3/4 4 1/4 1/8 1/4 3/8 1/2
December, 1994 3 3/4 4 1/4 1/4 3/8 7/16
March, 1995 3 3/4 4 1/4 1/4 3/8 1/4 3/8
June, 1995 2 3/4 4 1/32 1/4 1/4 1/4
September, 1995 2 1/8 3 1/32 5/8 1/4 3/8
December, 1995 1/4 2 1/8 not listed not listed 1/4 1/4
March, 1996 1/8 15/16 not listed not listed 1/32 1/4
</TABLE>
The above quotations reflect inter-dealer prices, without retail mark-up,
mark-down, or commission and may not represent actual transactions.
The total number of shares of Common Stock of the Company outstanding as of June
30, 1996 was 1,620,500. The number of holders of the Company's Common Stock and
the Series A Convertible Preferred Stock, including beneficial holders of shares
held in street name, as of the close of business on June 30, 1996, is estimated
to be 450.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS:
The statements contained in this report which are not historical facts may
constitute "forward-looking statements" within the meaning of Section 27A of the
Securities Exchange Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, and are subject to the safe harbors created
thereby. These forward-looking statements involve risks and uncertainties,
including, but not limited to, the risk that the Company may not be able to
obtain additional financing, if necessary; the risk that the Company may not be
able to conclude a corporate reorganization of its capital structure on terms
that will eliminate the arrearage of the Preferred Stock dividend; the risk that
the Company may not be able to geographically diversify its operations on a
profitable basis; the risk that the Company may in the future have to comply
with more stringent environmental laws or regulations, or more vigorous
enforcement policies or regulatory agencies, and that such compliance could
require substantial expenditures by the Company; and the risk that the Company
may not be able to maintain its listing on the Nasdaq Small Cap Market. In
addition, the Company's business, operations and financial condition are subject
to substantial risks which are described in the Company's reports and statements
filed from time to time with the Securities and Exchange Commission, including
this Report.
RESULTS OF OPERATIONS
Reconditioned Systems, Inc. and its wholly-owned subsidiaries (hereinafter the
"Company") reported a net loss of $1,728,052 for the fiscal year ended March 31,
1996 (hereinafter the "reporting period") compared to a net loss of $2,015,008
for the fiscal year ended March 31, 1995 (hereinafter the "comparable period").
The losses in the reporting and comparable periods were primarily attributable
to goodwill impairment and the Company's restructuring program. The charges
incurred by the Company as a result of the impairment of goodwill and its
restructuring program accounted for 82% of its pre-tax loss for the reporting
period and 76% of its pre-tax loss for the comparable period.
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The Company's sales for the reporting period were $7,971,697, which represents a
$2,848,667 or 26% decrease from the $10,820,364 of sales for the comparable
period. This decrease was attributable to the downsizing that was done in
conjunction with the Company's restructuring program. Sales at RSI, which is the
Company's only operation remaining after the restructuring, were $6,029,723 for
the reporting period, which represents a $232,827 or 4% increase over the
$5,796,896 of sales for this operation in the comparable period. The 4% increase
in sales at RSI was primarily a result of an increased marketing effort in the
form of additions to its sales staff.
The Company's gross profit margin for the reporting period was 19% as compared
to a gross profit margin of 21% for the comparable period. The primary reason
for this 2% decrease in the gross profit margin was the Company's lack of
working capital. Due to its lack of working capital, the Company has been
required to fill orders by buying small parts of large inventories of used
product at a premium rather than being able to purchase larger inventories at a
substantially lower cost.
The Company's selling and administrative expenses for the reporting and
comparable periods were 22% of sales and 25% of sales, respectively. The 3%
decrease was a result of the elimination of certain duplicated costs and
corporate overhead that was achieved as a result of the downsizing that was done
in conjunction with the Company's restructuring program.
The Company's other income and expenses, which consists primarily of interest
expense, decreased by $43,969 from the comparable period to the reporting
period. This decrease was primarily attributable to the reduction of the
Company's line of credit, which had outstanding balances of $715,989 at March
31, 1995 and $270,378 at March 31, 1996.
GOODWILL IMPAIRMENT
As of March 31, 1995, the Company determined that the $968,030 of remaining
goodwill associated with its acquisition of Corporate Upholstery, Inc. ("CUI")
was impaired because CUI's expected future net operating cash flows were $0.
This determination was based on the fact that while CUI's results of operations
had improved as a result of the Company's restructuring program, CUI incurred
significant losses from operations for the comparable period and for the three
months ended June 30, 1995 and, as a result of these losses, there was not any
evidence to support positive future cash flows from CUI's operations. Since this
goodwill impairment ocurred despite the Company's restructuring program and not
as a result of it, the $968,030 charge was not included in the restructuring
charge for the comparable period.
As of September 30, 1995, the Company determined that the $563,562 of remaining
goodwill associated with its August 3, 1993 acquisition of Facility Options
Group, Inc. ("FOG") was impaired becasue FOG's expected future net operating
cash flows were $0. This determination was based on the fact that FOG was closed
on September 1, 1995 as part of the Company's restructuring program. Since the
impairment of FOG's goodwill was a direct result of the Company's restructuring,
this $563,562 charge is included in the restructuring charge for the reporting
period.
RESTRUCTURING
The Company's restructuring plan originally involved closing RSI Integrated
Parts, Inc. ("RSIIP") and converting CUI and FOG to sales offices. The Company
planned to accomplish this restructuring over a period of several years and,
during March, 1994 when the plan was adopted, the Company did not anticipate
incurring any substantial charges as a result of the restructuring.
10
<PAGE> 11
The first step of the restructuring plan, closing RSIIP and converting CUI to a
sales office, was accomplished during the comparable period. The Company closed
down its parts supply operation, liquidated its parts supply inventory,
suspended its Steelcase remanufacturing operation, began the liquidation of its
Steelcase inventory, and converted CUI to a remanufactured Haworth sales office
by replacing its president and its entire sales staff, training the new sales
staff and changing its showroom from remanufactured Steelcase to remanufactured
Haworth. Subsequently, toward the end of the comparable period and in the early
part of the reporting period, as the Company was preparing to convert FOG to a
sales office and was working to build CUI into a successful sales office, the
Company's lender was requiring reductions to the Company's line of credit. The
Company's credit line was reduced from $1,250,000 to $500,000 between August,
1994 and August, 1995. In addition, during August, 1995, the Company's Chief
Executive Officer and its President resigned and a new President and Chief
Executive Officer and a new Chief Financial Officer were named. At this time,
the burden of the line of credit reductions and the continuing losses at CUI
were making the Company's cash flow position extremely difficult. In addition,
FOG's operating results were deteriorating and certain key managers at FOG were
unhappy with the management change and were not cooperating with the new
management team. The new management team determined that the Company's cash flow
could not withstand any additional losses at CUI or any potential losses at FOG
and, as such, decided to modify the original restructuring plan and close CUI
and FOG. Modifications made to the Company's restructuring plan caused the
remaining goodwill associated with the acquisition of FOG to be impaired and
caused the Company to incur a substantial amount of other charges that were not
anticipated when the plan was adopted. See Item 7, Note 11 to the Consolidated
Financial Statements, for further discussion of these charges.
The restructuring charges incurred by the Company for the years ended March 31,
1995 and 1996 and their impact on the Company's cash flow were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended Cash or Non-Cash
Item March 31, 1995 March 31, 1996 Charge
-------------- -------------- ----------------
<S> <C> <C> <C>
Impairment of goodwill 0 563,562 Non-cash
Realized loss on the disposal and 543,884 531,621 Non-cash
liquidation of inventories
Realized loss on the sale of equipment 0 100,048 Non-cash
Labor and other costs to move out of 122,245 41,644 Cash
certain locations
Impairment of certain prepaid expenses 0 84,393 Non-cash
and other assets
Buy-out of the employment contract of 65,000 0 Cash
CUI's President
Other 0 112,761 Combination
Total 731,129 1,434,029
</TABLE>
MANAGEMENT'S PLANS
The Company has completed its restructuring and has effectively downsized to its
original form, a Haworth reconditioner operating out of one location in Tempe,
Arizona. Over the past several fiscal years, these core operations have
generated annual sales between $4 million and $6 million and have been
profitable. To expand the Company's core operations, the Company must have
available working capital and must diversify its markets. With respect to
working capital, the Company believes that if it is able to reorganize its
capital structure (see discussion below under "Financial Condition and
Liquidity"), it will have sufficient working capital for its short-term growth
plans. Under these plans, the Company
11
<PAGE> 12
intends to diversify through opening low-cost sales offices or obtaining other
local representation in markets such as Tucson, San Diego, Orange County,
Northern California, Salt Lake City, Denver and Las Vegas. Management believes
that entrance into these markets will be attainable due to the fact that the
Company is the largest Haworth reconditioner in the western portion of the
country and it has a competitive advantage in some of these markets because its
reconditioning services are more comprehensive than those provided by the
smaller reconditioners that make up the majority of the competition in these
markets. However, no assurance can be given that the Company will have adequate
working capital to support its desired growth, that the Company will be able to
diversify geographically, or that the Company's remaining operations will
continue to be profitable.
INCOME TAXES
During the reporting period, the Company received an income tax refund of
approximately $300,000 due to the carryback of losses incurred during the
comparable period to prior years. The Company's tax benefit of $220,206 for the
comparable period is less than the refund due to a deferred tax valuation
allowance. As a result of restructuring its operating units and the substantial
operating losses the Company incurred during the reporting and comparable
periods, there is substantial uncertainty as to whether the Company will be able
to utilize its net operating loss carryforwards. As such, the Company has
recorded a $1,400,000 valuation allowance against its deferred tax assets and
has not recorded a deferred tax benefit as a result of the loss carryforwards
generated in the reporting and comparable periods.
As of March 31, 1996, the Company had federal loss carryforwards of
approximately $3,300,000 and state loss carryforwards of approximately
$3,100,000. The federal loss carryforwards expire through March 31, 2011 and the
state loss carryforwards expire through March 31, 2001. If the Company is
profitable before these loss carryforwards expire, it will benefit from them at
statutory rates.
FINANCIAL CONDITION AND LIQUIDITY
Due to the substantial losses the Company reported during the reporting and
comparable periods, its financial condition and liquidity have deteriorated. The
Company's net worth decreased by a total of $3,863,882 and its working capital
decreased by a total of $2,268,211 during the reporting and comparable periods.
In addition, during the period from August, 1994 through December, 1995, the
National Bank of Arizona reduced the Company's credit line from $1,250,000 to
$400,000, which further deteriorated the Company's working capital and put
tremendous strain on the Company's cash flow. As a result of the Company's
deteriorated financial condition and liquidity, the Company was forced to modify
its restructuring plan (See above under "Restructuring") and downsize itself to
an entity that was manageable within the constraints established by its working
capital position.
Since the completion of its restructuring, the Company has obtained a new credit
facility from Norwest Business Credit, Inc. ("Norwest"). Under the terms of this
new asset-based facility, the Company is allowed to borrow up to 80% of its
eligible accounts receivable and 30% of its eligible inventory. At March 31,
1996, the Company had sufficient eligible collateral to support a credit limit
of approximately $700,000 and had approximately $400,000 of availability. The
credit facility contains various covenants by the Company, including covenants
that the Company: (I) will maintain a net worth of $1,150,000 (adjusted upward
over time); (II) will have annual net income of $80,000 (adjusted upward over
time); (III) will maintain a debt service coverage ratio of at least 1.2 to 1;
(IV) will not create any liens or encumbrances on any of its assets other than
certain permitted liens and encumbrances; (V) will not incur any indebtedness
other than certain permitted indebtedness; (VI) will not make any investments in
or loans to any other person other than certain permitted investments and loans;
(VII) will not declare or pay
12
<PAGE> 13
any dividends (other than dividends payable solely in stock of the Company) or
make any other distributions on or repurchases or redemptions of any of its
stock; (VIII) will not dispose of any of its subsidiaries or will not
consolidate with or merge into any person or permit any other person to merge
into the Company; (IX) will not engage in any line of business materially
different from its present business; (X) will not expend or contract to expend
more than $50,000 during any fiscal year on capital assets; and (XI) will not
issue or sell any stock so as to change the percentage of stock owned by each of
the Company's Stockholders and will not permit the transfer of any or all of the
issued and outstanding shares of the Company's stock. The loan covenants
specifically authorize the Company to seek Stockholder approval of a
reorganization of the Company's current capital structure (see below), which, if
not passed, will result in the Company being in default on this credit facility.
Interest on the credit facility is payable monthly at prime plus 6%, with a
minimum interest requirement of $9,000.
The Company's operations provided cash flows of $746,840 during the reporting
period and used $445,256 in the comparable period. The primary reasons that the
Company was able to produce positive cash flow from operations during the
reporting period despite its overall net loss from operations for this period
were: (1) a significant portion of the loss from operations incurred for the
reporting period resulted from non-cash restructuring charges and (2) the
Company dramatically improved its accounts receivable and inventory turns during
the reporting period. The number of days sales in the Company's accounts
receivable as of March 31, 1995 and 1996 were 43 and 25, respectively, and the
Company's inventory turns for the comparable and reporting periods were 3.4 and
4.7, respectively.
While management is extremely pleased with its improved accounts receivable and
inventory turns and hopes to maintain the current turnover levels, it does not
believe that any significant additional improvements to these turnover levels
are attainable in the near future. As such, in order for the Company to maintain
positive cash flows, the Company will need to produce net income from its
operations. There can be no assurance that the Company will be able to do so.
Subsequent to the completion of its restructuring, for the six months ended
March 31, 1996, the Company reported net income of $36,833. However, due to its
Preferred Stock dividend requirement, it reported a net loss attributable to
common stockholders of $75,733 for this same period. As of March 31, 1996, the
Company's preferred stock dividend arrearage was $225,133 and, based on the net
loss attributable to common stockholders for the six months ended March 31,
1996, it does not appear the Company will have sufficient operating income to
pay the dividends in arrears or the current dividends anytime in the near
future. As such, despite the new Norwest credit facility, the Company's improved
operating results and its improved accounts receivable and inventory turns, the
Company's financial condition and liquidity will continue to deteriorate unless
it is able to dramatically increase its income from operations or its preferred
stock dividend requirement is removed. In addition, as a result of the dividend
default, the Preferred Stockholders have appointed an individual to the
Company's Board of Directors and the Company cannot pay or declare any dividend
or other distribution on the Common Stock or other equity securities of the
Company.
In order to improve the financial condition and liquidity of the Company and to
give the newly restructured Company the ability to move forward with its
expansion plans, the Company believes it must be relieved of its Preferred Stock
dividend requirement. At its Annual Stockholders Meeting, the Company will ask
its Stockholders to approve, among other things, a reorganization of the
Company's capital structure. Under the proposed reorganization, the Preferred
Stock, together with any and all accrued but unpaid dividends through the
conversion date, would be converted automatically into 13 shares of the
Company's Common Stock. As a result, the holders of the Preferred Stock would
obtain control of the Company. In addition to the conversion of the Preferred
Stock into Common Stock, the Common Stock would be reverse split on a six-to-one
basis.
13
<PAGE> 14
If the Stockholders do not approve the proposed reorganization and the Company
is unable to convert the Preferred Stock into Common Stock, the Company will
likely fall out of compliance with the covenants under the new Norwest credit
facility and lose its Nasdaq Small Cap Market listing. Further, if the
Stockholders do not approve the reverse stock split, the Company may lose its
Nasdaq Small Cap Market listing. If the Company defaults on the Norwest credit
facility, it would then be required to seek additional capital. There can be no
assurance than any such capital would be available on terms favorable to the
Company or at all. Any lack of capital would have a material adverse effect on
the Company's business, financial condition, and results of operations.
14
<PAGE> 15
ITEM 7. FINANCIAL STATEMENTS
RECONDITIONED SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1996
15
<PAGE> 16
SEMPLE & COOPER, PLC
INDEPENDENT AUDITORS' REPORT
To The Stockholders and Board of Directors of
Reconditioned Systems, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Reconditioned
Systems, Inc. and Subsidiaries, and the related consolidated statements of
operations, statement of stockholders' equity, and cash flows for the year ended
March 31, 1996. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall consolidated
financial statement presentation. We believe that our audit provides 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 Reconditioned
Systems, Inc. and Subsidiaries as of March 31, 1996, and the results of its
operations, statement of stockholders' equity, and its cash flows for the year
ended March 31, 1996, in conformity with generally accepted accounting
principles.
/s/ Semple & Cooper, PLC
Semple & Cooper, PLC
Certified Public Accountants
Phoenix, Arizona
May 13, 1996
16
<PAGE> 17
[LETTERHEAD OF MCGLADERY & PULLEN, LLP]
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Reconditioned Systems, Inc.
and Subsidiaries
Tempe, Arizona
We have audited the accompanying consolidated statements of operations,
stockholders' equity, and cash flows for the year ended March 31, 1995 of
Reconditioned Systems, Inc. and Subsidiaries. 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 audit.
We conducted our audit 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 audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
Reconditioned Systems, Inc. and Subsidiaries for the year ended March 31, 1995
in conformity with generally accepted accounting principles.
/s/ McGLADREY & PULLEN, LLP
Phoenix, Arizona
June 2, 1995
17
<PAGE> 18
RECONDITIONED SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
March 31, 1996
ASSETS
<TABLE>
<S> <C> <C>
Current Assets:
Cash and cash equivalents (Note 1) $ 100,698
Accounts receivable - trade, net of
allowance for doubtful accounts of
$8,000 (Notes 2, 3 and 4) 556,577
Inventory (Notes 1, 3 and 4) 1,376,531
Prepaid expenses and other current assets 24,879
----------
Total Current Assets 2,058,685
Property and Equipment: (Notes 1, 3 and 4)
Machinery and equipment $ 228,488
Office furniture and equipment 219,621
Leasehold improvements 35,620
Vehicles 13,632
----------
497,361
Less: accumulated depreciation and
amortization (282,444) 214,917
----------
Other Assets:
Refundable deposits and other 62,694
----------
$2,336,296
==========
</TABLE>
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
18
<PAGE> 19
RECONDITIONED SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
March 31, 1996
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<S> <C> <C>
Current Liabilities:
Note payable (Note 3) $ 270,378
Current maturities of long-term
debt (Note 4) 47,461
Accounts payable (Note 2) 409,015
Accrued expenses 348,937
----------
Total Current Liabilities 1,075,791
Long-Term Debt, less current maturities
(Note 4) 83,717
Commitments: (Note 5) -
Stockholders' Equity: (Notes 7, 8, and 9)
Common stock, no par value; 20,000,000
shares authorized; 1,621,300 shares
issued and 1,620,500 shares outstanding $2,489,143
9% Series A convertible preferred
stock, no par value; cumulative;
10,000,000 shares authorized;
555,555 shares issued and outstanding 2,156,717
Accumulated deficit (3,465,318)
----------
1,180,542
Less: treasury stock, at cost (3,754) 1,176,788
---------- ----------
$2,336,296
==========
</TABLE>
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
19
<PAGE> 20
RECONDITIONED SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For The Years Ended March 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Sales (Note 2) $ 7,971,697 $ 10,820,364
Cost of Sales (Note 2) 6,454,271 8,498,945
------------ ------------
Gross Profit 1,517,426 2,321,419
Selling and Administrative Expenses 1,757,135 2,746,191
Goodwill Impairment (Note 10) -- 968,030
Restructuring Charges (Note 11) 1,434,029 731,129
------------ ------------
Loss from Operations (1,673,738) (2,123,931)
------------ ------------
Other Income (Expense):
Interest income 893 1,256
Interest expense (88,912) (118,586)
Other 20,705 6,047
------------ ------------
(67,314) (111,283)
------------ ------------
Loss before Income Taxes (1,741,052) (2,235,214)
Provision for Income Taxes (Note 6) 13,000 220,206
------------ ------------
Net Loss (1,728,052) (2,015,008)
Preferred stock dividends (Note 8) (225,133) (225,133)
------------ ------------
Net loss attributable to common
stockholders $ (1,953,185) $ (2,240,141)
============ ============
Loss per Common Share (Note 1) $ (1.23) $ (1.38)
============ ============
Weighted Average Number of Common
Shares Outstanding 1,586,708 1,627,533
============ ============
</TABLE>
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
20
<PAGE> 21
RECONDITIONED SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For The Years Ended March 31, 1996 and 1995
<TABLE>
<CAPTION>
Common Stock
------------
Preferred Retained Treasury
Shares Amount Stock Earnings Stock Total
------ ------ ----- -------- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Balance,
March 31, 1994 1,613,000 $ 2,364,368 $ 2,177,181 $ 502,875 $ (3,754) $ 5,040,670
Purchase of
Facility Options
Group, Inc.
(Note 7) 20,000 81,250 -- -- -- 81,250
Cancellation of
founders' stock
(Note 7) (100,000) -- -- -- -- --
Payments related to
private placement
of preferred
stock (Note 8) -- -- (20,464) -- -- (20,464)
Preferred stock
dividends
(Note 8) -- -- -- (225,133) -- (225,133)
Net loss -- -- -- (2,015,008) -- (2,015,008)
----------- ----------- ----------- ----------- ----------- -----------
Balance,
March 31, 1995 1,533,000 2,445,618 2,156,717 (1,737,266) (3,754) 2,861,315
Conversion of
redeemable
common stock
(Note 7) 12,000 43,525 -- -- -- 43,525
Purchase of
Corporate
Upholstery, Inc.
(Note 7) 76,300 -- -- -- -- --
Net loss -- -- -- (1,728,052) -- (1,728,052)
----------- ----------- ----------- ----------- ----------- -----------
Balance
March 31, 1996 1,621,300 $ 2,489,143 $ 2,156,717 $(3,465,318) $ (3,754) $ 1,176,788
=========== =========== =========== =========== =========== ===========
</TABLE>
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
21
<PAGE> 22
RECONDITIONED SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Years Ended March 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Cash Flows from Operating Activities:
Cash received from customers $ 8,701,153 $ 10,890,673
Cash paid to suppliers and employees (8,170,062) (11,285,537)
Interest received 893 1,256
Interest paid (88,912) (118,586)
Income taxes received 303,768 152,935
Income taxes paid -- (85,997)
------------ ------------
Net cash provided (used) by
operating activities 746,840 (445,256)
------------ ------------
Cash Flows from Investing Activities:
Property and equipment (12,270) (69,360)
Other (17,771) 20,936
------------ ------------
Net cash used by
investing activities (30,041) (48,424)
------------ ------------
Cash Flows from Financing Activities:
Proceeds from notes payable and
long-term borrowings 5,196,603 1,775,936
Principal payments on notes payable,
long-term borrowings and
obligations under capital lease (5,885,787) (1,262,811)
Preferred stock dividends -- (225,133)
Conversion of redeemable common stock (16,475) --
Payments related to private placement
of preferred stock -- (20,464)
------------ ------------
Net cash provided (used) by
financing activities (705,659) 267,528
------------ ------------
Net increase (decrease) in cash and
cash equivalents 11,140 (226,152)
Cash and cash equivalents at beginning
of year 89,558 315,710
------------ ------------
Cash and cash equivalents at end
of year $ 100,698 $ 89,558
============ ============
</TABLE>
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
22
<PAGE> 23
RECONDITIONED SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
For The Years Ended March 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Reconciliation of Net Loss to Net Cash
Provided (Used) by Operating Activities:
Net loss $(1,728,052) $(2,015,008)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Depreciation and amortization 103,393 204,960
Loss on sale of property and equipment -- 4,528
Provision for doubtful accounts (9,100) 72,796
Deferred income taxes (13,000) 66,000
Goodwill impairment -- 968,030
Restructuring charge 663,610 --
Changes in Assets and Liabilities:
Trade receivables 717,851 (2,487)
Income tax refund receivable 303,768 (206,268)
Inventory 1,120,970 504,058
Prepaid expenses and other 150,256 70,107
Accounts payable and accrued expenses (562,856) (98,972)
Income taxes payable -- (13,000)
----------- -----------
Net cash provided (used) by operating
activities $ 746,840 $ (445,256)
=========== ===========
</TABLE>
Non-Cash Investing and Financing Activities:
During the year ended March 31, 1996, the Company recognized investing
activities that affected stockholders' equity, but did not result in cash
receipts or payments. These non-cash activities are as follows:
Conversion of redeemable common stock to 12,000 shares of common stock
valued at $43,525 (See Note 7).
Issued 76,300 shares of common stock to an individual pursuant to the
CUI acquisition agreement (See Note 7).
During the year ended March 31, 1995, the Company recognized investing and
financing activities that affected its assets and liabilities, but did not
result in cash receipts or payments. These non-cash activities are as follows:
Financed the purchase of equipment in the amount of $24,496.
Issuance of 20,000 shares of common stock to the former owner of FOG,
valued at $81,250 (See Note 7).
Cancellation of 100,000 shares of common stock pursuant to an agreement
with the Company's founders (See Note 7).
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
23
<PAGE> 24
RECONDITIONED SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies:
Nature of Business:
Reconditioned Systems, Inc. ("RSI" or the "Company"), is a corporation
which was incorporated under the laws of the State of Arizona in March,
1987. The principal business purpose of the Company is the
reconditioning and sale of office workstations comprised of panel
systems to customers located throughout the country.
Pervasiveness of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles 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.
Principles of Consolidation:
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries: RSI Integrated Parts, Inc.
(RSIIP), RSI Acquisitions, Inc. (RSIA), Corporate Upholstery, Inc.
(CUI, a subsidiary of RSIA) and Facility Options Group, Inc. (FOG, a
subsidiary of RSIA). All material intercompany accounts and
transactions are eliminated in consolidation.
Restated Consolidated Statement of Operations:
The Company's Consolidated Statement of Operations for the year ended
March 31, 1995, has been restated to include preferred stock dividends
and net loss attributable to common stockholders.
Revenue Recognition:
The Company recognizes a sale when its earning process is complete. In
connection with projects that are to be installed by the customer or an
agent of the customer, the sale is recognized when the product is
shipped to or possession is taken by the customer. In connection with
projects installed by the Company, the sale is recognized upon
completion of the installation.
Cash and Cash Equivalents:
The Company considers all highly liquid debt instruments and money
market funds purchased with an initial maturity of three (3) months or
less to be cash equivalents.
Inventory:
Inventory, composed of used office workstations and reconditioning
supplies, is stated at the lower of cost (weighted-average method) or
market. The Company reviews its inventory monthly and makes provisions
for damaged and obsolete items. The Company contemplates its ability to
alter the size of panels and other workstation components, and designs
projects so that the workstations are comprised of products currently
in inventory in establishing its obsolescence reserve. At March 31,
1996, the Company had established a reserve for damaged and obsolete
inventory in the amount of $25,000.
Property and Equipment:
Property and equipment are recorded at cost. Depreciation is generally
provided for on the straight-line basis over the following estimated
useful lives of the assets:
24
<PAGE> 25
RECONDITIONED SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Summary of Significant Accounting Policies: (CONTINUED)
<TABLE>
<CAPTION>
Years
-----
<S> <C>
Machinery and equipment 5 - 7
Office furniture and equipment 5 - 7
Leasehold improvements Lease term
Vehicles 4 - 5
</TABLE>
It is the Company's policy to include amortization expense on assets
acquired under capital leases with depreciation expense on owned
assets.
Goodwill:
The Company reviews its goodwill at least annually to evaluate
potential impairment by comparing the carrying value of the intangible
with expected future net operating cash flows from the related
operations. If the expected future net operating cash flows are less
than the carrying value, the Company recognizes an impairment loss
equal to the amount by which the carrying value exceeds the discounted
expected future net operating cash flows from the related operation.
Deferred Income Taxes:
Deferred income taxes are provided on a 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 bases. 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.
Loss Per Common Share:
The computation of loss per common share is based on the net loss
attributable to common stockholders and the weighted average number of
common shares outstanding for each period. Outstanding warrants, the
Series A Convertible Preferred Stock and common shares contingently
issuable are not included in the computation of earnings per share
because their effect would be anti-dilutive.
New Accounting Pronouncements:
Statements of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS No. 123), issued by the Financial
Accounting Standards Board (FASB), is effective for financial
statements for fiscal years beginning after December 15, 1995. The new
standard establishes a fair value method of accounting for stock-based
compensation plans and for transactions in which an entity acquires
goods or services from non-employees in exchange for equity
instruments. At the present time, the Company has not determined if it
will change its accounting policy for stock-based compensation, or only
provide required financial statement disclosures. As such, the impact
on the Company's financial position and results of operations is
currently unknown.
25
<PAGE> 26
RECONDITIONED SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Related Party Transactions:
The Company sells some of its reconditioned workstations to a related
entity, and also purchases new and used parts from that entity. A
summary of these related party transactions and balances included in
the accompanying financial statements, is as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Sales $111,387 $175,963
======== ========
Purchases $212,020 $318,919
======== ========
Accounts receivable $ 5,932
========
Accounts payable and accrued expenses $117,530
========
</TABLE>
3. Pledged Assets and Line of Credit:
As of March 31, 1996, the Company had outstanding borrowings of
$270,378 under a $1,200,000 revolving line of credit agreement with
Norwest Business Credit, Inc. Interest is payable at the bank's base
rate plus six percent (6%), and has a minimum monthly interest
requirement of $9,000. Borrowings on the line of credit may not exceed
a total of eighty percent (80%) of eligible accounts receivable and
thirty percent (30%) of eligible inventory. At March 31, 1996, the
maximum amount available on the line of credit was approximately
$700,000. Accounts receivable, inventory, property and equipment and
intangibles have been assigned as collateral for amounts borrowed under
this loan agreement. The credit facility contains various covenants by
the Company, including covenants that the Company: (i) will maintain a
net worth of $1,150,000 (adjusted upward over time); (ii) will have
annual net income of $80,000 (adjusted upward over time); (iii) will
maintain a debt service coverage ratio of at least 1.2 to 1; (iv) will
not create any liens or encumbrances on any of its assets other than
certain permitted liens and encumbrances; (v) will not incur any
indebtedness other than certain permitted indebtedness; (vi) will not
make any investments in or loans to any other person other than certain
permitted investments and loans; (vii) will not declare or pay any
dividends (other than dividends payable solely in stock of the Company)
or make any other distributions on or repurchases or redemptions of any
of its stock; (viii) will not dispose of any of its subsidiaries or
will not consolidate with or merge into any person or permit any other
person to merge into the Company; (ix) will not engage in any line of
business materially different from its present business; (x) will not
expend or contract to expend more than $50,000 during any fiscal year
on capital assets; and (xi) will not issue or sell any stock so as to
change the percentage of stock owned by each of the Company's
stockholders, and will not permit the transfer of any or all of the
issued and outstanding shares of the Company's stock. As of March 31,
1996, the Company was in compliance with these covenants.
26
<PAGE> 27
RECONDITIONED SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. Pledged Assets and Long-Term Debt:
Long-term debt consists of the following:
8.25% note payable to National Bank of Arizona, due in monthly
installments of $4,087, including principal and interest until paid in
full; collateralized by accounts receivable, inventory, property and
equipment, and intangibles. In connection with this loan agreement, the
Company has agreed to maintain certain financial ratios and various
other covenants and, as of March 31, 1996, the Company was in
compliance with these financial ratios and other covenants. In
addition, this note payable is guaranteed by certain of the Company's
stockholders.
<TABLE>
<S> <C>
$ 116,835
Capital lease obligations 14,343
---------
131,178
Less: current maturities (47,461)
---------
Long-term portion $ 83,717
=========
Aggregate maturities of long-term debt, are as follows:
March 31, Amount
--------- ------
1997 $ 47,461
1998 50,657
1999 33,060
--------
$131,178
========
</TABLE>
5. Operating Lease Commitments:
The Company leases facilities in Tempe and Phoenix, Arizona, as well as
certain equipment and vehicles under operating lease agreements
expiring at various times through March, 2001. Certain of the lease
agreements require the Company to pay property taxes, insurance and
maintenance costs. The lease on the Tempe, Arizona facility, which
expires in March, 2001, is guaranteed by certain of the Company's
stockholders.
The total minimum rental commitment is due as follows:
<TABLE>
<CAPTION>
March 31, Amount
--------- ------
<S> <C>
1997 $ 218,205
1998 205,867
1999 197,571
2000 195,912
2001 195,353
----------
$1,012,908
==========
</TABLE>
Rent expense under operating lease agreements for the years ended March
31, 1996 and 1995 was approximately $425,000 and $560,000,
respectively.
27
<PAGE> 28
RECONDITIONED SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. Income Taxes:
Deferred tax assets consist of the following components:
<TABLE>
<S> <C>
Deferred tax assets:
State loss carryforwards $ 280,000
Federal loss carryforward 1,120,000
------------
1,400,000
Less: valuation allowance (1,400,000)
------------
$ -
============
</TABLE>
The Company has established a valuation allowance equal to the full
amount of the deferred tax asset because as a result of its recent
operating losses, in management's opinion it is more likely than not
the Company's deferred asset will not be realized.
The components of income tax expense (benefit), are as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Current:
Federal $ -- $(286,206)
State -- --
--------- ---------
-- (286,206)
--------- ---------
Deferred:
Federal (9,750) 25,000
State (3,250) 41,000
--------- ---------
(13,000) 66,000
--------- ---------
$ (13,000) $(220,206)
========= =========
</TABLE>
The Company's tax expense (benefit) differed from the statutory rate, as
follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Statutory rate applied to loss before
income taxes $ (590,000) $ (782,325)
Increase (decrease) in income taxes resulting from:
State income taxes (160,000) (105,000)
Statutory/actual rate difference 4,000 23,000
Non-deductible goodwill amortization 190,000 27,000
Non-deductible goodwill impairment -- 339,000
Non-deductible expenses (20,000) 37,000
Deductible goodwill impairment (580,000) --
Deferred tax asset valuation allowance 1,170,000 230,000
Other (27,000) 11,119
----------- -----------
$ (13,000) $ (220,206)
=========== ===========
</TABLE>
28
<PAGE> 29
RECONDITIONED SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. Income Taxes: (CONTINUED)
The Company's approximate net operating loss carryforwards and their
respective expiration dates, are as follows:
<TABLE>
<CAPTION>
Amount Expiration
------ ----------
<S> <C> <C>
Federal $3,300,000 $430,000 in 2010, $2,870,000 in 2011
Arizona 3,100,000 $200,000 in 1999, $765,000 in 2000, $2,135,000 in 2001
</TABLE>
7. Common Stock, Common Stock Purchase Warrants and Common Stock Options:
At the Company's inception, in March, 1987, 100 shares of Common Stock
were issued to the founders for $100. In July, 1992, the Company's
Board of Directors approved a 10,000 for 1 stock split, increasing the
number of shares held by the founders to 1,000,000 shares.
On December 17, 1992, 500,000 shares of the Company's Common Stock were
sold in an initial public offering in units consisting of two shares of
common stock, together with one Class A Common Stock Purchase Warrant
and one Class B Common Stock Purchase Warrant. The units were sold for
$5 each and resulted in gross proceeds in the amount of $2,500,000. The
Company received $1,824,268 after paying costs of the offering,
consisting primarily of underwriting fees, legal fees, accounting fees,
and printing fees. Each Class A Common Stock Purchase Warrant entitled
the holder to purchase one share of common stock and was exercisable at
$5.50 per share through June 30, 1994. Each Class B Common Stock
Purchase Warrant entitled the holder to purchase one share of common
stock and was exercisable at $6.50 per share through June 30, 1995. The
warrants required the Company to maintain an effective registration
statement for the term of the warrants. Holders of warrants residing in
states where such shares are not qualified or registered, or otherwise
exempt from such requirements, may be denied the right to exercise
those warrants. In addition, in connection with this offering, the
Company issued the Underwriters warrants to purchase 25,000 units
exercisable at $6.25 per share through December 17, 1997. The warrants
issued to the Underwriters also contained certain registration rights
for the underlying shares.
On March 31, 1993, the Company acquired all of the outstanding shares
of CUI from two individuals. Prior to the acquisition, these
individuals owned 90% and 10% of CUI, respectively. The total cost of
the purchase was $1,273,289, which consisted of cash of $300,000, notes
payable of $300,000, 120,000 restricted shares of the Company's Common
Stock, and acquisition costs of $73,289. As part of the purchase, the
stockholders of CUI were given a put option to require the Company to
redeem the 120,000 restricted shares of the Company's Common Stock for
$600,000 ($5 per share) for a period contemporaneous with the common
stock's market restriction. As such, the 120,000 restricted shares of
the Company's Common Stock issued as part of this purchase were valued
at $600,000 and were recorded as Redeemable Common Stock and were not
included in the Company's Stockholders' Equity.
The acquisition was accounted for as a purchase and the excess of the
purchase price over the fair value of the net assets acquired in the
amount of $1,075,589 was recorded as Goodwill.
29
<PAGE> 30
RECONDITIONED SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. Common Stock, Common Stock Purchase Warrants and Common Stock Options:
(CONTINUED)
On August 3, 1993, the Company acquired all of the outstanding shares
of FOG from its stockholder. The cost of this transaction was
originally recorded at $534,916. This consisted of assumed liabilities
in excess of assets of $218,191, acquisition costs of $154,225, and
50,000 shares of common stock previously held in the Company's treasury
(See Note 9). The acquisition was accounted for under the purchase
method of accounting. The excess of the purchase price over the fair
value of the net assets acquired was recorded as Goodwill in the amount
of $534,916. The 50,000 shares of common stock were recorded at their
fair value at the date of the acquisition as reported by the Nasdaq
Small Cap Market, which was $3.25 per share or $162,500. The fair value
had decreased from the original cost of the treasury shares by $1.50
per share or $75,000, which was charged to retained earnings. In
addition, as part of the purchase, an additional 50,000 restricted
shares of the Company's Common Stock were contingently issued in the
name of the former owner of FOG, and placed in escrow. The shares were
to be issued out of escrow when and if FOG attained certain sales
levels. Because these contingent shares were issuable based upon FOG's
performance, and were not connected with the continued employment of
the former owner of FOG, the value of the contingent shares was
considered to be non-compensatory. The shares were considered to be a
purchase price adjustment in the acquisition of FOG at the point in
time when they were earned.
On December 28, 1993, the Company entered into an agreement with the
individual that held 90%, or 108,000 shares, of the redeemable common
stock issued in connection with the purchase of CUI. Under the terms of
this agreement, the redemption right was exchanged for 5,000 additional
restricted shares of the Company's Common Stock, and the Company's
guarantee that on or about August 31, 1995, he would receive additional
shares of restricted common stock that would result from dividing the
then per share market value of the stock into the difference between
the then market value of his 108,000 shares and $540,000. The Company
did not change the cost of the CUI acquisition as a result of this
agreement, since the best estimate of fair value of the total common
stock held by this individual was $540,000 at the date of the
agreement. At that time, the $540,000 was transferred from Redeemable
Common Stock to Common Stock and included in the Company's
Stockholders' Equity.
On January 14, 1994, the Company issued 10,000 Common Stock Purchase
Warrants to Nutmeg Securities, Ltd., exercisable at $3.50 per share
through July 15, 1996, as a commission on the sale of 8,000 shares
previously held in the Company's treasury (See Note 9). In addition,
certain other Common Stock Purchase Warrants which were issued by the
Company on January 14, 1994 have currently expired without being
exercised.
On or about November 1, 1994, the individual who held the other 12,000
shares of redeemable common stock issued in the CUI acquisition
requested the Company to redeem these shares for $60,000. The Company
was unable to comply with the request and was sued by this individual.
During the quarter ended September 30, 1995, the Company reached a
settlement with the individual whereby the redemption rights were
cancelled, he sold the 12,000 shares on the open market for a total of
$43,525, and the Company paid damages in the amount of $16,475. The
purchasers of these shares do not have any redemption rights and, as
such, the $43,525 was transferred to the Company's Common Stock account
and the $16,475 was expensed.
In addition, on or about November 1, 1994, FOG attained sales levels
upon which 20,000 shares of the Company's Common Stock were issued to
the former owner of FOG. The 20,000 shares were valued based on the
fair market value as quoted by the Nasdaq Small Cap Market at that date
and were added to the initial purchase price of FOG at $4.0625 per
share, or $81,250.
30
<PAGE> 31
RECONDITIONED SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. Common Stock, Common Stock Purchase Warrants and Common Stock Options:
(CONTINUED)
Effective March 31, 1995, the Company's founders were required to
cancel 100,000 shares of common stock as a result of the Company's
failure to obtain certain profit thresholds that were outlined in the
Company's initial public offering. Since the Company's founders did not
receive anything in return for the cancelled shares, no value was
assigned to this non-reciprocal, non-monetary transaction.
On August 10, 1995, the Company issued 200,000 Common Stock Options to
its current President and Chief Executive Officer (100,000) and its
current Chief Financial Officer (100,000). These options are
exercisable at $2.75 per share through August 10, 2005. They contain
certain registration rights and were issued in conjunction with
employment agreements executed between the Company and these
individuals.
On or about August 31, 1995, the Company issued 76,300 shares of common
stock to the former 90% owner of CUI in accordance with the agreement
entered into on December 28, 1993 and described previously in this
Note 7. Since any value placed on these new shares of common stock
would only reduce the value of the original shares of common stock
issued to this individual as part of the purchase of CUI, no value
was placed on this transaction.
On September 1, 1995, FOG ceased operations. Therefore, FOG was unable
to attain the sales levels required for the former owner to receive the
final 30,000 contingent shares that were being held in escrow. As such,
these 30,000 shares of the Company's redeemable Common Stock were
cancelled.
The Company's Board of Directors has extended the date through which
the Company's Class A and Class B Common Stock Purchase Warrants may be
exercised to June 30, 1996 and June 30, 1997, respectively. As of the
date of this report, none of the Company's Stock Purchase Warrants or
Stock Options have been exercised.
8. Preferred Stock:
On February 25, 1994, the Company consummated a private offering,
pursuant to a stock purchase agreement, selling 555,555 shares of its
Series A Convertible Preferred Stock, no par value, (the "Preferred
Stock") at an exercise price of $4.50 per share. The gross proceeds
from the offering were $2,500,000. The Company received $2,156,717
after payments of selling commissions and structuring fees of $175,000,
and offering costs of $168,283.
The Preferred Stock provides for payments of nine percent (9%)
dividends (a rate of $.405 per share per annum), payable quarterly in
preference to any declaration or payment of any dividend on the common
stock or other equity securities of the Company. The dividends are
cumulative and accrue on each share of Preferred Stock from the date of
issuance. In the event of any liquidation, dissolution, or winding up
of the Company, the holders of the Preferred Stock shall be entitled to
receive $4.50 per share, plus any accrued but unpaid dividends, prior
to any distribution to holders of common stock. Each holder of
Preferred Stock is entitled to notice of any stockholders meetings and
is entitled to the number of votes equal to the number of shares of
common stock into which each share of Preferred Stock is convertible.
Each share of Preferred Stock is convertible into such number of fully
paid and non-assessable shares of common stock, as is determined by
dividing $4.50 by the conversion price, which is currently $4.50.
31
<PAGE> 32
RECONDITIONED SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Preferred Stock: (CONTINUED)
The Company has granted the holders of Preferred Stock certain
protective provisions which prohibit any actions by the Company which
might impair or affect the rights or preferences of such holders,
without the consent of a majority of the holders of Preferred Stock In
addition, if the Company causes an "Event of Default" in the payment of
dividends to holders of Preferred Stock, then the holders of a majority
of the Preferred Stock have the right to appoint a person to the Board
of Directors until the "Event of Default" has been cured. The holders
of Preferred Stock have also been granted certain registration rights.
The registration rights enable them to demand registration under the
Securities Act of 1933 on the common stock issuable pursuant to
conversion of the Preferred Stock or to require that the Company
include such common stock in a registration statement filed by the
Company.
As of March 31, 1996, the Company had not paid the last four quarterly
dividends on its Series A Convertible Preferred Stock. As a result of
this dividend default, the preferred stockholders appointed a member to
the Company's Board of Directors during December, 1995. These unpaid
dividends of $225,133 are included in the computation of net loss
attributable to common stockholders and loss per common share, but have
not been accrued as a liability in the accompanying consolidated
financial statements since they have not been declared by the Company's
Board of Directors.
9. Treasury Stock:
During the year ended March 31, 1992, RSIA purchased 58,800 shares of
RSI common stock on the open market for approximately $4.75 per share,
or a total of $279,254. During the year ended March 31, 1994, the
Company sold 8,000 of these shares for $24,450 (See Note 7) and
reissued 50,000 of these shares in connection with the acquisition of
FOG (See Note 7). During the year ended March 31, 1996, ownership of
the remaining 800 shares of the Company's Common Stock was transferred
from RSIA to RSI.
10. Goodwill Impairment:
As of March 31, 1995, the Company determined that the $968,030 of
remaining goodwill associated with the March 31, 1993 acquisition of
CUI was impaired since CUI's expected future net operating cash flows
were $0. This determination was based on the fact that while CUI's
results of operations had improved as a result of the Company's
restructuring program (See Note 11), CUI incurred significant losses
from operations for the year ended March 31, 1995 and for the three
months ended June 30, 1995 and, as a result of these losses, there was
no evidence to support positive future cash flows from CUI's
operations. Since this goodwill impairment occurred despite the
Company's restructuring program and not as a result of it, the $968,030
charge is not included in the restructuring charge for the year ended
March 31, 1995.
As of September 30, 1995, the Company determined that the $563,562 of
remaining goodwill associated with the August 3, 1993 acquisition of
FOG was impaired since FOG's expected future net operating cash flows
were $0. This determination was based on the fact that FOG was closed
on September 1, 1995 as part of the Company's restructuring program.
Since the impairment of FOG's goodwill was a direct result of the
Company's restructuring, this $563,562 charge is included in the
restructuring charge for the year ended March 31, 1996. The FOG
Goodwill was not considered impaired as of March 31, 1995, since FOG
reported net income and positive cash flow from operations for the year
ended March 31, 1995, and at the time the Company's March 31, 1995
financial statements were released, the expected future net operating
cash flows from FOG exceeded the carrying value of its Goodwill.
32
<PAGE> 33
RECONDITIONED SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. Restructuring:
Despite increasing revenues during the fiscal year ended March 31,
1994, the Company incurred significant operating losses and in response
thereto, the Board of Directors adopted a restructuring program in
March, 1994. The original program was intended to be accomplished over
a period of several years, and without any substantial charges as a
result of the restructuring. The goal of the program was to simplify
operations and reduce operating costs by closing RSIIP, which
specialized in distributing clone Haworth and Herman Miller parts;
converting CUI from an operation that specialized in marketing and
remanufacturing Steelcase office furniture to a sales office
concentrating on marketing Haworth workstations remanufactured by RSI;
and converting FOG from an operation that specialized in marketing and
remanufacturing Haworth workstations to a sales office concentrating on
marketing Haworth workstations remanufactured by RSI. The Company did
not anticipate any significant charges would be incurred as a result of
the program, since the only employees that had mandatory severance
packages were going to be retained, the inventory at RSIIP, CUI, and
FOG could be sold off over time at book value, the Company's facilities
with significant lease commitments would be retained and used after the
restructuring, and the entire process would unfold slowly and
methodically over several years. Subsequent factors, such as an
opportunity to buy out the lease on the RSIIP facility, continuing
operating losses, decreases to the Company's line of credit placing
extreme pressure on the Company's cash flow position, and unexpected
resistance to the restructuring by key employees forced the Company to
modify and accelerate its original restructuring plan. As a result of
this acceleration and modification of the original restructuring plan,
the Company charged $1,434,029 to restructuring for the year ended
March 31, 1996, and $731,129 to restructuring for the year ended March
31, 1995.
Following adoption of the plan, CUI's operating results further
deteriorated. On July 15, 1994, the Company began the search for a new
President under whom the planned changes could be implemented.
Severance expenses relating to the CUI management change which were not
anticipated at the time the original restructuring plan was adopted,
were a direct result of the restructuring, and resulted in a charge of
$65,000 for the year ended March 31, 1995.
During the period from the adoption of the restructuring program
through August 1, 1994, the Company transferred all of RSIIP's clone
Haworth parts to RSI at cost and RSI used these parts in its
operations. In addition, during this period, the Company sold
approximately $50,000 of the $185,000 of clone Herman Miller parts it
had on hand at the time the restructuring program was adopted and the
decision was made to close RSIIP. The $50,000 of clone Herman Miller
parts were sold at an amount which approximated their cost and the
Company then expected that the remainder of these parts could be sold
at least at their cost. On or about August 1, 1994, the Company was
contacted by the landlord of RSIIP's facility, who was aware that RSIIP
was being closed and the facility was currently under-utilized. The
landlord presented the Company with an opportunity to buy out the
remainder of the lease for $30,000, provided the Company could vacate
the premises immediately. At that time, the Company had twenty months
remaining on the lease, with monthly occupancy costs of approximately
$10,000. While the extra warehouse space was being utilized by RSI,
RSI's management believed the Company would be able to forego such
space.
33
<PAGE> 34
RECONDITIONED SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. Restructuring: (CONTINUED)
To save the $200,000 of future occupancy costs, the Company elected to
immediately liquidate the remaining clone Herman Miller parts.
Management believed that the sum of any loss incurred as a result of
the immediate liquidation of these parts and the lease buyout would be
less than the future occupancy costs. The Company was able to liquidate
these parts to a competitor. However, because the competitor had the
ability to purchase these parts for the same price as the Company, the
Company was required to substantially discount the price to consummate
the sale. The Company incurred a loss in the amount of $94,887 on the
sale of the parts, which was completed during August, 1994. A charge in
the amount of $30,000 to buy out the lease was paid to the landlord
during the quarter ended September 30, 1994, and the Company incurred
costs of $17,245, for labor and other matters to return the leased
premises to the condition required under the lease agreement. These
total charges of $142,132, which were not anticipated by the Company at
the time the original restructuring plan was adopted, were a direct
result of the Company's restructuring program, and were included in the
Company's restructuring charge for the fiscal year ended March 31,
1995.
During the quarter ended December 31, 1994, the Company hired a new
President for CUI and began the process of converting CUI to a sales
office. In January, 1995, the Company's banking relationship had
significantly deteriorated, primarily as a result of the severance
charges, the charges incurred in closing down RSIIP, and the continuing
losses at CUI. The bank had reduced the Company's credit line from
$1,250,000 to $900,000, and had requested that the Company take action
to immediately reduce the losses at CUI. The Company determined that
the most effective and expedient way to reduce CUI's losses was to
liquidate the inventory of used Steelcase office furniture to reduce
occupancy and labor costs. In addition, the Company believed that
liquidating this inventory would provide cash flow that would help with
the difficult cash position the Company had been placed in by the
reductions to the line of credit. On January 17, 1995, the Company
entered into an agreement with a competitor under which the Company
placed all of its Steelcase inventory with the competitor on
consignment. Once again, because this competitor had the ability to
purchase this type of product on the open market for the same cost as
the Company, and since the competitor incurred significant labor and
additional warehousing costs as a result of the large quantity of
inventory consigned to it, the Company was required to substantially
discount the consignment value of this inventory in order to entice the
competitor to enter into the agreement. In addition, a significant
portion of this product was damaged in shipping, and was not accepted
on consignment. As a result, the Company's net realizable value for
this inventory was reduced to the total consigned value, and the
Company realized a loss in the amount of $448,997. In addition, CUI
incurred labor and administrative costs of approximately $75,000 that
were a direct result of removing the Steelcase inventory from its
warehouses, loading the Steelcase inventory onto trucks, removing
equipment and racking from the warehouse, and rearranging the small
amount of warehouse space it was keeping so that it was better suited
to support the new sales office concept. These total charges of
$523,997, which the Company did not anticipate at the time the original
restructuring plan was adopted, were a direct result of the
acceleration of the plan that was required in light of the Company's
deteriorated working capital position, and were included in the
Company's restructuring plan for the fiscal year ended March 31, 1995.
34
<PAGE> 35
RECONDITIONED SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. Restructuring: (CONTINUED)
As of March 31, 1995, all of the items included in the Company's
$731,129 restructuring charge had either been paid or the losses had
been realized. In addition, as of March 31, 1995 and through July 12,
1995, when the Company released its March 31, 1995 financial
statements, the Company believed its restructuring was nearly complete
and the only remaining step to complete the restructuring was to
convert FOG from a full Haworth remanufacturing facility to a sales
office. Because the Company did not at that time anticipate any
significant additional charges would be incurred in connection with the
final step of its restructuring plan, there were no accrued liabilities
in connection with the Company's restructuring program as of March 31,
1995. At that time, FOG had reported net income and positive cash flows
from operations for the year ended March 31, 1995, and the Company
believed that the remaining goodwill recorded in connection with the
acquisition of FOG was not impaired. Management believed that it could
convert FOG to a sales office over time by allowing it to continue to
remanufacture, depleting its existing inventory, and having RSI
supplement its production. Under this plan, the Company believed that
FOG could realize full value for its inventory, continue to report
profits, and be fully converted to a sales office within twelve to
eighteen months without the Company incurring any additional
restructuring charges.
The $731,129 restructuring charge for the year ended March 31, 1995
consisted of the following:
<TABLE>
<S> <C>
Realized loss on parts inventory $ 94,887
Lease buy out and other costs to vacate the
parts facility 47,245
Buy out of the employment contract of CUI's
President 65,000
Abandonment and write-down to consignment
value of CUI's Steelcase inventory 448,997
Labor and administrative costs to convert CUI
to a remanufactured Haworth sales office 75,000
--------
$731,129
========
</TABLE>
During the first week of August, 1995, the Company's President and its
Chief Executive Officer resigned. The Company named a new President and
Chief Executive Officer and a new Chief Financial Officer. The
Company's working capital position and banking relationship had further
deteriorated, and the Company's line of credit had been reduced from
$900,000 to $500,000. In addition, the bank informed the new management
team that the credit line would continue to reduce until the losses
ceased. Due to the Company's extremely difficult cash position, and the
information from the bank that it would continue to reduce the line of
credit, the new management team believed it was necessary to modify the
Company's restructuring plan and close CUI immediately. In addition,
during the first half of August, 1995, the new management team
determined that FOG's operating results were deteriorating. FOG had
reported a net loss for the four months ended July 30, 1995, and based
on projected sales for August, 1995, it appeared a significant loss
would be reported for that month. Because the Company was not able to
withstand any further operating losses by FOG, the Company's new
management was required to take additional action. The Company
attempted to sell FOG, but did not receive any offers which equalled or
exceeded FOG's liquidation value. Management considered management
changes at FOG, but determined that the transition period would be
extremely costly. Having exhausted the possibilities, management
eventually decided to liquidate FOG.
35
<PAGE> 36
RECONDITIONED SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. Restructuring: (CONTINUED)
Effective September 1, 1995, the Company's restructuring plan was once
again modified and FOG was closed. As a result of the closing of CUI
and FOG, the Company incurred additional restructuring charges that
management did not originally anticipate. FOG's remaining goodwill of
$563,562 was fully impaired as of the date of its closing. In addition,
a loss on the sale of CUI and FOG's equipment in the amount of $100,048
was realized, and the Company spent $41,644 to vacate CUI and FOG's
facilities and return them to the condition required by their leases.
The Company was required to write-off $84,393 of certain prepaid
expenses and other current assets of CUI and FOG. These items included
uncollectible receivables from former employees which were to have been
paid through payroll deductions and non-refundable prepaid expenses
such as brochures and promotional inventoried materials. As of
September 30, 1995, the Company also accrued $112,760 for other
expenses it expected to incur as a result of closing CUI and FOG. This
estimate of additional closing costs was for items such as lease
settlements and attorney fees. The remaining amount in the accrual as
of March 31, 1996 was $21,074, and most of that accrual has been used
subsequent to March 31, 1996.
The last charge incurred as a result of closing CUI and FOG was the
loss realized on the liquidation and disposal of inventory, in the
amount of $531,621. During August, 1995, due to the Company's extreme
cash needs, the Company's new management approached certain of its
competitors and requested them to provide a cash offer to purchase the
remaining Steelcase inventory owned by CUI, which was held on
consignment by a competitor. The highest bid the Company received for
this inventory was approximately $90,000, which was approximately 40%
of the amount it had been consigned for. Due to the Company's critical
cash situation, the Company accepted the offer and realized an
additional loss of approximately $135,000 on the inventory. The
remaining loss on the liquidation and disposal of inventory in the
approximate amount of $400,000 all related to FOG's inventory. Upon
closing FOG on September 1, 1995, the Company had two months to
complete all of FOG's work-in-progress and vacate the building, since
FOG's lease expired on October 31, 1995. All of FOG's inventory which
RSI could utilize was sold to RSI at its cost, and the remainder of
FOG's inventory was liquidated to various competitors in a manner
similar to and at discounted rates similar to the liquidation of CUI
and RSIIP's inventories.
The total charges to close CUI and FOG amounted to $1,434,029, and were
directly a result of the modifications to the restructuring plan,
primarily caused by the deterioration of the Company's working capital
position as operating losses mounted and the credit facility was
reduced and then eliminated. These charges were not anticipated at the
time the restructuring plan was adopted, or at the time the Company's
March 31, 1995 financial statements were released. They were included
in the Company's restructuring charge for the year ended March 31,
1996, and the breakdown is as follows:
<TABLE>
<S> <C>
Impairment of FOG goodwill $ 563,562
Liquidation and disposal of inventory 531,621
Realized loss on sale of equipment 100,048
Impairment of certain prepaid expenses and
other current assets 84,393
Labor and other costs to vacate leased space 41,644
Other 112,761
----------
$1,434,029
==========
</TABLE>
36
<PAGE> 37
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE:
On March 21, 1996, the Company, acting on the direction of its Board of
Directors, informed McGladrey & Pullen, LLP that it would be seeking additional
fee proposals for its March 31, 1996 audit, and on March 22, 1996, McGladrey &
Pullen, LLP notified the Company that the firm would not be submitting a
proposal. Accordingly, on March 22, 1996, the client-auditor relationship
between the Company and McGladrey & Pullen, LLP ceased.
McGladrey & Pullen, LLP's reports on the Company's financial statements for the
years ended March 31, 1994 and 1995, did not contain an adverse opinion or a
disclaimer of opinion and were not qualified or modified as to uncertainty,
audit scope, or accounting principles. There were no disagreements with
McGladrey & Pullen, LLP on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure in connection
with McGladrey & Pullen, LLP's issuance of their audit report in connection with
their audit of the Company's financial statements for the years ended March 31,
1995 or 1994.
The only disagreement in connection with the Company's interim reports on Form
10-QSB filed subsequent to the Company's Form 10-KSB filing for the year ended
March 31, 1995, is discussed in the following paragraph.
During March, 1996, the Company requested that McGladrey & Pullen, LLP
reissue their report on the Company's 1995 and 1994 financial statements for
inclusion in a proxy statement for a special meeting of the Company's
stockholders. In connection with this engagement, McGladrey & Pullen, LLP
determined that the Company had accrued dividends on its 9% Series A
Convertible Preferred Stock in its last three 10-QSB filings. McGladrey &
Pullen, LLP advised the Company that, inasmuch as such dividends had not been
declared, in their opinion, accrual of these dividends was not in accordance
with generally accepted accounting principles. The Company originally
disagreed, but eventually acquiesced and, on March 19, 1996, amended its Form
10-QSB filings for the quarters ended June 30, 1995, September 30, 1995, and
December 31, 1995.
On March 28, 1996, the Company selected Semple & Cooper, PLC as its new
independent accountants.
37
<PAGE> 38
PART III
The information required by Items 9-12 of Part III is omitted from this Report
by virtue of the fact that the Company has filed with the Securities and
Exchange Commission (the "SEC"), pursuant to Regulation 14A, within 120 days
after the end of the fiscal year covered by this Report, a definitive proxy
statement (the "Proxy Statement") relating to the Company's Annual Stockholders'
Meeting to be held August 5, 1996. Such information included in the Proxy
Statement is incorporated herein by reference. The Company disseminated the
Proxy Statement to stockholders on or about July 15, 1996.
Material incorporated herein by reference and location in Proxy Statement for
1996 Annual Meeting:
<TABLE>
<CAPTION>
Item No. Item Description Proxy Statement
- -------- ---------------- ---------------
<S> <C> <C>
9 Directors, Executive Officers, Proposal Five - Election of Directors
Promoters, and Control Persons;
Compliance with Section 16(a)
of the Exchange Act
10 Executive Compensation Proposal Five - Election of Directors
11 Security Ownership of Certain General Information - Security
Beneficial Owners and Management Ownership of Certain Principal
Stockholders and Management
12 Certain Relationships and Related Proposal Five - Election of Directors
Transactions
</TABLE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K:
(a)(1) EXHIBITS
The following exhibits are filed herewith pursuant to Regulation S-B
<TABLE>
<CAPTION>
No. Description Reference
- --- ----------- ---------
<S> <C> <C>
3.1 Articles of Incorporation of the Registrant, as amended and restated 5
3.2 Bylaws of Registrant 1
4.1 Form of Common Stock Certificate 1
1.2 Form of Class A and Class B Warrant Agreement 1
4.3 Form of Series A Preferred Stock Certificate 5
4.4 Preferred Stock Purchase Agreements 6
4.5 Registration Rights Agreements 6
4.6 Founders Agreements 6
4.8 Warrants issued to Nutmeg Securities, Inc. 7
4.9 Options issued to Wayne R. Collignon 7
4.10 Options issued to Dirk D. Anderson 7
10.1 Lease Agreement, dated April 12, 1990 between Boston Safe Deposit
and Trust Company, as Lessor, and Registrant as Lessee 1
10.11 Purchase Agreement between Registrant and CUI 2
10.16 Purchase Agreement between FOG and the Registrant 4
10.17 Loan documents between National Bank of Arizona and the Registrant 6
10.18 Agreement for Surrender and Cancellation of Redemption Right between
Larry Henry and the Registrant 5
10.20 Agreement between Sheppard's Business Interiors, Inc., the Registrant,
and the Registrant's wholly-owned subsidiary CUI 6
10.21 Employment Agreement between the Registrant and Wayne R. Collignon 7
</TABLE>
38
<PAGE> 39
<TABLE>
<CAPTION>
No. Description Reference
- --- ----------- ---------
<S> <C> <C>
10.22 Employment Agreement between the Registrant and Dirk D. Anderson 7
10.23 Third amendment to the Lease between the Registrant, as Lessee, and
Newhew Associates, as Lessor 7
10.24 Loan documents between the Registrant and Norwest Business Credit, Inc. 7
16.1 Letter from McGladrey & Pullen, LLP, former auditors 7
21 List of subsidiaries 5
23 Consents of Semple & Cooper, PLC and McGladrey & Pullen, LLP 7
27 Financial Data Schedule 7
</TABLE>
(1) Filed with Registration Statement on Form S-18, No. 33-51980-LA,
under the Securities Act of 1933, as declared effective on
December 17, 1992
(2) Filed with Form 8 amendment May 17, 1993, amending 8-K filed
April 30, 1993
(3) Filed with Form 10-KSB on June 30, 1993
(4) Filed with Form 8-K on August 17, 1993
(5) Filed with Form 10-KSB on June 20, 1994
(6) Filed with Form 10-KSB on July 13, 1995
(7) Filed herewith
(*) Indicates a compensatory plan or arrangement
(b) REPORT ON FORM 8-K
The Registrant filed a Form 8-K on March 29, 1996 and a Form 8-K/A on April 10,
1996, in connection with its change of auditors (see above under "Item 8.
Changes In and Disagreements with Accountants on Accounting and Financial
Disclosure").
39
<PAGE> 40
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
RECONDITIONED SYSTEMS, INC.
By: /s/ Wayne R. Collignon
----------------------------------------------------
Wayne R. Collignon, President and Chief Executive Officer
Date: July 2, 1996
--------------------------------------------------
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and the
dates indicated.
Reconditioned Systems, Inc.
By: /s/ Wayne R. Collignon
----------------------------------------------------
Wayne R. Collignon, President and Chief Executive Officer
(Principal Executive Officer) and Director
Date: July 2, 1996
----------------------------------------------------
By: /s/ Dirk D.Anderson
----------------------------------------------------
Dirk D. Anderson, Chief Financial Officer (Principal Financial
Officer and Principal Accounting Officer) and Director
Date: July 2, 1996
----------------------------------------------------
By: /s/ Robert L. Campbell
----------------------------------------------------
Robert L. Campbell, Chairman of the Board of Directors
Date: July 2, 1996
----------------------------------------------------
By: /s/ Edward J. Cain
----------------------------------------------------
Edward J. Cain, Director
Date: July 2, 1996
----------------------------------------------------
By: /s/ Scott W. Ryan
----------------------------------------------------
Scott W. Ryan, Director
Date: July 2, 1996
----------------------------------------------------
40
<PAGE> 1
EXHIBIT 4.8
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT"), AND MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR
HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT
TO THE SECURITIES UNDER THE ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE
COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED. THESE SECURITIES ARE SUBJECT TO
THE TERMS OF THAT CERTAIN LETTER AGREEMENT DATED JULY 15, 1993, BETWEEN THE
COMPANY AND NUTMEG SECURITIES, INC. (THE "NUTMEG LETTER AGREEMENT").
WARRANT TO PURCHASE 10,000 SHARES
VOID AFTER 5:00 P.M., MOUNTAIN STANDARD TIME
ON JULY 15, 1996
RECONDITIONED SYSTEMS, INC.
This certifies that, for value received NUTMEG SECURITIES, INC., the
registered holder hereof (the "Holder"), is entitled to purchase from
RECONDITIONED SYSTEMS, INC., an Arizona corporation (the "Company"), at any time
after 5:00 P.M., Mountain Standard Time, on July 15, 1993 and before July 15,
1996 at 5:00 P.M. Mountain Standard Time, at the purchase price per Share of
$3.50 (the "Warrant Price"), a maximum of ten thousand (10,000) shares of common
stock (the "Shares") of the Company.
The Warrants evidenced hereby may be exercised in whole or in part by
presentation of this Warrant certificate with the Purchase Form attached hereto,
duly executed with signature guarantee and simultaneous payment of the Warrant
Price (subject to adjustment) at the principal office in Phoenix, Arizona of
Bank One Arizona, NA, (the "Warrant Agent"). Payment of such price shall be made
at the option of the Holder in cash or by certified check or bank draft.
Each of the Warrants evidenced hereby authorize the Holder to purchase
one Share and are issued under and in exchange for services provided to the
Company by the Holder having a value equal to the value of the Warrants and are
subject to the terms and provisions contained in the Agreement dated July 15,
1993 evidenced by the communication executed by Robert L. Campbell, Chairman of
the Board (the "Letter Agreement").
Upon any partial exercise of the Warrants evidenced hereby, there shall
be issued to the Holder a new Warrant certificate in respect of the Shares
evidenced hereby which shall not have been exercised. This Warrant certificate
may be exchanged at the office of the Warrant Agent by surrender of this Warrant
certificate properly endorsed either separately or in combination with one or
more other Warrants for one or more new Warrants to purchase the same aggregate
number of Shares as here evidenced by the Warrant or Warrants exchanged. No
fractional Shares will be issued upon the exercise of rights to purchase
hereunder, but the Company shall pay the cash value of any fraction upon the
exercise of one or more Warrants.
Dated: January 14, 1994 RECONDITIONED SYSTEMS, INC.
--------------------
By: /s/ Charles R. Johnson
--------------------------------
CHARLES R. JOHNSON, President
ATTEST:
/s/ James Roach
- -----------------------
JAMES ROACH, Secretary
<PAGE> 1
EXHIBIT 4.9
STOCK OPTION AGREEMENT
EFFECTIVE DATE: August 10, 1995
PLACE: Tempe, Arizona
PARTIES: RECONDITIONED SYSTEMS, INC., an Arizona corporation (the
"Company"), and Wayne Collignon ("Optionee")
RECITALS:
Pursuant to the Employment Agreement dated as of the Effective Date
hereof between the Company and Optionee, Optionee is entitled to receive options
to acquire up to 100,000 shares of the Company's no par value common stock
("Common Stock"). Capitalized terms not otherwise defined herein shall have the
same meaning as ascribed to them in the Employment Agreement.
AGREEMENTS:
In consideration of the mutual promises herein contained, the parties
agree as follows:
1. Grant of Option. The Company hereby irrevocably grants to Optionee
the right and option (the "Option") to purchase all or any part of an aggregate
of up to one hundred thousand (100,000) shares of Common Stock (the "Shares") on
the terms and conditions set forth herein.
2. Purchase Price. The purchase price of the Shares acquired pursuant
to the exercise of an Option shall be _________ ($2.75) per Share, which equals
the fair market value of the Shares on the date of this grant. The purchase
price shall be paid in the manner set forth in Paragraph 11.
3. Vesting. Optionee's right to acquire Shares pursuant to the
exercise of the Option as provided herein shall be fully vested as of the date
hereof; provided, however, that Optionee hereby agrees not to sell, assign,
transfer, pledge, hypothecate or otherwise dispose of any Shares acquired upon
exercise of this Option for a period of twelve (12) months following the
Effective Date of this Option.
4. Term of Option. Subject to early termination of the Option as
provided in Paragraphs 7, 8, and 9 hereof, the Option shall terminate as the
date ten (10) years after the date hereof.
5. Exercise of the Option. Subject to earlier termination of the
Option as provided in Paragraphs 7, 8 and 9 hereof, and to the lock-up
provisions contained in Paragraph 3 hereof, Optionee may exercise the Option
from time to time as to any part or all of the vested Shares covered hereby.
<PAGE> 2
6. Nontransferability. The Option shall not be transferable otherwise
than by will or the laws of descent and distribution, and the Option may be
exercised, during the lifetime of Optionee, only by Optionee. More particularly,
but without limiting the generality of the foregoing, and except as otherwise
specified, the Option may not be sold, assigned, transferred, pledged,
hypothecated, or disposed of in any manner, shall not be assignable by operation
of law, and shall not be subject to execution, attachment, or similar process.
Any attempted sale, assignment, transfer, pledge, hypothecation, or other
disposition contrary to the provisions hereof, and the levy of execution,
attachment, or similar process upon the Option, shall be null and void and
without effect.
7. Termination of Employment; Effect on Employment. If the employment
of Optionee is terminated (otherwise than by reason of death), the Option may be
exercised at any time within three (3) months after the date of such
termination, but not more than ten (10) years from the date hereof. To the
extent the Option has not been exercised by such time, the Option shall
terminate. So long as Optionee shall continue to be an employee of the Company
or any parent or subsidiary of the Company, this Option shall not be affected by
any change of duties or position. Nothing in this Agreement shall confer upon
Optionee any right to continue in the employ of the Company or any parent or
subsidiary of the Company or interfere in any way with the right of the Company
or any parent or subsidiary of the Company to terminate Optionee's employment at
any time.
8. Death of Optionee. If Optionee dies while employed by the Company or
within three (3) months after the termination of his employment, the Option may
be exercised by the legal representative of his estate, or by any person or
persons who shall have acquired the Option directly from Optionee by bequest or
inheritance, at any time within one (1) year after the date of his death, but
not more than ten (10) years from the date hereof. To the extent the Option has
not been exercised by such time, the Option shall terminate.
9. Dissolution or Liquidation of Company. In the event of the proposed
dissolution or liquidation of the Company, or in the event of a proposed sale of
substantially all of the assets of the Company, or in the event of a merger or
consolidation with another corporation in any manner in which the Company is not
the surviving corporation and the surviving corporation does not agree to assume
the Option granted hereunder, the Option will terminate immediately before the
consummation of such proposed action, unless sooner terminated as of a date
fixed by the Board of Directors, in which event Optionee shall be given the
right to exercise the Option as to all or any part of the Shares subject to this
Agreement.
10. Rights as Stockholder. Optionee shall not by reason of the Option
have any rights of a stockholder of the Company until Optionee shall, from time
to time, have exercised the Option, and, upon each such exercise, Optionee shall
have, with respect to the number of Shares as to which the Option is then
exercised, all rights of a stockholder of record from the date of such exercise,
irrespective of whether certificates to evidence the Shares with respect to
which the Option was exercised shall have been issued on such date.
2
<PAGE> 3
11. Method of Exercising.
(a) Notice of Exercise/Payment of Purchase Price. Subject to
the terms and conditions of this Agreement, the Option may be exercised by
written notice to the Secretary of the Company, at the Company's main office, or
at such other address as the Company, by written notice to Optionee, may
designate from time to time. Such notice shall state the election to exercise
the Option and the number of Shares in respect of which the Option is being
exercised, and shall be signed by the person or persons exercising the Option.
Such notice shall be accompanied by payment of the full purchase price of such
Shares, by cashier's or certified check, or by such other form of consideration,
if any, as may be approved by the Company's Board of Directors. In addition to
the foregoing, the purchase price for the Shares may be paid through a sale and
remittance procedure by which Optionee shall provide concurrent irrevocable
written instructions to: (i) a Company designated brokerage firm to effect the
immediate sale of the purchased Shares and remit to the Company, out of the sale
proceeds available on the settlement date, sufficient funds to cover the
purchase price for the Shares acquired pursuant to exercise of the Option, and
(ii) the Company to deliver the certificates for the purchased Shares directly
to such brokerage firm to complete the sale transaction.
(b) Stock Certificates. Upon the exercise of an Option, the
Company shall deliver a certificate or certificates representing any Shares
acquired hereunder as soon as practicable after the notice and payment shall be
received. Except if issued through the sale and remittance procedure described
in Paragraph 11(a), the certificate or certificates for the Shares as to which
the Option shall have been so exercised shall be registered in the name of
Optionee or in the name of any other person or entity specified in writing by
Optionee. If an Option shall be exercised by the legal representative of
Optionee's estate, or by any person or persons who shall have acquired the
Option directly from Optionee as a result of Optionee's death, whether by
bequest, inheritance, or otherwise, such notice shall be accompanied by
appropriate proof of the right of such person or persons to exercise the Option.
All Shares that shall be purchased upon the exercise of an Option as provided
herein shall be fully paid and nonassessable.
12. Reservation of Shares. The Company shall at all times during the
term of the Option reserve and keep available such number of shares of Common
Stock as will be sufficient to satisfy the requirements of this Agreement, shall
pay all fees, expenses, and taxes necessarily incurred by the Company in
connection therewith, and shall, from time to time, use its good faith efforts
to comply with all laws, rules, and regulations which, in the opinion of counsel
for the Company, shall be applicable thereto.
13. Registration of Shares. The Company shall register the Shares
issuable upon exercise of the Option with the Securities and Exchange Commission
(the "Commission") by filing a Registration Statement on Form S-8 with the
Commission.
14. Adjustment for Recapitalization. In the event of any stock
dividend, stock split, combination of shares, recapitalization or other change
in the capital structure of the Company or any merger, consolidation, spin-off,
split-off, split-up, reorganization, partial or complete liquidation or other
distribution of assets, issuance of warrants or other rights to purchase
securities or any other corporate transaction or event having an effect similar
to any
3
<PAGE> 4
of the foregoing, appropriate adjustments shall be made by the Board of
Directors of the Company to the number and kind of Shares and the price per
Share subject to this Agreement.
15. Taxes. Optionee agrees, no later than the date as of which the
value of any Option or Shares acquired pursuant to this Agreement first becomes
includible in the gross income of Optionee for federal income tax purposes, to
pay to the Company, or make arrangements satisfactory to the Company regarding
payment of, any federal, state or local taxes of any kind required by law to be
withheld with respect to the Option or such Shares. The obligations of the
Company under this Agreement shall be conditional on such payment or
arrangements, and the Company shall, to the extent permitted by law, have the
right to deduct any such taxes from any payment of any kind otherwise due to
Optionee.
16. Action Taken in Good Faith. No member of the Board of Directors,
nor any officer or employee of the Company acting on behalf of the Board, shall
be personally liable for any action, determination or interpretation taken or
made in good faith with respect to this Agreement.
17. Miscellaneous.
(a) Waiver. The waiver of any provision of this Agreement will
not be effective unless in writing and executed by the party against whom
enforcement of the waiver is sought.
(b) Entire Agreement. This Agreement constitutes the entire
integrated agreement among the parties pertaining to the subject matter hereof,
and supersedes all prior and contemporaneous agreements, representations, and
understandings of the parties. This Agreement may not be amended except by
written instrument executed by the parties.
(c) Arbitration. Any dispute or controversy arising under or
in connection with this Agreement shall be settled exclusively by arbitration,
conducted before a panel of three (3) arbitrators in Phoenix, Arizona in
accordance with the rules of the American Arbitration Association then in
effect. The decision of the arbitrators shall be final and binding on the
parties, and judgment may be entered on the arbitrators' award in any court
having jurisdiction. The costs and expenses of such arbitration, including but
not limited to attorneys' and other professionals' fees, shall be borne in
accordance with the determination of the arbitrators.
(d) Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Arizona without regard to
its conflict of laws principles.
(e) Severability. If any provision of this Agreement is held
to be unenforceable by a court of competent jurisdiction, the remainder of this
Agreement shall be severable and not affected thereby.
4
<PAGE> 5
(f) Counterparts. This Agreement may be executed in one or
more counterparts each of which shall be deemed an original, but all of which
shall constitute one and the same instrument.
(g) Delays or Omissions. No delay or omission to exercise any
right, power, or remedy accruing to any party hereunder or any breach or default
under this Agreement shall impair any such right, power, or remedy, nor shall it
be construed as a waiver of or acquiescence to any such breach or default, or of
or in any similar breach or default occurring later; nor shall any waiver of any
single breach or default be deemed a waiver of any other breach or default
occurring before or after the waiver. Any waiver, permit, consent, or approval
of any kind of any breach or default under this Agreement or of any provision or
condition of this Agreement must be in writing and shall be effective only to
the extent specifically stated in such writing. All remedies, either under this
Agreement or by law or otherwise afforded to any party shall be cumulative.
(h) Headings. The headings in this Agreement have been
inserted for convenience only and shall not affect the meaning or interpretation
of any provision in this Agreement.
(i) Assignment. The rights and obligations of the Company and
Optionee hereunder shall inure to the benefit of and shall be binding on their
successors and assigns.
IN WITNESS WHEREOF, the undersigned have duly executed this Agreement
effective as of the day and year first above written.
COMPANY: OPTIONEE:
RECONDITIONED SYSTEMS, INC.,
an Arizona corporation
By /s/ Robert L. Campbell /s/ Wayne Collignon
----------------------------- ----------------------------
Robert L. Campbell, Wayne Collignon
Chairman
5
<PAGE> 1
Exhibit 4.10
STOCK OPTION AGREEMENT
EFFECTIVE DATE: August 10, 1995
PLACE: Tempe, Arizona
PARTIES: RECONDITIONED SYSTEMS, INC., an Arizona corporation (the
"Company"), and Dirk Anderson ("Optionee")
RECITALS:
Pursuant to the Employment Agreement dated as of the Effective Date
hereof between the Company and Optionee, Optionee is entitled to receive options
to acquire up to 100,000 shares of the Company's no par value common stock
("Common Stock"). Capitalized terms not otherwise defined herein shall have the
same meaning as ascribed to them in the Employment Agreement.
AGREEMENTS:
In consideration of the mutual promises herein contained, the parties
agree as follows:
1. Grant of Option. The Company hereby irrevocably grants to Optionee
the right and option (the "Option") to purchase all or any part of an aggregate
of up to one hundred thousand (100,000) shares of Common Stock (the "Shares") on
the terms and conditions set forth herein.
2. Purchase Price. The purchase price of the Shares acquired pursuant
to the exercise of an Option shall be ($2.75) per Share, which equals
the fair market value of the Shares on the date of this grant. The purchase
price shall be paid in the manner set forth in Paragraph 11.
3. Vesting. Optionee's right to acquire Shares pursuant to the
exercise of the Option as provided herein shall be fully vested as of the date
hereof; provided, however, that Optionee hereby agrees not to sell, assign,
transfer, pledge, hypothecate or otherwise dispose of any Shares acquired upon
exercise of this Option for a period of twelve (12) months following the
Effective Date of this Option.
4. Term of Option. Subject to early termination of the Option as
provided in Paragraphs 7, 8, and 9 hereof, the Option shall terminate as the
date ten (10) years after the date hereof.
5. Exercise of the Option. Subject to earlier termination of the Option
as provided in Paragraphs 7, 8 and 9 hereof, and to the lock-up provisions
contained in Paragraph 3 hereof, Optionee may exercise the Option from time to
time as to any part or all of the vested Shares covered hereby.
<PAGE> 2
6. Nontransferability. The Option shall not be transferable otherwise
than by will or the laws of descent and distribution, and the Option may be
exercised, during the lifetime of Optionee, only by Optionee. More particularly,
but without limiting the generality of the foregoing, and except as otherwise
specified, the Option may not be sold, assigned, transferred, pledged,
hypothecated, or disposed of in any manner, shall not be assignable by operation
of law, and shall not be subject to execution, attachment, or similar process.
Any attempted sale, assignment, transfer, pledge, hypothecation, or other
disposition contrary to the provisions hereof, and the levy of execution,
attachment, or similar process upon the Option, shall be null and void and
without effect.
7. Termination of Employment; Effect on Employment. If the employment
of Optionee is terminated (otherwise than by reason of death), the Option may be
exercised at any time within three (3) months after the date of such
termination, but not more than ten (10) years from the date hereof. To the
extent the Option has not been exercised by such time, the Option shall
terminate. So long as Optionee shall continue to be an employee of the Company
or any parent or subsidiary of the Company, this Option shall not be affected by
any change of duties or position. Nothing in this Agreement shall confer upon
Optionee any right to continue in the employ of the Company or any parent or
subsidiary of the Company or interfere in any way with the right of the Company
or any parent or subsidiary of the Company to terminate Optionee's employment at
any time.
8. Death of Optionee. If Optionee dies while employed by the Company or
within three (3) months after the termination of his employment, the Option may
be exercised by the legal representative of his estate, or by any person or
persons who shall have acquired the Option directly from Optionee by bequest or
inheritance, at any time within one (1) year after the date of his death, but
not more than ten (10) years from the date hereof. To the extent the Option has
not been exercised by such time, the Option shall terminate.
9. Dissolution or Liquidation of Company. In the event of the proposed
dissolution or liquidation of the Company, or in the event of a proposed sale of
substantially all of the assets of the Company, or in the event of a merger or
consolidation with another corporation in any manner in which the Company is not
the surviving corporation and the surviving corporation does not agree to assume
the Option granted hereunder, the Option will terminate immediately before the
consummation of such proposed action, unless sooner terminated as of a date
fixed by the Board of Directors, in which event Optionee shall be given the
right to exercise the Option as to all or any part of the Shares subject to this
Agreement.
10. Rights as Stockholder. Optionee shall not by reason of the Option
have any rights of a stockholder of the Company until Optionee shall, from time
to time, have exercised the Option, and, upon each such exercise, Optionee shall
have, with respect to the number of Shares as to which the Option is then
exercised, all rights of a stockholder of record from the date of such exercise,
irrespective of whether certificates to evidence the Shares with respect to
which the Option was exercised shall have been issued on such date.
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<PAGE> 3
11. Method of Exercising.
(a) Notice of Exercise/Payment of Purchase Price. Subject to
the terms and conditions of this Agreement, the Option may be exercised by
written notice to the Secretary of the Company, at the Company's main office, or
at such other address as the Company, by written notice to Optionee, may
designate from time to time. Such notice shall state the election to exercise
the Option and the number of Shares in respect of which the Option is being
exercised, and shall be signed by the person or persons exercising the Option.
Such notice shall be accompanied by payment of the full purchase price of such
Shares, by cashier's or certified check, or by such other form of consideration,
if any, as may be approved by the Company's Board of Directors. In addition to
the foregoing, the purchase price for the Shares may be paid through a sale and
remittance procedure by which Optionee shall provide concurrent irrevocable
written instructions to: (i) a Company designated brokerage firm to effect the
immediate sale of the purchased Shares and remit to the Company, out of the sale
proceeds available on the settlement date, sufficient funds to cover the
purchase price for the Shares acquired pursuant to exercise of the Option, and
(ii) the Company to deliver the certificates for the purchased Shares directly
to such brokerage firm to complete the sale transaction.
(b) Stock Certificates. Upon the exercise of an Option, the
Company shall deliver a certificate or certificates representing any Shares
acquired hereunder as soon as practicable after the notice and payment shall be
received. Except if issued through the sale and remittance procedure described
in Paragraph 11(a), the certificate or certificates for the Shares as to which
the Option shall have been so exercised shall be registered in the name of
Optionee or in the name of any other person or entity specified in writing by
Optionee. If an Option shall be exercised by the legal representative of
Optionee's estate, or by any person or persons who shall have acquired the
Option directly from Optionee as a result of Optionee's death, whether by
bequest, inheritance, or otherwise, such notice shall be accompanied by
appropriate proof of the right of such person or persons to exercise the Option.
All Shares that shall be purchased upon the exercise of an Option as provided
herein shall be fully paid and nonassessable.
12. Reservation of Shares. The Company shall at all times during the
term of the Option reserve and keep available such number of shares of Common
Stock as will be sufficient to satisfy the requirements of this Agreement, shall
pay all fees, expenses, and taxes necessarily incurred by the Company in
connection therewith, and shall, from time to time, use its good faith efforts
to comply with all laws, rules, and regulations which, in the opinion of counsel
for the Company, shall be applicable thereto.
13. Registration of Shares. The Company shall register the Shares
issuable upon exercise of the Option with the Securities and Exchange Commission
(the "Commission") by filing a Registration Statement on Form S-8 with the
Commission.
14. Adjustment for Recapitalization. In the event of any stock
dividend, stock split, combination of shares, recapitalization or other change
in the capital structure of the Company or any merger, consolidation, spin-off,
split-off, split-up, reorganization, partial or complete liquidation or other
distribution of assets, issuance of warrants or other rights to purchase
securities or any other corporate transaction or event having an effect similar
to any
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of the foregoing, appropriate adjustments shall be made by the Board of
Directors of the Company to the number and kind of Shares and the price per
Share subject to this Agreement.
15. Taxes. Optionee agrees, no later than the date as of which the
value of any Option or Shares acquired pursuant to this Agreement first becomes
includible in the gross income of Optionee for federal income tax purposes, to
pay to the Company, or make arrangements satisfactory to the Company regarding
payment of, any federal, state or local taxes of any kind required by law to be
withheld with respect to the Option or such Shares. The obligations of the
Company under this Agreement shall be conditional on such payment or
arrangements, and the Company shall, to the extent permitted by law, have the
right to deduct any such taxes from any payment of any kind otherwise due to
Optionee.
16. Action Taken in Good Faith. No member of the Board of Directors,
nor any officer or employee of the Company acting on behalf of the Board, shall
be personally liable for any action, determination or interpretation taken or
made in good faith with respect to this Agreement.
17. Miscellaneous.
(a) Waiver. The waiver of any provision of this Agreement will
not be effective unless in writing and executed by the party against whom
enforcement of the waiver is sought.
(b) Entire Agreement. This Agreement constitutes the entire
integrated agreement among the parties pertaining to the subject matter hereof,
and supersedes all prior and contemporaneous agreements, representations, and
understandings of the parties. This Agreement may not be amended except by
written instrument executed by the parties.
(c) Arbitration. Any dispute or controversy arising under or
in connection with this Agreement shall be settled exclusively by arbitration,
conducted before a panel of three (3) arbitrators in Phoenix, Arizona in
accordance with the rules of the American Arbitration Association then in
effect. The decision of the arbitrators shall be final and binding on the
parties, and judgment may be entered on the arbitrators' award in any court
having jurisdiction. The costs and expenses of such arbitration, including but
not limited to attorneys' and other professionals' fees, shall be borne in
accordance with the determination of the arbitrators.
(d) Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Arizona without regard to
its conflict of laws principles.
(e) Severability. If any provision of this Agreement is held
to be unenforceable by a court of competent jurisdiction, the remainder of this
Agreement shall be severable and not affected thereby.
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(f) Counterparts. This Agreement may be executed in one or
more counterparts each of which shall be deemed an original, but all of which
shall constitute one and the same instrument.
(g) Delays or Omissions. No delay or omission to exercise any
right, power, or remedy accruing to any party hereunder or any breach or default
under this Agreement shall impair any such right, power, or remedy, nor shall it
be construed as a waiver of or acquiescence to any such breach or default, or of
or in any similar breach or default occurring later; nor shall any waiver of any
single breach or default be deemed a waiver of any other breach or default
occurring before or after the waiver. Any waiver, permit, consent, or approval
of any kind of any breach or default under this Agreement or of any provision or
condition of this Agreement must be in writing and shall be effective only to
the extent specifically stated in such writing. All remedies, either under this
Agreement or by law or otherwise afforded to any party shall be cumulative.
(h) Headings. The headings in this Agreement have been
inserted for convenience only and shall not affect the meaning or interpretation
of any provision in this Agreement.
(i) Assignment. The rights and obligations of the Company and
Optionee hereunder shall inure to the benefit of and shall be binding on their
successors and assigns.
IN WITNESS WHEREOF, the undersigned have duly executed this Agreement
effective as of the day and year first above written.
COMPANY: OPTIONEE:
RECONDITIONED SYSTEMS, INC.,
an Arizona corporation
By /s/ Robert L. Campbell /s/ Dirk Anderson
----------------------------- ----------------------------
Robert L. Campbell, Dirk Anderson
Chairman
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EXHIBIT 10.21
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as
of this 10th day of August, 1995, between Reconditioned Systems, Inc., an
Arizona corporation (the "Company"), and Wayne Collignon (the "Executive").
RECITALS
A. The Company is engaged, among other things, in the business of
purchasing, reconditioning, selling and distributing modular office work
stations consisting of panels, work surfaces, file drawers, book and binder
storage and integrated electrical components ("Workstations"). The Executive has
substantial experience and expertise in managing and operating the business of
the Company.
B. The Company desires to retain the services of the Executive as its
President and Chief Executive Officer, and the Executive desires employment with
the Company in that capacity.
C. The Company and the Executive desire to embody the terms and
conditions of the Executive's employment in a written agreement, which will
supersede all prior agreements of employment, whether written or oral, between
the Company and the Executive, pursuant to the terms and conditions hereinafter
set forth.
NOW, THEREFORE, in consideration of their mutual covenants and other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties agree as follows:
ARTICLE I
DUTIES AND TERM
1.1 Employment.
(a) The Executive is employed as the President and Chief
Executive Officer of the Company. The Executive shall have such duties and
responsibilities as shall be assigned to the Executive from time to time by the
Board of Directors of the Company (the "Board") in the Executive's capacity as
the President and Chief Executive Officer of the Company.
(b) During the period of his employment hereunder, the
Executive shall devote substantially all of his business time, attention, skill
and efforts to the faithful performance of his duties hereunder; provided,
however, that the Executive may serve or continue to serve on the board of
directors or hold other offices or positions in companies or organizations if
they involve no conflict of interest with the interests of the Company and may
engage in customary professional activities which in the judgment of the Board
will not materially affect the performance by the Executive of his duties
hereunder. The Executive has disclosed to the Board all material business
ventures in which he is currently involved, and, subject to approval by the
Board (after written notice to it), may in the future have other business
investments and
<PAGE> 2
participate in other business ventures which may, from time to time, require
portions of his time, but shall not interfere with his duties hereunder.
1.2 Term. The term of this Agreement shall commence on the date first
above written and shall continue, unless sooner terminated, for three (3) years
(the "Initial Term"). Thereafter, the term of this Agreement shall automatically
be extended for successive one (1) year periods ("Renewal Terms") unless either
the Board or the Executive gives written notice to the other at least ninety
(90) days prior to the end of the Initial Term or any Renewal Term, as the case
may be, of its or his intention not to renew the term of this Agreement. The
Initial Term and any Renewal Terms of this Agreement shall be collectively
referred to as the "Term."
1.3 Location. During the Term of this Agreement, the Executive shall be
based in the principal offices of the Company in Maricopa County, Arizona, and
shall not be required to be based anywhere other than Maricopa County, Arizona
except for travel reasonably required in the performance of his duties hereunder
and except as may be otherwise agreed to by the Executive.
ARTICLE II
COMPENSATION
2.1 Base Salary. Subject to the further provisions of this Agreement,
the Company shall pay the Executive during the Term of this Agreement a base
salary at an annual rate of not less than $105,000 (the "Base Salary"). The Base
Salary shall be reviewed at least annually by the Board and the Board may, in
its discretion, increase the Base Salary. The Base Salary of the Executive shall
not be decreased at any time during the Term of this Agreement from the amount
of Base Salary then in effect, except in connection with across-the-board salary
reductions similarly affecting all senior executives of the Company.
Participation in deferred compensation, discretionary bonus, retirement, stock
option and other employee benefit plans and in fringe benefits shall not reduce
the Base Salary payable to the Executive under this Section 2.1. The Base
Salary under this Section 2.1 shall be payable by the Company to the Executive
not less frequently than monthly.
2.2 Discretionary Bonuses. Subject to the further provisions of this
Agreement, during the Term of this Agreement the Executive shall be entitled to
participate in an equitable manner with all other senior executives of the
Company in such discretionary bonuses including, but not limited to, bonuses
provided pursuant to any management bonus plan that the Company may adopt (based
upon the performance of the participant and the Company), as may be authorized
and declared by the Board to the Company's senior executives. Nothing in this
Section shall be deemed to limit the ability of the Executive to be paid and
receive discretionary bonuses from the Company, based solely on the Executive's
performance, without regard to the payment of discretionary bonuses to any other
officers of the Company.
2.3 Participation in Retirement and Employee Benefit Plans; Fringe
Benefits. The Executive shall be entitled to participate in all plans of the
Company relating to stock options, stock purchases, pension, thrift, profit
sharing, life insurance, hospitalization and medical coverage, disability,
travel or accident insurance, education or other retirement or employee benefits
that the Company has adopted or may adopt for the benefit of its senior
executives. In
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addition, the Executive shall be entitled to participate in any other fringe
benefits, such as club dues and fees of professional organizations and
associations, which are now or may become applicable to the Company's senior
executives, and any other benefits which are commensurate with the duties and
responsibilities to be performed by the Executive under this Agreement. In
addition to such other fringe benefits, the Executive shall be entitled to a car
allowance of $300 per month. The Executive shall, during the Term of his
employment hereunder, continue to be provided with benefits at a level which
shall in no event be less in any material respect than the benefits available to
the Executive as of the date of this Agreement. Notwithstanding the foregoing,
the Company may terminate or reduce benefits under any benefit plans and
programs to the extent such reductions apply uniformly to all senior executives
entitled to participate therein, and the Executive's benefits shall be reduced
or terminated accordingly.
2.4 Stock Options. In addition to the plans and fringe benefits of the
Company in which the Executive shall be entitled to participate pursuant to
Section 2.3, upon execution of this Agreement the Company shall grant to the
Executive an option to purchase 100,000 shares of the Company's Common Stock, no
par value. Such option shall be fully vested and exercisable for a period of ten
(10) years from the date of grant at an exercise price equal to the fair market
value of the Company's Common Stock on the date of grant, and shall be evidenced
by a separate option agreement. The Executive shall agree not to sell or
otherwise dispose of any Common Stock acquired pursuant to exercise of the
option for a period of twelve (12) months following the date of grant. The
Company shall file a Registration Statement on Form S-8 with the Securities and
Exchange Commission relating to the shares underlying the option.
2.5 Vacations. The Executive shall be entitled, without loss of pay, to
be absent voluntarily for reasonable periods of time from the performance of his
duties and responsibilities under this Agreement. All such voluntary absences
shall count as paid vacation time, unless the Board otherwise determines. The
timing of paid vacations shall be scheduled in a manner reasonably acceptable to
the Company.
ARTICLE III
TERMINATION OF EMPLOYMENT
3.1 Death or Retirement of Executive. This Agreement shall
automatically terminate upon the death or Retirement (as defined in Section 3.4)
of the Executive.
3.2 By the Executive. The Executive shall be entitled to terminate this
Agreement by giving written notice to the Company:
(a) at least ninety (90) days prior to the end of the Initial
Term or any Renewal Term of this Agreement;
(b) for Good Reason (as defined in Section 3.4); and
(c) at any time without Good Reason.
3.3 By the Company. The Company shall be entitled to terminate this
Agreement by giving written notice to the Executive:
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(a) at least ninety (90) days prior to the end of the Initial
Term or any Renewal Term of this Agreement;
(b) in the event of the Executive's Disability (as defined in
Section 3.4);
(c) for Cause (as defined in Section 3.4); and
(d) at any time without Cause.
3.4 Definitions. For purposes of this Agreement, the following terms
shall have the following meanings:
(a) "Cause" shall mean any of the following:
(i) the conviction of or a plea of guilty by the
Executive to a felony involving fraud, embezzlement or theft;
(ii) willful misrepresentation of material fact by
the Executive in connection with the performance of his duties hereunder;
(iii) failure of or refusal on the part of the
Executive to substantially perform all of his duties hereunder, which failure or
refusal shall not be cured within fifteen (15) days following (A) receipt by the
Executive of a written notice specifying the factors or events constituting such
failure or refusal, and (B) a reasonable opportunity for the Executive to
correct such deficiencies;
(iv) the Executive's violation of the Company's then
current drug and alcohol policy;
(v) the Executive's unauthorized absence from his
duties hereunder for a period exceeding thirty (30) consecutive days; or
(vi) other material breach of this Agreement by the
Executive, which breach shall not be cured within fifteen (15) days after
written notice thereof to the Executive.
(b) "Disability" shall mean the Executive's inability, with or
without reasonable accommodation, to perform all of the essential functions of
his position hereunder on a full-time basis for a period exceeding ninety (90)
consecutive days or for periods aggregating more than ninety (90) days during
any one hundred eighty (180) day period as a result of incapacity due to
physical or mental illness not due to drug or alcohol abuse. If there is a
dispute as to whether the Executive is or was physically or mentally unable to
perform the essential functions of his position with or without reasonable
accommodation under this Agreement, such dispute shall be submitted for
resolution to a licensed physician agreed upon by the Board and the Executive,
or if an agreement cannot be promptly reached, the Board and the Executive will
each select a physician, and if these physicians cannot agree, they will pick a
third physician whose decision shall be binding on all parties. If such a
dispute arises, the Executive shall submit to such examinations and shall
provide such information as such
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physician(s) may request, and the determination of the physician(s) as to the
Executive's physical or mental condition shall be binding and conclusive.
(c) "Good Reason" shall mean any of the following if the same
shall occur without the Executive's express prior written consent:
(i) a material change by the Company in the
Executive's function, duties or responsibilities (including reporting
responsibilities) which would cause the Executive's position with the Company to
become of less dignity, responsibility and importance than those associated with
his functions, duties or responsibilities as of the date of this Agreement;
(ii) the Executive's Base Salary is reduced by the
Company, unless such reduction is pursuant to a salary reduction program as
described in Section 2.1 hereof, or there is a material reduction in the
benefits that are in effect for the Executive, unless such reduction is pursuant
to a uniform reduction in benefits for all senior executives as described in
Section 2.3 hereof;
(iii) the failure by the Company to obtain the
assumption by operation of law or otherwise of this Agreement by any entity
which is the surviving entity in any merger or other form of corporate
reorganization involving the Company or by any entity which acquires all or
substantially all of the Company's assets; or
(iv) other material breach of this Agreement by the
Company, which breach shall not be cured within fifteen (15) days after written
notice thereof to the Company.
(d) "Retirement" shall mean normal retirement at age 65 or in
accordance with the retirement rules generally applicable to the Company's
senior executives.
ARTICLE IV
COMPENSATION UPON TERMINATION OF EMPLOYMENT
4.1 Upon Termination for Death, Disability or Retirement, at Expiration
of Term, by the Company for Cause or by the Executive Without Good Reason. If
the Executive's employment is terminated by reason of the Executive's death,
Disability or Retirement, upon expiration of the Term of this Agreement, by the
Company for Cause or by the Executive without Good Reason, the Company shall:
(a) pay the Executive (or his estate or beneficiaries) any
Base Salary which has accrued but not been paid as of the termination date (the
"Accrued Base Salary");
(b) reimburse the Executive (or his estate or beneficiaries)
for expenses incurred by him prior to the date of termination which are subject
to reimbursement pursuant to applicable Company policies then in effect (the
"Accrued Reimbursable Expenses");
(c) provide to the Executive (or his estate or beneficiaries)
any accrued and vested benefits required to be provided by the terms of any
Company-sponsored benefit plans
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or programs (the "Accrued Benefits"), together with any benefits required to be
paid or provided in the event of the Executive's death, Disability or Retirement
under applicable law;
(d) pay the Executive (or his estate or beneficiaries) any
discretionary bonus with respect to a prior fiscal year which has accrued and
been earned but has not been paid (the "Accrued Bonus");
(e) in addition, the Executive (or his estate or
beneficiaries) shall have the right to exercise all vested, unexercised stock
options outstanding at the termination date in accordance with terms of the
plans and agreements pursuant to which such options were issued; and
(f) in addition, to the extent permitted by the terms of the
policies then in effect, the Executive shall have a right of first refusal to
cause the transfer of the ownership of all key-man life insurance policies
maintained by the Company on the Executive to the Executive at the Executive's
sole cost and expense (the "Right of First Refusal").
4.2 Upon Termination by the Company Without Cause or by the Executive
for Good Reason. If the Executive's employment is terminated by the Company
without Cause or by the Executive for Good Reason, the Company shall:
(a) pay the Executive the Accrued Base Salary;
(b) pay the Executive the Accrued Reimbursable Expenses;
(c) pay the Executive the Accrued Benefits;
(d) pay the Executive the Accrued Bonus;
(e) pay the Executive his Base Salary, as and when the same
would have been paid to the Executive pursuant to Section 2.1 had the
termination not occurred, for a period of six (6) months following the
termination date;
(f) maintain in full force and effect, for the continued
benefit of the Executive and his eligible beneficiaries, until the first to
occur of (i) his attainment of comparable benefits upon alternative employment
or (ii) six (6) months following the termination date, the employee benefits
pursuant to Company-sponsored benefit plans, programs or other arrangements in
which the Executive was entitled to participate immediately prior to such
termination, but only to the extent that the Executive's continued participation
is permitted under the general terms and provisions of such plans, programs and
arrangements;
(g) in addition, the Executive shall have the right to
exercise all vested, unexercised stock options in accordance with the terms of
the plans and agreements pursuant to which such options were issued; and
(h) in addition, the Executive shall have the Right of First
Refusal.
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ARTICLE V
RESTRICTIVE COVENANTS
5.1 Confidentiality.
(a) The Executive agrees to keep all trade secrets and/or
proprietary information (collectively, "Confidential Information") of the
Company in strict confidence and agrees not to disclose any Confidential
Information to any other person, firm, association, partnership, corporation or
other entity for any reason except as such disclosure may be required in
connection with his employment hereunder. The Executive further agrees not to
use any Confidential Information for any purpose except on behalf of the
Company.
(b) For purposes of this Agreement, "Confidential Information"
shall mean any information, process or idea that is not generally known in the
industry, that the Company considers confidential, and/or that gives the Company
a competitive advantage, including, without limitation: all information relating
to products under development by the Company, including but not limited to
prototypes, specifications, evaluations and test results; customer lists and
records; product design and/or reconditioning techniques; joint ventures with
other companies; suppliers, production costs or production information;
marketing plans; business forecasts; and sales records. The Executive
understands that the above list is intended to be illustrative and that other
Confidential Information may currently exist or arise in the future. If the
Executive is unsure whether certain information or material is Confidential
Information, the Executive shall treat that information or material as
confidential unless the Executive is informed by the Company, in writing, to the
contrary. "Confidential Information" shall not include any information which:
(i) is or becomes publicly available through no act or failure of the Executive;
(ii) was or is rightfully learned by the Executive from a source other than the
Company before being received from the Company; or (iii) becomes independently
available to the Executive as matter of right from a third party. If only a
portion of the Confidential Information is or becomes publicly available, then
only that portion shall not be Confidential Information hereunder.
(c) The Executive further agrees that upon termination of his
employment with the Company, for whatever reason, the Executive will surrender
to the Company all of the property, client lists, notes, manuals, reports,
documents and other things in the Executive's possession, including copies or
computerized records thereof, which relate directly or indirectly to
Confidential Information.
5.2 Competition.
(a) The Executive agrees that during his employment with the
Company and for a period of six (6) months following the date of termination of
his employment hereunder (the "Non-Competition Period"), for any reason (whether
such termination shall be voluntary or involuntary), the Executive shall not:
(i) except as a passive investor in publicly-held companies,
and except for investments held as of the date hereof, directly or indirectly
own, operate, manage, consult with, control, participate in the management or
control of, be employed by, maintain or continue
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any interest whatsoever in any business reconditioning Workstations that
directly competes with the Company; or
(ii) directly or indirectly solicit any business of a
nature that is directly competitive with the business of the Company from any
individual or entity that obtained such products or services from the Company or
its affiliates at any time during his employment with the Company; or
(iii) directly or indirectly solicit any business of
a nature that is directly competitive with the business of the Company from any
individual or entity solicited by him on behalf of the Company or its
affiliates; or
(iv) employ, or directly or indirectly solicit, or
cause the solicitation of, any employees of the Company who are in the employ of
the Company on the termination date of his employment hereunder for employment
by others.
(b) The Executive expressly agrees and acknowledges that:
(i) this covenant not to compete is reasonably
necessary for the protection of the interests of the Company and is reasonable
as to time and geographical area and does not place any unreasonable burden upon
him;
(ii) the general public will not be harmed as a
result of enforcement of this covenant not to compete;
(iii) his personal legal counsel has reviewed this
covenant not to compete; and
(iv) he understands and hereby agrees to each and
every term and condition of this covenant not to compete.
5.3 Remedies. The Executive expressly agrees and acknowledges that the
covenant not to compete set forth in Section 5.2 is necessary for the Company's
and its affiliates' protection because of the nature and scope of their business
and his position with the Company. Further, the Executive acknowledges that, in
the event of his breach of his covenant not to compete, money damages will not
sufficiently compensate the Company for its injury caused thereby, and he
accordingly agrees that in addition to such money damages he may be restrained
and enjoined from any continuing breach of the covenant not to compete without
any bond or other security being required. The Executive acknowledges that any
breach of the covenant not to compete would result in irreparable damage to the
Company. The Executive further acknowledges and agrees that if the Executive
fails to comply with this Article V, the Company has no obligation to provide
any compensation or other benefits described in Article IV hereof. The Executive
acknowledges that the remedy at law for any breach or threatened breach of
Sections 5.1 and 5.2 will be inadequate and, accordingly, that the Company
shall, in addition to all other available remedies (including without
limitation, seeking such damages as it can show it has sustained by reason of
such breach), be entitled to injunctive relief or specific performance.
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ARTICLE VI
MISCELLANEOUS
6.1 No Assignments. This Agreement is personal to each of the parties
hereto. No party may assign or delegate any rights or obligations hereunder
without first obtaining the written consent of the other party hereto, except
that this Agreement shall be binding upon and inure to the benefit of any
successor corporation to the Company.
(a) The Company shall use reasonable efforts to require any
successor (whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business and/or assets of the
Company to expressly assume and agree to perform this Agreement in the same
manner and to the same extent that the Company would be required to perform it
if no such succession had taken place. As used in this Agreement, "Company"
shall mean the Company as defined herein and any successor to its business
and/or assets which assumes this Agreement by operation of law or otherwise.
(b) This Agreement shall inure to the benefit of and be
enforceable by the Executive and his personal or legal representatives,
executors, administrators, successors, heirs, distributees, devisees and
legatees. If the Executive should die while any amount would still be payable to
him hereunder had he continued to live, all such amounts, unless otherwise
provided herein, shall be paid in accordance with the terms of this Agreement to
his devisee, legatee or other designee, or if there is no such designee, to his
estate.
6.2 Notices. For the purpose of this Agreement, notices and all other
communications provided for in this Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
certified or registered mail, return receipt requested, postage prepaid,
addressed to the respective addresses set forth below, or to such other
addresses as either party may have furnished to the other in writing in
accordance herewith, except that notice of a change of address shall be
effective only upon actual receipt:
To the Company: Reconditioned Systems, Inc.
444 West Fairmont
Tempe, Arizona 85282
To the Executive: Wayne Collignon
4503 East Badger Way
Phoenix, Arizona 85044
Notices pursuant to Article III of this Agreement shall specify the specific
termination provision relied upon by the party giving notice and shall state the
effective date of the termination.
6.3 Amendments or Additions. No amendments or additions to this
Agreement shall be binding unless in writing and signed by each of the parties
hereto.
6.4 Section Headings. The section headings used in this Agreement are
included solely for convenience and shall not affect, or be used in connection
with, the interpretation of this Agreement.
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6.5 Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof. If, in any
judicial proceedings, a court shall refuse to enforce one or more of the
covenants or agreements contained herein because the duration thereof is too
long, or the scope thereof is too broad, it is expressly agreed between the
parties hereto that such scope or duration shall be deemed reduced to the extent
necessary to permit the enforcement of such covenants or agreements.
6.6 Counterparts. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original but all of which
together shall constitute one and the same instrument.
6.7 Arbitration. Any dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration,
conducted before a panel of three (3) arbitrators in Phoenix, Arizona in
accordance with the rules of the American Arbitration Association then in
effect. The decision of the arbitrators shall be final and binding on the
parties, and judgment may be entered on the arbitrators' award in any court
having jurisdiction. The costs and expenses of such arbitration, including but
not limited to attorneys' and other professionals' fees, shall be borne in
accordance with the determination of the arbitrators. Notwithstanding any other
provision of this Agreement, if any termination of this Agreement becomes
subject to arbitration, the Company shall not be required to pay any amounts to
the Executive (except those amounts required by law) until the completion of the
arbitration and the rendering of the arbitrators' decision. The amounts, if any,
determined by the arbitrators to be owed by the Company to the Executive shall
be paid within five (5) days after the decision by the arbitrators is rendered.
6.8 Modifications and Waivers. No provision of this Agreement may be
modified, waived or discharged unless such waiver, modification or discharge is
agreed to in writing and signed by the Executive and such officer of the Company
as may be specifically designated by the Board. No waiver by either party hereto
at any time of any breach by the other party hereto of, or compliance with, any
condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of similar or dissimilar provisions or conditions at
the same or at any prior or subsequent time.
6.9 Governing Law. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the State of
Arizona without regard to its conflicts of law principles.
6.10 Taxes. Any payments provided for hereunder shall be paid net of
any applicable withholding or other employment taxes required under federal,
state or local law.
6.11 Survival. The obligations of the Company under Article IV hereof
and the obligations of the Executive under Article V hereof shall survive the
expiration of this Agreement.
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IN WITNESS WHEREOF, each of the parties hereto has executed this
Agreement as of the date first indicated above.
THE COMPANY:
RECONDITIONED SYSTEMS, INC.,
an Arizona corporation
Attest: /s/ Edward J. Cain By: /s/ Robert L. Campbell
-------------------- -----------------------
Edward J. Cain, Robert L. Campbell,
Secretary Chairman
THE EXECUTIVE:
/s/ Wayne Collignon
--------------------------
Wayne Collignon
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<PAGE> 1
EXHIBIT 10.22
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as
of this 10th day of August, 1995, between Reconditioned Systems, Inc., an
Arizona corporation (the "Company"), and Dirk Anderson (the "Executive").
RECITALS
A. The Company is engaged, among other things, in the business of
purchasing, reconditioning, selling and distributing modular office work
stations consisting of panels, work surfaces, file drawers, book and binder
storage and integrated electrical components ("Workstations"). The Executive has
substantial experience and expertise in managing and operating the business of
the Company.
B. The Company desires to retain the services of the Executive as its
Chief Financial Officer, and the Executive desires employment with the Company
in that capacity.
C. The Company and the Executive desire to embody the terms and
conditions of the Executive's employment in a written agreement, which will
supersede all prior agreements of employment, whether written or oral, between
the Company and the Executive, pursuant to the terms and conditions hereinafter
set forth.
NOW, THEREFORE, in consideration of their mutual covenants and other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties agree as follows:
ARTICLE I
DUTIES AND TERM
1.1 Employment.
(a) The Executive is employed as the Chief Financial Officer
of the Company. The Executive shall have such duties and responsibilities as
shall be assigned to the Executive from time to time by the Board of Directors
of the Company (the "Board") in the Executive's capacity as the Chief Financial
Officer of the Company.
(b) During the period of his employment hereunder, the
Executive shall devote substantially all of his business time, attention, skill
and efforts to the faithful performance of his duties hereunder; provided,
however, that the Executive may serve or continue to serve on the board of
directors or hold other offices or positions in companies or organizations if
they involve no conflict of interest with the interests of the Company and may
engage in customary professional activities which in the judgment of the Board
will not materially affect the performance by the Executive of his duties
hereunder. The Executive has disclosed to the Board
<PAGE> 2
all material business ventures in which he is currently involved, and, subject
to approval by the Board (after written notice to it), may in the future have
other business investments and participate in other business ventures which may,
from time to time, require portions of his time, but shall not interfere with
his duties hereunder.
1.2 Term. The term of this Agreement shall commence on the date first
above written and shall continue, unless sooner terminated, for three (3) years
(the "Initial Term"). Thereafter, the term of this Agreement shall automatically
be extended for successive one (1) year periods ("Renewal Terms") unless either
the Board or the Executive gives written notice to the other at least ninety
(90) days prior to the end of the Initial Term or any Renewal Term, as the case
may be, of its or his intention not to renew the term of this Agreement. The
Initial Term and any Renewal Terms of this Agreement shall be collectively
referred to as the "Term."
1.3 Location. During the Term of this Agreement, the Executive shall be
based in the principal offices of the Company in Maricopa County, Arizona, and
shall not be required to be based anywhere other than Maricopa County, Arizona
except for travel reasonably required in the performance of his duties hereunder
and except as may be otherwise agreed to by the Executive.
ARTICLE II
COMPENSATION
2.1 Base Salary. Subject to the further provisions of this Agreement,
the Company shall pay the Executive during the Term of this Agreement a base
salary at an annual rate of not less than $75,000 (the "Base Salary"). The Base
Salary shall be reviewed at least annually by the Board and the Board may, in
its discretion, increase the Base Salary. The Base Salary of the Executive shall
not be decreased at any time during the Term of this Agreement from the amount
of Base Salary then in effect, except in connection with across-the-board salary
reductions similarly affecting all senior executives of the Company.
Participation in deferred compensation, discretionary bonus, retirement, stock
option and other employee benefit plans and in fringe benefits shall not reduce
the Base Salary payable to the Executive under this Section 2.1. The Base
Salary under this Section 2.1 shall be payable by the Company to the Executive
not less frequently than monthly.
2.2 Discretionary Bonuses. Subject to the further provisions of this
Agreement, during the Term of this Agreement the Executive shall be entitled to
participate in an equitable manner with all other senior executives of the
Company in such discretionary bonuses including, but not limited to, bonuses
provided pursuant to any management bonus plan that the Company may adopt (based
upon the performance of the participant and the Company), as may be authorized
and declared by the Board to the Company's senior executives. Nothing in this
Section shall be deemed to limit the ability of the Executive to be paid and
receive discretionary bonuses from the Company, based solely on the Executive's
performance, without regard to the payment of discretionary bonuses to any other
officers of the Company.
2.3 Participation in Retirement and Employee Benefit Plans; Fringe
Benefits. The Executive shall be entitled to participate in all plans of the
Company relating to stock options, stock purchases, pension, thrift, profit
sharing, life insurance, hospitalization and medical
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coverage, disability, travel or accident insurance, education or other
retirement or employee benefits that the Company has adopted or may adopt for
the benefit of its senior executives. In addition, the Executive shall be
entitled to participate in any other fringe benefits, such as club dues and fees
of professional organizations and associations, which are now or may become
applicable to the Company's senior executives, and any other benefits which are
commensurate with the duties and responsibilities to be performed by the
Executive under this Agreement. In addition to such other fringe benefits, the
Executive shall be entitled to a car allowance of $300 per month. The Executive
shall, during the Term of his employment hereunder, continue to be provided with
benefits at a level which shall in no event be less in any material respect than
the benefits available to the Executive as of the date of this Agreement.
Notwithstanding the foregoing, the Company may terminate or reduce benefits
under any benefit plans and programs to the extent such reductions apply
uniformly to all senior executives entitled to participate therein, and the
Executive's benefits shall be reduced or terminated accordingly.
2.4 Stock Options. In addition to the plans and fringe benefits of the
Company in which the Executive shall be entitled to participate pursuant to
Section 2.3, upon execution of this Agreement the Company shall grant to the
Executive an option to purchase 100,000 shares of the Company's Common Stock, no
par value. Such option shall be fully vested and exercisable for a period of ten
(10) years from the date of grant at an exercise price equal to the fair market
value of the Company's Common Stock on the date of grant, and shall be evidenced
by a separate option agreement. The Executive shall agree not to sell or
otherwise dispose of any Common Stock acquired pursuant to exercise of the
option for a period of twelve (12) months following the date of grant. The
Company shall file a Registration Statement on Form S-8 with the Securities and
Exchange Commission relating to the shares underlying the option.
2.5 Vacations. The Executive shall be entitled, without loss of pay, to
be absent voluntarily for reasonable periods of time from the performance of his
duties and responsibilities under this Agreement. All such voluntary absences
shall count as paid vacation time, unless the Board otherwise determines. The
timing of paid vacations shall be scheduled in a manner reasonably acceptable to
the Company.
ARTICLE III
TERMINATION OF EMPLOYMENT
3.1 Death or Retirement of Executive. This Agreement shall
automatically terminate upon the death or Retirement (as defined in Section 3.4)
of the Executive.
3.2 By the Executive. The Executive shall be entitled to terminate this
Agreement by giving written notice to the Company:
(a) at least ninety (90) days prior to the end of the Initial
Term or any Renewal Term of this Agreement;
(b) for Good Reason (as defined in Section 3.4); and
(c) at any time without Good Reason.
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3.3 By the Company. The Company shall be entitled to terminate this
Agreement by giving written notice to the Executive:
(a) at least ninety (90) days prior to the end of the Initial
Term or any Renewal Term of this Agreement;
(b) in the event of the Executive's Disability (as defined in
Section 3.4);
(c) for Cause (as defined in Section 3.4); and
(d) at any time without Cause.
3.4 Definitions. For purposes of this Agreement, the following terms
shall have the following meanings:
(a) "Cause" shall mean any of the following:
(i) the conviction of or a plea of guilty by the
Executive to a felony involving fraud, embezzlement or theft;
(ii) willful misrepresentation of material fact by
the Executive in connection with the performance of his duties hereunder;
(iii) failure of or refusal on the part of the
Executive to substantially perform all of his duties hereunder, which failure or
refusal shall not be cured within fifteen (15) days following (A) receipt by the
Executive of a written notice specifying the factors or events constituting such
failure or refusal, and (B) a reasonable opportunity for the Executive to
correct such deficiencies;
(iv) the Executive's violation of the Company's then
current drug and alcohol policy;
(v) the Executive's unauthorized absence from his
duties hereunder for a period exceeding thirty (30) consecutive days; or
(vi) other material breach of this Agreement by the
Executive, which breach shall not be cured within fifteen (15) days after
written notice thereof to the Executive.
(b) "Disability" shall mean the Executive's inability, with or
without reasonable accommodation, to perform all of the essential functions of
his position hereunder on a full-time basis for a period exceeding ninety (90)
consecutive days or for periods aggregating more than ninety (90) days during
any one hundred eighty (180) day period as a result of incapacity due to
physical or mental illness not due to drug or alcohol abuse. If there is a
dispute as to whether the Executive is or was physically or mentally unable to
perform the essential functions of his position with or without reasonable
accommodation under this Agreement, such dispute shall be submitted for
resolution to a licensed physician agreed upon by the Board and the Executive,
or if an agreement cannot be promptly reached, the Board and
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the Executive will each select a physician, and if these physicians cannot
agree, they will pick a third physician whose decision shall be binding on all
parties. If such a dispute arises, the Executive shall submit to such
examinations and shall provide such information as such physician(s) may
request, and the determination of the physician(s) as to the Executive's
physical or mental condition shall be binding and conclusive.
(c) "Good Reason" shall mean any of the following if the same
shall occur without the Executive's express prior written consent:
(i) a material change by the Company in the
Executive's function, duties or responsibilities (including reporting
responsibilities) which would cause the Executive's position with the Company to
become of less dignity, responsibility and importance than those associated with
his functions, duties or responsibilities as of the date of this Agreement;
(ii) the Executive's Base Salary is reduced by the
Company, unless such reduction is pursuant to a salary reduction program as
described in Section 2.1 hereof, or there is a material reduction in the
benefits that are in effect for the Executive, unless such reduction is pursuant
to a uniform reduction in benefits for all senior executives as described in
Section 2.3 hereof;
(iii) the failure by the Company to obtain the
assumption by operation of law or otherwise of this Agreement by any entity
which is the surviving entity in any merger or other form of corporate
reorganization involving the Company or by any entity which acquires all or
substantially all of the Company's assets; or
(iv) other material breach of this Agreement by the
Company, which breach shall not be cured within fifteen (15) days after written
notice thereof to the Company.
(d) "Retirement" shall mean normal retirement at age 65 or in
accordance with retirement rules generally applicable to the Company's senior
executives.
ARTICLE IV
COMPENSATION UPON TERMINATION OF EMPLOYMENT
4.1 Upon Termination for Death, Disability or Retirement, at Expiration
of Term, by the Company for Cause or by the Executive Without Good Reason. If
the Executive's employment is terminated by reason of the Executive's death,
Disability or Retirement, upon expiration of the Term of this Agreement, by the
Company for Cause or by the Executive without Good Reason, the Company shall:
(a) pay the Executive (or his estate or beneficiaries) any
Base Salary which has accrued but not been paid as of the termination date (the
"Accrued Base Salary");
(b) reimburse the Executive (or his estate or beneficiaries)
for expenses incurred by him prior to the date of termination which are subject
to reimbursement pursuant to applicable Company policies then in effect (the
"Accrued Reimbursable Expenses");
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(c) provide to the Executive (or his estate or beneficiaries)
any accrued and vested benefits required to be provided by the terms of any
Company-sponsored benefit plans or programs (the "Accrued Benefits"), together
with any benefits required to be paid or provided in the event of the
Executive's death, Disability or Retirement under applicable law;
(d) pay the Executive (or his estate or beneficiaries) any
discretionary bonus with respect to a prior fiscal year which has accrued and
been earned but has not been paid (the "Accrued Bonus");
(e) in addition, the Executive (or his estate or
beneficiaries) shall have the right to exercise all vested, unexercised stock
options outstanding at the termination date in accordance with terms of the
plans and agreements pursuant to which such options were issued; and
(f) in addition, to the extent permitted by the terms of the
policies then in effect, the Executive shall have a right of first refusal to
cause the transfer of the ownership of all key-man life insurance policies
maintained by the Company on the Executive to the Executive at the Executive's
sole cost and expense (the "Right of First Refusal").
4.2 Upon Termination by the Company Without Cause or by the Executive
for Good Reason. If the Executive's employment is terminated by the Company
without Cause or by the Executive for Good Reason, the Company shall:
(a) pay the Executive the Accrued Base Salary;
(b) pay the Executive the Accrued Reimbursable Expenses;
(c) pay the Executive the Accrued Benefits;
(d) pay the Executive the Accrued Bonus;
(e) pay the Executive his Base Salary, as and when the same
would have been paid to the Executive pursuant to Section 2.1 had the
termination not occurred, for a period of six (6) months following the
termination date;
(f) maintain in full force and effect, for the continued
benefit of the Executive and his eligible beneficiaries, until the first to
occur of (i) his attainment of comparable benefits upon alternative employment
or (ii) six (6) months following the termination date, the employee benefits
pursuant to Company-sponsored benefit plans, programs or other arrangements in
which the Executive was entitled to participate immediately prior to such
termination, but only to the extent that the Executive's continued participation
is permitted under the general terms and provisions of such plans, programs and
arrangements;
(g) in addition, the Executive shall have the right to
exercise all vested, unexercised stock options in accordance with the terms of
the plans and agreements pursuant to which such options were issued; and
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(h) in addition, the Executive shall have the Right of First
Refusal.
ARTICLE V
RESTRICTIVE COVENANTS
5.1 Confidentiality.
(a) The Executive agrees to keep all trade secrets and/or
proprietary information (collectively, "Confidential Information") of the
Company in strict confidence and agrees not to disclose any Confidential
Information to any other person, firm, association, partnership, corporation or
other entity for any reason except as such disclosure may be required in
connection with his employment hereunder. The Executive further agrees not to
use any Confidential Information for any purpose except on behalf of the
Company.
(b) For purposes of this Agreement, "Confidential Information"
shall mean any information, process or idea that is not generally known in the
industry, that the Company considers confidential, and/or that gives the Company
a competitive advantage, including, without limitation: all information relating
to products under development by the Company, including but not limited to
prototypes, specifications, evaluations and test results; customer lists and
records; product design and/or reconditioning techniques; joint ventures with
other companies; suppliers, production costs or production information;
marketing plans; business forecasts; and sales records. The Executive
understands that the above list is intended to be illustrative and that other
Confidential Information may currently exist or arise in the future. If the
Executive is unsure whether certain information or material is Confidential
Information, the Executive shall treat that information or material as
confidential unless the Executive is informed by the Company, in writing, to the
contrary. "Confidential Information" shall not include any information which:
(i) is or becomes publicly available through no act or failure of the Executive;
(ii) was or is rightfully learned by the Executive from a source other than the
Company before being received from the Company; or (iii) becomes independently
available to the Executive as matter of right from a third party. If only a
portion of the Confidential Information is or becomes publicly available, then
only that portion shall not be Confidential Information hereunder.
(c) The Executive further agrees that upon termination of his
employment with the Company, for whatever reason, the Executive will surrender
to the Company all of the property, client lists, notes, manuals, reports,
documents and other things in the Executive's possession, including copies or
computerized records thereof, which relate directly or indirectly to
Confidential Information.
5.2 Competition.
(a) The Executive agrees that during his employment with the
Company and for a period of six (6) months following the date of termination of
his employment hereunder (the "Non-Competition Period"), for any reason (whether
such termination shall be voluntary or involuntary), the Executive shall not:
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(i) except as a passive investor in publicly-held
companies, and except for investments held as of the date hereof, directly or
indirectly own, operate, manage, consult with, control, participate in the
management or control of, be employed by, maintain or continue any interest
whatsoever in any business reconditioning Workstations that directly competes
with the Company; or
(ii) directly or indirectly solicit any business of a
nature that is directly competitive with the business of the Company from any
individual or entity that obtained such products or services from the Company or
its affiliates at any time during his employment with the Company; or
(iii) directly or indirectly solicit any business of
a nature that is directly competitive with the business of the Company from any
individual or entity solicited by him on behalf of the Company or its
affiliates; or
(iv) employ, or directly or indirectly solicit, or
cause the solicitation of, any employees of the Company who are in the employ of
the Company on the termination date of his employment hereunder for employment
by others.
(b) The Executive expressly agrees and acknowledges that:
(i) this covenant not to compete is reasonably
necessary for the protection of the interests of the Company and is reasonable
as to time and geographical area and does not place any unreasonable burden upon
him;
(ii) the general public will not be harmed as a
result of enforcement of this covenant not to compete;
(iii) his personal legal counsel has reviewed this
covenant not to compete; and
(iv) he understands and hereby agrees to each and
every term and condition of this covenant not to compete.
5.3 Remedies. The Executive expressly agrees and acknowledges that the
covenant not to compete set forth in Section 5.2 is necessary for the Company's
and its affiliates' protection because of the nature and scope of their business
and his position with the Company. Further, the Executive acknowledges that, in
the event of his breach of his covenant not to compete, money damages will not
sufficiently compensate the Company for its injury caused thereby, and he
accordingly agrees that in addition to such money damages he may be restrained
and enjoined from any continuing breach of the covenant not to compete without
any bond or other security being required. The Executive acknowledges that any
breach of the covenant not to compete would result in irreparable damage to the
Company. The Executive further acknowledges and agrees that if the Executive
fails to comply with this Article V, the Company has no obligation to provide
any compensation or other benefits described in Article IV hereof. The Executive
acknowledges that the remedy at law for any breach or threatened breach of
Sections 5.1 and 5.2 will be inadequate and, accordingly, that the Company
shall, in addition
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to all other available remedies (including without limitation, seeking such
damages as it can show it has sustained by reason of such breach), be entitled
to injunctive relief or specific performance.
ARTICLE VI
MISCELLANEOUS
6.1 No Assignments. This Agreement is personal to each of the parties
hereto. No party may assign or delegate any rights or obligations hereunder
without first obtaining the written consent of the other party hereto, except
that this Agreement shall be binding upon and inure to the benefit of any
successor corporation to the Company.
(a) The Company shall use reasonable efforts to require any
successor (whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business and/or assets of the
Company to expressly assume and agree to perform this Agreement in the same
manner and to the same extent that the Company would be required to perform it
if no such succession had taken place. As used in this Agreement, "Company"
shall mean the Company as defined herein and any successor to its business
and/or assets which assumes this Agreement by operation of law or otherwise.
(b) This Agreement shall inure to the benefit of and be
enforceable by the Executive and his personal or legal representatives,
executors, administrators, successors, heirs, distributees, devisees and
legatees. If the Executive should die while any amount would still be payable to
him hereunder had he continued to live, all such amounts, unless otherwise
provided herein, shall be paid in accordance with the terms of this Agreement to
his devisee, legatee or other designee, or if there is no such designee, to his
estate.
6.2 Notices. For the purpose of this Agreement, notices and all other
communications provided for in this Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
certified or registered mail, return receipt requested, postage prepaid,
addressed to the respective addresses set forth below, or to such other
addresses as either party may have furnished to the other in writing in
accordance herewith, except that notice of a change of address shall be
effective only upon actual receipt:
To the Company: Reconditioned Systems, Inc.
444 West Fairmont
Tempe, Arizona 85282
To the Executive: Dirk Anderson
1877 East Drake Drive
Tempe, Arizona 85283
Notices pursuant to Article III of this Agreement shall specify the specific
termination provision relied upon by the party giving notice and shall state the
effective date of the termination.
6.3 Amendments or Additions. No amendments or additions to this
Agreement shall be binding unless in writing and signed by each of the parties
hereto.
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6.4 Section Headings. The section headings used in this Agreement are
included solely for convenience and shall not affect, or be used in connection
with, the interpretation of this Agreement.
6.5 Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof. If, in any
judicial proceedings, a court shall refuse to enforce one or more of the
covenants or agreements contained herein because the duration thereof is too
long, or the scope thereof is too broad, it is expressly agreed between the
parties hereto that such scope or duration shall be deemed reduced to the extent
necessary to permit the enforcement of such covenants or agreements.
6.6 Counterparts. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original but all of which
together shall constitute one and the same instrument.
6.7 Arbitration. Any dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration,
conducted before a panel of three (3) arbitrators in Phoenix, Arizona in
accordance with the rules of the American Arbitration Association then in
effect. The decision of the arbitrators shall be final and binding on the
parties, and judgment may be entered on the arbitrators' award in any court
having jurisdiction. The costs and expenses of such arbitration, including but
not limited to attorneys' and other professionals' fees, shall be borne in
accordance with the determination of the arbitrators. Notwithstanding any other
provision of this Agreement, if any termination of this Agreement becomes
subject to arbitration, the Company shall not be required to pay any amounts to
the Executive (except those amounts required by law) until the completion of the
arbitration and the rendering of the arbitrators' decision. The amounts, if any,
determined by the arbitrators to be owed by the Company to the Executive shall
be paid within five (5) days after the decision by the arbitrators is rendered.
6.8 Modifications and Waivers. No provision of this Agreement may be
modified, waived or discharged unless such waiver, modification or discharge is
agreed to in writing and signed by the Executive and such officer of the
Company as may be specifically designated by the Board. No waiver by either
party hereto at any time of any breach by the other party hereto of, or
compliance with, any condition or provision of this Agreement to be performed by
such other party shall be deemed a waiver of similar or dissimilar provisions or
conditions at the same or at any prior or subsequent time.
6.9 Governing Law. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the State of
Arizona without regard to its conflicts of law principles.
6. 10 Taxes. Any payments provided for hereunder shall be paid net of
any applicable withholding or other employment taxes required under federal,
state or local law.
10
<PAGE> 11
6.11 Survival. The obligations of the Company under Article IV hereof
and the obligations of the Executive under Article V hereof shall survive the
expiration of this Agreement.
IN WITNESS WHEREOF, each of the parties hereto has executed this
Agreement as of the date first indicated above.
THE COMPANY:
RECONDITIONED SYSTEMS, INC.,
an Arizona corporation
Attest: /s/ Edward J. Cain By: /s/ Robert L. Campbell
--------------------- ------------------------
Edward J. Cain, Robert L. Campbell,
Secretary Chairman
THE EXECUTIVE:
/s/ Dirk Anderson
-------------------------
Dirk Anderson
11
<PAGE> 1
EXHIBIT 10.23
THIRD AMENDMENT TO LEASE
That certain lease dated April 12, 1990 by and between Boston Safe Deposit and
Trust Company, Trustee, as assigned to Landlord, and Reconditioned Systems,
Inc., an Arizona Corporation, Tenant, for the premises located at 444 West
Fairmont, Tempe, Arizona 85282 Building --, Suite --, is amended this 14th
day of February, 1996 solely as hereinafter described. Newhew Associates, an
Arizona General Partnership.
Effective the 14th day of February, 1996, the clauses below are substituted for
like numbered clauses in the Lease agreement.
1.05 Lease Term: Sixty (60) months
1.12 Fixed Rent: Months 1-24 @ $16,256.14/Mo*
Months 25-47 @ Monthly rent for months
1-24 plus C.P.I. increase as
mentioned on the Lease Rider
in paragraph 1. Cost of
Living Adjustment.*
Months 48-60 @ Monthly rent for months 25-47
plus C.P.I. increase as
mentioned on the Lease Rider
in paragraph 1. Cost of
Living Adjustment.*
*Plus applicable rental tax
1.05 Commencement Date: The lease term commences May 1, 1996 with a
new expiration date of April 30, 2001.
Tenant Improvements: Landlord to provide a tenant improvement
allowance not to exceed $30,000.00 including
architectural, engineering and city permits.
Exhibit D: Facilitec Guaranty of Lease to be deleted
and replaced with attached guarantees.
All other terms and conditions of said Lease shall remain in full force and
effect.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Amendment as of the
date first written above.
LANDLORD: TENANT:
NEWHEW ASSOCIATES, RECONDITIONED SYSTEMS, INC.,
an Arizona General Partnership an Arizona corporation
By: COPLEY REALTY INCOME PARTNERS 4, By: /s/
A LIMITED PARTNERSHIP --------------------------------
a Massachusetts limited partnership, It's: President
General Partner ------------------------------
By: Fourth Income Corporation
Managing General Partner
By: /s/
-----------------------------------
It's: Vice President
---------------------------------
By: California Property Investment Co.,
a California corporation, General Partner
By: HEWSON PROPERTIES, INC.
a California corporation
By: /s/ Ernest F. Modzelewski
-----------------------------------
Ernest F. Modzelewski
It's: President
<PAGE> 1
EXHIBIT 10.24
CREDIT AND SECURITY AGREEMENT
Dated as of February 26, 1996
RECONDITIONED SYSTEMS, INC., an Arizona corporation (the "Borrower"),
and NORWEST BUSINESS CREDIT, INC., a Minnesota corporation (the "Lender"),
hereby agree as follows:
ARTICLE I
Definitions
Section 1. 1 Definitions. For all purposes of this Agreement, except as
otherwise expressly provided or unless the context otherwise requires:
(a) the terms defined in this Article have the meanings
assigned to them in this Article, and include the plural as well as the
singular; and
(b) all accounting terms not otherwise defined herein have the
meanings assigned to them in accordance with generally accepted accounting
principles.
"Accounts" means the aggregate unpaid obligations of customers
and other account debtors to the Borrower arising out of the sale or
lease of goods or rendition of services by the Borrower on an open
account or deferred payment basis.
"Advance" means an advance to the Borrower by the Lender under
the Credit Facility.
"Affiliate" or "Affiliates" means any Person controlled by,
controlling or under common control with the Borrower, including
(without limitation) any Subsidiary of the Borrower. For purposes of
this definition, "control," when used with respect to any specified
Person, means the power to direct the management and policies of such
Person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise.
"Agreement" means this Credit and Security Agreement.
"Banking Day" means a day other than a Saturday on which banks
are generally open for business in Phoenix, Arizona.
"Base Rate" means the rate of interest publicly announced from
time to time by Norwest Bank Minnesota, National Association as its
"base rate" or, if such bank ceases to announce a rate so designated,
any similar successor rate designated by the Lender.
<PAGE> 2
"Borrowing Base" means, at any time and subject to change from
time to time in the Lender's sole discretion, the lesser of
(1) the Commitment, or
(2) the sum of
(i) the lesser of (A) 80% of Eligible Accounts
or (B) $1,200,000.00, plus
(ii) the lesser of (A) 30% of Eligible Inventory
or (B) $500,000.00.
(3) less in either case a rental reserve in an
amount of (a) $35,000 from the date hereof
through and until September 30, 1996, (b)
$25,000.00 from October 1, 1996 through and
until December 31, 1996, (c) $13,000.00 from
January 1, 1997 through and until March 31,
1997, and (d) $0.00 thereafter, provided,
however, the reductions in the rental
reserve outlined in clauses (b) through (d)
above shall be specifically conditioned upon
the Borrower's compliance with the reporting
requirements contained in Section 6.1 below,
and provided further, however,
notwithstanding anything to the contrary,
said rental reserve shall be not less than
$35,000.00 (or such other amount as Lender
may determine from time to time in its sole
discretion) upon the occurrence or existence
of an Event of Default or a Default Period.
"Capital Expenditures" means net tangible and intangible
expenditures of the applicable Person or Persons for the lease,
purchase or acquisition of capital assets, or a capitalized lease of
any other asset (capitalized leases being determined in accordance with
generally accepted accounting principles).
"Collateral" means all of the Equipment, General Intangibles,
Inventory, Receivables and all sums on deposit in any collateral
account, together with all substitutions and replacements for and
products of any of the foregoing Collateral and together with proceeds
of any and all of the foregoing Collateral and, in the case of all
tangible Collateral, together with all accessions and together with (i)
all accessories, attachments, parts, equipment and repairs now or
hereafter attached or affixed to or used in connection with any such
goods, and (ii) all warehouse receipts, bills of lading and other
documents of title now or hereafter covering such goods.
"Collateral Account" has the meaning specified in Section
4.1(d) hereof.
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<PAGE> 3
"Commitment" means $1,200,000.00, unless said amount is
reduced pursuant to Section 2.4(b) hereof, in which event it means the
amount to which said amount is reduced.
"Credit Facility" means the credit facility being made
available to the Borrower by the Lender pursuant to Article II hereof.
"Default" means an event that, with giving of notice or
passage of time or both, would constitute an Event of Default.
"Default Period" means the period following the occurrence of
a Default or Event of Default which period shall continue until and
unless the Lender shall thereafter waive such Default or Event of
Default in writing.
"Default Rate" means at any time two percent (2%) over the
Floating Rate, which Default Rate shall change when and as the Floating
Rate changes.
"Eligible Accounts" means all unpaid Accounts, net of any
credits, except the following shall not in any event be deemed Eligible
Accounts:
a) That portion of Accounts over 90 days past invoice
date;
b) That portion of Accounts that are disputed or
subject to a claim of offset or a contra account;
c) That portion of Accounts not yet earned by the
final delivery of goods or rendition of services, as
applicable, by the Borrower to the customer including, but not
limited to, customer deposits;
d) Accounts owed by any unit of government, whether
foreign or domestic (provided, however, that there shall be
included in Eligible Accounts that portion of Accounts owed by
such units of government with respect to which the Borrower
has provided evidence satisfactory to the Lender that (A) the
Lender has a first priority security interest and (B) such
Account may be enforced by the Lender directly against such
unit of government under all applicable laws);
e) Accounts owed by an account debtor located outside
the United States which are not backed by a bank letter of
credit assigned to the Lender, in the possession of the Lender
and acceptable to the Lender in all respects, in its sole
discretion;
f) Accounts owed by an account debtor that is the
subject of bankruptcy proceedings or has gone out of business;
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<PAGE> 4
g) Accounts owed by Facilitec, Inc., an Arizona
corporation ("Facilitec") or by a shareholder, subsidiary,
Affiliate, officer or employee of the Borrower;
h) Accounts not subject to a duly perfected security
interest in favor of the Lender or which are subject to any
lien, security interest or claim in favor of any Person other
than the Lender;
i) That portion of Accounts that have been
restructured, extended, amended or modified;
j) That portion of Accounts that constitutes finance
charges, service charges or sales or excise taxes;
k) Accounts owed by an account debtor, regardless of
whether otherwise eligible, if 10% or more of the total amount
due under Accounts from such debtor is ineligible under
clauses or (a), (b) or (i) above; and
l) Accounts, or portions thereof, otherwise deemed
ineligible by the Lender in its sole discretion.
"Eligible Inventory" means all inventory of the Borrower, at
the lower of cost or market value as determined in accordance with
generally accepted accounting principles; provided, however, that the
following shall not in any event be deemed Eligible Inventory:
i) Inventory that is: in-transit; located at any
warehouse or other premises not approved by the Lender in
writing; located outside of the states, or localities, as
applicable, in which the Lender has filed financing statements
to perfect a first priority security interest in such
inventory; covered by any negotiable or non-negotiable
warehouse receipt, bill of lading or other document of title;
on consignment to or from any other person or subject to any
bailment;
ii) Supplies, packaging and non-Haworth components
and parts inventory;
iii) Work-in-process and raw materials inventory;
iv) Inventory that is damaged, obsolete or not
currently saleable in the normal course of the Borrower's
operations;
v) Inventory that the Borrower has returned, has
attempted to return, is in the process of returning or intends
to return to the vendor thereof;
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<PAGE> 5
vi) Inventory that is subject to a security interest
in favor of any Person other than the Lender; and
vii) Inventory otherwise deemed ineligible by the
Lender in its sole discretion.
"Environmental Laws" has the meaning specified in Section 5.12
hereof.
"Equipment" means all of the Borrower's equipment, as such
term is defined in the UCC, whether now owned or hereafter acquired,
including but not limited to all present and future machinery,
vehicles, furniture, fixtures, manufacturing equipment, shop equipment,
office and recordkeeping equipment, parts, tools, supplies, and
including specifically (without limitation) the goods described in any
equipment schedule or list herewith or hereafter furnished to the
Lender by the Borrower.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended.
"Event of Default" has the meaning specified in Section 8.1
hereof.
"Floating Rate" means an annual rate equal to the sum of the
Base Rate plus six percent (6%), which Floating Rate shall change when
and as the Base Rate changes.
"Funds from Operations" means after tax net income of the
Borrower plus depreciation for the applicable period or periods,
adjusted to exclude non-cash items of income or expense which are
extraordinary items or items not related to operations.
"General Intangibles" means all of the Borrower's general
intangibles, as such term is defined in the UCC, whether now owned or
hereafter acquired, including (without limitation) all present and
future patents, patent applications, copyrights, trademarks, trade
names, trade secrets, customer or supplier lists and contracts,
manuals, operating instructions, permits, franchises, the right to use
the Borrower's name, and the goodwill of the Borrower's business.
"Inventory" means all of the Borrower's inventory, as such
term is defined in the UCC, whether now owned or hereafter acquired,
whether consisting of whole goods, spare parts or components, supplies
or materials, whether acquired, held or furnished for sale, for lease
or under service contracts or for manufacture or processing, and
wherever located.
"Loan Documents" means this Agreement, the Note and the
Security Documents.
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<PAGE> 6
"Lockbox" has the meaning specified in Section 4.1(e)
hereof.
"Minimum Interest Charge" has the meaning specified in Section
2.3(b) hereof.
"Net Income" means after tax net income of the Borrower from
continuing operations.
"Net Worth" means the Borrower's book net worth determined in
accordance with generally accepted accounting principles but not
including any equity created in the Borrower pursuant to Borrower's
compliance with Section 8.1(m).
"Note" means the Revolving Note of the Borrower payable to the
order of the Lender in substantially the form attached hereto as
Exhibit A.
"Obligations" has the meaning specified in Section 3.1 hereof.
"Person" means any individual, corporation, partnership, joint
venture, limited liability company, association, joint-stock company,
trust, unincorporated organization or government or any agency or
political subdivision thereof.
"Plan" means an employee benefit plan or other plan maintained
for employees of the Borrower and covered by Title IV of ERISA.
"Premises" means all premises where the Borrower conducts its
business and has any rights of possession, including (without
limitation) the premises legally described in Exhibit E attached
hereto.
"Receivables" means each and every right of the Borrower to
the payment of money, whether such right to payment now exists or
hereafter arises, whether such right to payment arises out of a sale,
lease or other disposition of goods or other property, out of a
rendering of services, out of a loan, out of the overpayment of taxes
or other liabilities, or otherwise arises under any contract or
agreement, whether such right to payment is created, generated or
earned by the Borrower or by some other person who subsequently
transfers such person's interest to the Borrower, whether such right to
payment is or is not already earned by performance, and howsoever such
right to payment may be evidenced, together with all other rights and
interests (including all liens and security interests) which the
Borrower may at any time have by law or agreement against any account
debtor or other obligor obligated to make any such payment or against
any property of such account debtor or other obligor; all including but
not limited to all present and future accounts, contract rights, loans
and obligations receivable, chattel papers, bonds, notes and other debt
instruments, tax refunds and rights to payment in the nature of general
intangibles.
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<PAGE> 7
"Reportable Event" shall have the meaning assigned to that
term in Title IV of ERISA.
"Security Documents" means the Collateral Account Agreement
and the Lockbox Agreement, each as described in Section 4.1 hereof and
any other documents or agreements securing the Obligations.
"Security Interest" has the meaning specified in Section 3.1
hereof.
"Subsidiary" means any corporation of which more than 50% of
the outstanding shares of capital stock having general voting power
under ordinary circumstances to elect a majority of the board of
directors of such corporation, irrespective of whether or not at the
time stock of any other class or classes shall have or might have
voting power by reason of the happening of any contingency, is at the
time directly or indirectly owned by the Borrower, by the Borrower and
one or more other Subsidiaries, or by one or more other Subsidiaries.
"Termination Date" means February 28, 1999.
"UCC" means the Uniform Commercial Code as in effect from time
to time in the state designated in Section 9.12 hereof as the state
whose laws shall govern this Agreement, or in any other state whose
laws are held to govern this Agreement or any portion hereof.
ARTICLE II
Amount and Terms of the Credit Facility
Section 2.1 Advances. The Lender agrees, on the terms and subject to
the conditions herein set forth, to make Advances to the Borrower from time to
time during the period from the date hereof to and including the Termination
Date, or the earlier date of termination in whole of the Credit Facility
pursuant to Sections 2.4(a) or 8.2 hereof, in an aggregate amount at any time
outstanding not to exceed the Borrowing Base, which Advances shall be secured by
the Collateral as provided in Article III hereof. The Credit Facility shall be a
revolving facility and it is contemplated that the Borrower will request
Advances, make prepayments and request additional Advances. The Borrower agrees
to comply with the following procedures in requesting Advances under this
Section 2.1:
(a) The Borrower will not request any Advance under this
Section 2.1 if, after giving effect to such requested Advance, the sum of the
outstanding and unpaid Advances under this Section 2.1 or otherwise would exceed
the Borrowing Base.
(b) Each request for an Advance under this Section 2.1 shall
be made to the Lender prior to 12:00 noon (Minneapolis time) of the day of the
requested Advance by the Borrower. Each request for an Advance may be made in
writing or by telephone, specifying the date of the requested Advance and the
amount thereof, and shall be by (i) any officer of the
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<PAGE> 8
Borrower; or (ii) any person designated as the Borrower's agent by any officer
of the Borrower in a writing delivered to the Lender; or (iii) any person
reasonably believed by the Lender to be an officer of the Borrower or such a
designated agent.
(c) Upon fulfillment of the applicable conditions set forth in
Article IV hereof, the Lender shall disburse loan proceeds by crediting the same
to the Borrower's demand deposit account maintained with Norwest Bank, Arizona,
NA unless the Lender and the Borrower shall agree in writing to another manner
of disbursement. Upon request of the Lender, the Borrower shall promptly confirm
each telephonic request for an Advance by executing and delivering an
appropriate confirmation certificate to the Lender. The Borrower shall be
obligated to repay all Advances under this Section 2.1 notwithstanding the
failure of the Lender to receive such confirmation and notwithstanding the fact
that the person requesting the same was not in fact authorized to do so. Any
request for an Advance under this Section 2.1, whether written or telephonic,
shall be deemed to be a representation by the Borrower that (i) the condition
set forth in Section 2.1 (a) hereof has been met, and (ii) the conditions set
forth in Section 4.2 hereof have been met as of the time of the request.
Section 2.2 Note. All Advances made by the Lender under this Article II
shall be evidenced by and repayable with interest in accordance with the Note.
The principal of the Note shall be payable as provided herein and on the earlier
of the Termination Date or acceleration by the Lender pursuant to Section 8.2
hereof, and shall bear interest as provided herein.
Section 2.3 Interest.
(a) The principal of the Advances outstanding from time to
time during any month shall bear interest (computed on the basis of actual days
elapsed in a 360-day year) at the Floating Rate; provided, however, that from
the first day of any month during which any Default or Event of Default occurs
or exists at any time, in the Lender's discretion and without waiving any of its
other rights and remedies, the principal of the Advances outstanding from time
to time shall bear interest at the Default Rate during the entire Default
Period; and provided, further, that in any event no rate change shall be put
into effect which would result in a rate greater than the highest rate permitted
by law. Interest accruing on the principal balance of the Advances outstanding
from time to time shall be payable on the first day of each succeeding month and
on the Termination Date or earlier demand or prepayment in full. The Borrower
agrees that the interest rate contracted for includes the interest rate set
forth herein plus any other charges or fees set forth herein and costs and
expenses incident to this transaction paid by the Borrower to the extent same
are deemed interest under applicable law.
(b) Notwithstanding the interest payable pursuant to Section
2.3(a) hereof, the Borrower shall be liable to the Lender for interest hereunder
of not less than $9,000.00 per calendar month (the "Minimum Interest Charge")
during the term of this Agreement, and the Borrower shall pay any deficiency
between the Minimum Interest Charge and the amount of interest otherwise
calculated under Sections 2.3(a) hereof on the date and in the manner provided
in Section 2.3(a) hereof.
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<PAGE> 9
(c) If any Person shall acquire a participation in Advances
under this Agreement, the Borrower shall be obligated to the Lender to pay the
full amount of all interest calculated under Sections 2.3(a) and 2.3(b) hereof,
along with all other fees, charges and other amounts due under this Agreement,
regardless if such Person elects to accept interest with respect to its
participation at a lower rate than the Floating Rate, or otherwise elects to
accept less than its pro rata share of such fees, charges and other amounts due
under this Agreement.
Section 2.4 Voluntary Prepayment; Termination of Agreement by the
Borrower; Permanent Reduction of Commitment.
(a) Except as otherwise provided herein, the Borrower may, in
its discretion, prepay the Advances in whole at any time or from time to time in
part. The Borrower may terminate this Agreement at any time and, subject to
payment and performance of all the Borrower's obligations to the Lender, may
obtain any release or termination of the Security Interest to which the Borrower
is otherwise entitled by law by (1) giving at least 30 days' prior written
notice to the Lender of the Borrower's intention to terminate this Agreement;
and (2) paying the Lender a prepayment fee of (i) 2% of the aggregate amount of
the Commitment, if such termination occurs during the period from the date of
this Agreement through February 28, 1998, or (ii) 1% of the aggregate amount of
the Commitment, if such termination occurs during the period from March 1, 1998,
until the Termination Date, provided, however, no such fee shall be payable if
and to the extent (i) the funds for any termination of the Advances, are derived
from Funds from Operations or (ii) such termination represents a refinancing of
the Obligations by Norwest Bank, Arizona, N.A.
(b) The Borrower may at any time and from time to time, upon
at least 30 days' prior written notice to the Lender, permanently reduce in part
the Commitment; provided, however, that no reduction shall reduce the Commitment
to an amount less than the then-aggregate amount of the Advances; and provided,
further, that if the Borrower shall elect permanently to reduce in part the
Commitment at any time other than the Termination Date, the Borrower shall pay
to the Lender a premium in an amount equal to (i) 2% of the reduction from the
date of this Agreement through February 28, 1998, or (ii) 1% of the reduction
from March 1, 1998, until the Termination Date.
Section 2.5 Mandatory Prepayment. Without notice or demand, if the sum
of the outstanding principal balance of the Advances shall at any time exceed
the Borrowing Base, the Borrower shall immediately prepay the Advances to the
extent necessary to reduce the sum of the outstanding principal balance of the
Advances to the Borrowing Base. Any payment received by the Lender under this
Section 2.5 or under Section 2.4 may be applied to the Advances, including
interest thereon and any fees, commissions, costs and expenses hereunder and
under the Security Documents, in such order and in such amounts as the Lender,
in its discretion, may from time to time determine. For each day or portion
thereof that the Advances shall exceed the Borrowing Base, the Borrower shall
pay to the Lender an overadvance charge in the amount of $100.00; provided,
however, that if any such day occurs during a Default Period, the overadvance
charge for such day shall be $200.00.
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<PAGE> 10
Section 2.6 Payment. All payments of principal of and interest on the
Advances shall be made to the Lender in immediately available funds. The
Borrower hereby authorizes the Lender, in its discretion at any time or from
time to time and without request by the Borrower, to make an Advance or Advances
in such amount as shall be necessary to pay amounts and any interest, fees,
costs or expenses hereunder or under the Security Documents.
Section 2.7 Payment on Non-Banking Days. Whenever any payment to be
made hereunder shall be stated to be due on a day which is not a Banking Day,
such payment may be made on the next succeeding Banking Day, and such extension
of time shall in such case be included in the computation of interest on the
Advances or the fees hereunder, as the case may be.
Section 2.8 Use of Proceeds. The proceeds of Advances shall be used by
the Borrower to pay off its existing revolving line of credit with National Bank
of Arizona ("NBA"), bring its accounts payable current and for ordinary working
capital purposes.
Section 2.9 Liability Records. The Lender may maintain from time to
time, at its discretion, liability records as to any and all Advances made or
repaid and interest accrued or paid under this Agreement. All entries made on
any such record shall be presumed correct until the Borrower establishes the
contrary. On demand by the Lender, the Borrower will admit and certify in
writing the exact principal balance that the Borrower then asserts to be
outstanding to the Lender for Advances under this Agreement. Any billing
statement or accounting rendered by the Lender shall be conclusive and fully
binding on the Borrower unless specific written notice of exception is given to
the Lender by the Borrower within 30 days after its receipt by the Borrower.
Section 2.10 Setoff. The Borrower agrees that the Lender may at any
time or from time to time, at its sole discretion and without demand and without
notice to anyone, setoff any liability owed to the Borrower by the Lender,
whether or not due, against any indebtedness owed to the Lender by the Borrower
(for Advances or for any other transaction or event), whether or not due. In
addition, each other Person holding a participating interest in any Advances
made to the Borrower by the Lender shall have the right to appropriate or setoff
any deposit or other liability then owed by such Person to the Borrower, whether
or not due, and apply the same to the payment of said participating interest, as
fully as if such Person had lent directly to the Borrower the amount of such
participating interest.
Section 2.11 Fees.
(a) The Borrower hereby agrees to pay the Lender a fully
earned and non-refundable origination fee of $12,000.00, due and payable upon
the execution of this Agreement.
(b) The Borrower agrees to pay to the Lender an unused fee
each month at the rate of one-half percent (1/2%) per annum on the average daily
unused amount of the Commitment from the date hereof to and including the date
on which such facility is terminated, due and payable monthly in arrears on the
first day of each month, commencing March 1, 1996,
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<PAGE> 11
provided that any such unused fee remaining unpaid upon termination of the
Credit Facility or acceleration of the Note by the Lender pursuant to Section
8.2 hereof shall be due and payable on the date of such termination or
acceleration. Such fee shall be calculated on the basis of actual days elapsed
in a 360-day year.
(c) The Borrower hereby agrees to pay the Lender, on demand,
audit fees of $50 per hour, per auditor or such other standard rate as the
Lender may announce from time to time in connection with any audits or
inspections by the Lender of any collateral or the operations or business of the
Borrower, together with all actual out-of-pocket costs and expenses incurred in
conducting any such audit or inspection.
Section 2.12 Capital Adequacy. If the Lender shall determine that the
adoption after the date hereof of any applicable law, rule or regulation
regarding capital adequacy, or any change therein after the date hereof, any
change after the date hereof in the interpretation or administration thereof by
any governmental authority, central bank or comparable agency charged with the
interpretation or administration thereof, or compliance by the Lender or its
parent corporation with any guideline or request issued after the date hereof
regarding capital adequacy (whether nor not having the force of law) of any such
authority, central bank or comparable agency, has or would have the effect of
reducing the rate of return on the Lender's or the Lender's parent corporation's
capital as a consequence of the Lender's obligations hereunder to a level below
that which the Lender or its parent corporation could have achieved but for such
adoption, change or compliance (taking into consideration the Lender's policies
with respect to capital adequacy and those of the Lender's parent corporation)
by an amount deemed to the Lender or its parent corporation to be material, then
from time to time on demand by the Lender, the Borrower shall pay to the Lender
such additional amount or amounts as will compensate the Lender or its parent
corporation for such reduction. Certificates of the Lender sent to the Borrower
from time to time claiming compensation under this Section, stating the reason
therefor and setting forth in reasonable detail the calculation of the
additional amount or amounts to be paid to the Lender hereunder shall be
conclusive absent manifest error. In determining such amounts, the Lender or its
parent corporation may use any reasonable averaging and attribution methods.
ARTICLE III
Security Interest
Section 3.1 Grant of Security Interest. The Borrower hereby assigns
and grants to the Lender a security interest (collectively referred to as the
"Security Interests") in the Collateral, as security for the payment and
performance of each and every debt, liability and obligation of every type and
description which the Borrower may now or at any time hereafter owe to the
Lender (whether such debt, liability or obligation now exists or is hereafter
created or incurred, whether it arises in a transaction involving the Lender
alone or in a transaction involving other creditors of the Borrower, and whether
it is direct or indirect, due or to become due, absolute or contingent, primary
or secondary, liquidated or unliquidated, or sole, joint, several or joint and
several, and including specifically, but not limited to, all indebtedness of the
Borrower arising under this Agreement or any other loan or credit agreement or
guaranty
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between the Borrower and the Lender, whether now in effect or hereafter entered
into; all such debts, liabilities and obligations are herein collectively
referred to as the "Obligations").
Section 3.2 Notification of Account Debtors and Other Obligors. In
addition to the rights of the Lender under Section 6.10 hereof, with respect
to any and all rights to payment constituting Collateral the Lender may at any
time (either before or after the occurrence of an Event of Default) notify any
account debtor or other person obligated to pay the amount due that such right
to payment has been assigned or transferred to the Lender for security and shall
be paid directly to the Lender. The Borrower will join in giving such notice if
the Lender so requests. At any time after the Borrower or the Lender gives such
notice to an account debtor or other obligor, the Lender may, but need not, in
the Lender's name or in the Borrower's name, (a) demand, sue for, collect or
receive any money or property at any time payable or receivable on account of,
or securing, any such right to payment, or grant any extension to, make any
compromise or settlement with or otherwise agree to waive, modify, amend or
change the obligations (including collateral obligations) of any such account
debtor or other obligor; and (b) as agent and attorney in fact of the Borrower,
notify the United States Postal Service to change the address for delivery of
the Borrower's mail to any address designated by the Lender, otherwise intercept
the Borrower's mail, and receive, open and dispose of the Borrower's mail,
applying all Collateral as permitted under this Agreement and holding all other
mail for the Borrower's account or forwarding such mail to the Borrower's last
known address.
Section 3.3 Assignment of Insurance. As additional security for the
payment and performance of the Obligations, the Borrower hereby assigns to the
Lender any and all monies (including, without limitation, proceeds of insurance
and refunds of unearned premiums) due or to become due under, and all other
rights of the Borrower with respect to, any and all policies of insurance now or
at any time hereafter covering the Collateral or any evidence thereof or any
business records or valuable papers pertaining thereto, and the Borrower hereby
directs the issuer of any such policy to pay all such monies directly to the
Lender. At any time, whether before or after the occurrence of any Event of
Default, the Lender may (but need not), in the Lender's name or in the
Borrower's name, execute and deliver proof of claim, receive all such monies,
endorse checks and other instruments representing payment of such monies, and
adjust, litigate, compromise or release any claim against the issuer of any such
policy.
Section 3.4 Occupancy.
(a) The Borrower hereby irrevocably grants to the Lender the
right to take possession of the Premises at any time after the occurrence and
during the continuance of an Event of Default.
(b) The Lender may use the Premises only to hold, process,
manufacture, sell, use, store, liquidate, realize upon or otherwise dispose of
goods that are Collateral and for other purposes that the Lender may in good
faith deem to be related or incidental purposes.
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(c) The right of the Lender to hold the Premises shall cease
and terminate upon the earlier of (i) payment in full and discharge of all
Obligations, and (ii) final sale or disposition of all goods constituting
Collateral and delivery of all such goods to purchasers.
(d) The Lender shall not be obligated to pay or account for
any rent or other compensation for the possession, occupancy or use of any of
the Premises; provided, however, in the event that the Lender does pay or
account for any rent or other compensation for the possession, occupancy or use
of any of the Premises, the Borrower shall reimburse the Lender promptly for the
full amount thereof. In addition, the Borrower will pay, or reimburse the Lender
for, all taxes, fees, duties, imposts, charges and expenses at any time incurred
by or imposed upon the Lender by reason of the execution, delivery, existence,
recordation, performance or enforcement of this Agreement or the provisions of
this Section 3.4.
Section 3.5 License. The Borrower hereby grants to the Lender a
non-exclusive, worldwide and royalty-free license to use or otherwise exploit
all trademarks, franchises, trade names, copyrights and patents of the Borrower
for the purpose of selling, leasing or otherwise disposing of any or all
Collateral following an Event of Default.
ARTICLE IV
Conditions of Lending
Section 4.1 Conditions Precedent to the Initial Advance. The
obligation of the Lender to make the initial Advance (the "Initial Advance")
under the Credit Facility shall be subject to the condition precedent that,
after the Initial Advance, there is at least $150,000.00 in excess availability
under the Borrowing Base, and that the Lender shall have received all of the
following, each in form and substance satisfactory to the Lender:
(a) This Agreement, properly executed on behalf of the
Borrower.
(b) The Note, properly executed on behalf of the Borrower.
(c) A true and correct copy of any and all leases pursuant to
which the Borrower is leasing the Premises, together with a landlord's
disclaimer and consent with respect to each such lease.
(d) A Collateral Account Agreement, duly executed by the
Borrower and a financial institution acceptable to the Lender, pursuant to which
the Borrower and the institution establish a depository account (the "Collateral
Account") in the name of and under the sole and exclusive control of the Lender,
from which such institution agrees to transfer finally collected funds to the
Lender for application to the Advances.
(e) A Lockbox Agreement, duly executed by the Borrower and an
institution acceptable to the Lender, pursuant to which the Borrower agrees to
maintain and direct account debtors to make payment to, and such institution
agrees to maintain and process
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<PAGE> 14
payments received in, a lockbox for the benefit of the Lender (the "Lockbox"),
from which Lockbox such institution shall transfer funds to the Collateral
Account.
(f) Current searches of appropriate filing offices showing
that (i) no state or federal tax liens have been filed and remain in effect
against the Borrower, (ii) no financing statements have been filed and remain in
effect against the Borrower, except those financing statements relating to liens
permitted pursuant to Section 7.1 hereof and those financing statements filed by
the Lender, and (iii) the Lender has duly filed all financing statements
necessary to perfect the Security Interests granted hereunder, to the extent the
Security Interests are capable of being perfected by filing.
(g) A certificate of the Secretary or an Assistant Secretary
of the Borrower, certifying as to (i) the resolutions of the directors and, if
required, the shareholders of the Borrower, authorizing the execution, delivery
and performance of this Agreement and the Security Documents, (ii) the articles
of incorporation and bylaws of the Borrower, and (iii) the signatures of the
officers or agents of the Borrower authorized to execute and deliver this
Agreement, the Security Documents and other instruments, agreements and
certificates, including Advance requests, on behalf of the Borrower.
(h) A current certificate issued by the Secretary of State of
the state of the Borrower's incorporation, certifying that the Borrower is in
compliance with all corporate organizational requirements of such state.
(i) Evidence that the Borrower is duly licensed or qualified
to transact business in all jurisdictions where the character of the property
owned or leased or the nature of the business transacted by it makes such
licensing or qualification necessary.
(j) A certificate of an officer of the Borrower confirming, in
his personal capacity, the representations and warranties set forth in Article V
hereof.
(k) An opinion of counsel to the Borrower, addressed to the
Lender, together with the results of a litigation search or searches showing all
actions and proceedings where the Borrower is a defendant or involving a claim
against the Borrower.
(l) Certificates of the insurance required hereunder, with all
hazard insurance containing a loss payee endorsement in favor of the Lender and
with all liability insurance naming the Lender as an additional insured.
(m) Payment of the fees due through the date of the initial
Advance under Section 2.11 hereof and expenses incurred by the Lender through
such date and required to be paid by the Borrower under Section 9.7 hereof.
(n) Such other documents as the Lender in its sole discretion
may require.
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Section 4.2 Conditions Precedent to All Advances. The obligation of the
Lender to make each Advance shall be subject to the further conditions precedent
that on such date:
(a) the representations and warranties contained in Article V
hereof are correct on and as of the date of such Advance as though made on and
as of such date, except to the extent that such representations and warranties
relate solely to an earlier date; and
(b) no event has occurred and is continuing, or would result
from such Advance which constitutes a Default or an Event of Default.
ARTICLE V
Representations and Warranties
The Borrower represents and warrants to the Lender as follows:
Section 5.1 Corporate Existence and Power; Name; Chief Executive
Office; Inventory and Equipment Locations. The Borrower is a corporation duly
incorporated, validly existing and in good standing under the laws of the State
of Arizona, and is duly licensed or qualified to transact business in all
jurisdictions where the character of the property owned or leased or the nature
of the business transacted by it makes such licensing or qualification
necessary. The Borrower has all requisite power and authority, corporate or
otherwise, to conduct its business, to own its properties and to execute and
deliver, and to perform all of its obligations under, the Loan Documents. During
its corporate existence, the Borrower has done business solely under the names
set forth in Exhibit B hereto. The chief executive office and principal place of
business of the Borrower is located at the address set forth in Exhibit B
hereto, and all of the Borrower's records relating to its business or the
Collateral are kept at that location. All Inventory and Equipment is located at
that location or at one of the other locations set forth in Exhibit B hereto.
Section 5.2 Authorization of Borrowing; No Conflict as to Law or
Agreements. The execution, delivery and performance by the Borrower of the Loan
Documents and the borrowings from time to time hereunder have been duly
authorized by all necessary corporate action and do not and will not (a) require
any consent or approval of the stockholders of the Borrower, (b) require any
authorization, consent or approval by, or registration, declaration or filing
with, or notice to, any governmental department, commission, board, bureau,
agency or instrumentality, domestic or foreign, or any third party, except (i)
such authorization, consent, approval, registration, declaration, filing or
notice as has been obtained, accomplished or given prior to the date hereof, or
(ii) such authorization, consent, approval, registration, declaration, filing or
notice required from the Security and Exchange Commission which Borrower shall
obtain as soon as possible and in no event later than as required by the rules
and regulations of the Securities and Exchange Commission, (c) violate any
provision of any law, rule or regulation (including, without limitation,
Regulation X of the Board of Governors of the Federal Reserve System) or of any
order, writ, injunction or decree presently in effect having applicability to
the Borrower or of the Articles of Incorporation or Bylaws of the Borrower, (d)
result in a breach
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<PAGE> 16
of or constitute a default under any indenture or loan or credit agreement or
any other material agreement, lease or instrument to which the Borrower is a
party or by which it or its properties may be bound or affected, or (e) result
in, or require, the creation or imposition of any mortgage, deed of trust,
pledge, lien, security interest or other charge or encumbrance of any nature
(other than the Security Interests) upon or with respect to any of the
properties now owned or hereafter acquired by the Borrower.
Section 5.3 Legal Agreements. This Agreement constitutes and, upon due
execution by the Borrower, the other Loan Documents will constitute the legal,
valid and binding obligations of the Borrower, enforceable against the Borrower
in accordance with their respective terms.
Section 5.4 Subsidiaries. Except as set forth in Exhibit B attached
hereto, the Borrower has no Subsidiaries.
Section 5.5 Financial Condition; No Adverse Change. The Borrower has
heretofore furnished to the Lender audited financial statements of the Borrower
for its fiscal year ended March 31, 1995, and unaudited financial statements of
the Borrower for the months ended December 31, 1995, and those statements fairly
present the financial condition of the Borrower on the dates thereof and the
results of its operations and cash flows for the periods then ended and were
prepared in accordance with generally accepted accounting principles. Since the
date of the most recent financial statements, there has been no material adverse
change in the business, properties or condition (financial or otherwise) of the
Borrower.
Section 5.6 Litigation. There are no actions, suits or proceedings
pending or, to the knowledge of the Borrower, threatened against or affecting
the Borrower or any of its Affiliates or the properties of the Borrower or any
of its Affiliates before any court or governmental department, commission,
board, bureau, agency or instrumentality, domestic or foreign, which, if
determined adversely to the Borrower or any of its Affiliates, would have a
material adverse effect on the financial condition, properties or operations of
the Borrower or any of its Affiliates.
Section 5.7 Regulation U. The Borrower is not engaged in the business
of extending credit for the purpose of purchasing or carrying margin stock
(within the meaning of Regulation U of the Board of Governors of the Federal
Reserve System), and no part of the proceeds of any Advance will be used to
purchase or carry any margin stock or to extend credit to others for the purpose
of purchasing or carrying any margin stock.
Section 5.8 Taxes. The Borrower and its Affiliates have paid or caused
to be paid to the proper authorities when due all federal, state and local taxes
required to be withheld by each of them. The Borrower and its Affiliates have
filed all federal, state and local tax returns which to the knowledge of the
officers of the Borrower or any Affiliate, as the case may be, are required to
be filed, and the Borrower and its Affiliates have paid or caused to be paid to
the respective taxing authorities all taxes as shown on said returns or on any
assessment received by any of them to the extent such taxes have become due.
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Section 5.9 Titles and Liens. The Borrower has good and absolute title
to all Collateral described in the collateral reports provided to the Lender and
all other Collateral, properties and assets reflected in the latest balance
sheet referred to in Section 5.5 hereof and all proceeds thereof, free and clear
of all mortgages, security interests, liens and encumbrances, except for (i)
mortgages, security interests and liens permitted by Section 7.1 hereof, and
(ii) in the case of any such property which is not Collateral or other
collateral described in the Security Documents, covenants, restrictions, rights,
easements and minor irregularities in title which do not materially interfere
with the business or operations of the Borrower as presently conducted. No
financing statement naming the Borrower as debtor is on file in any office
except to perfect only security interests permitted by Section 7.1 hereof.
Section 5.10 Plans. Except as disclosed to the Lender in writing prior
to the date hereof, neither the Borrower nor any of its Affiliates maintains or
has maintained any Plan. Neither the Borrower nor any Affiliate has received any
notice or has any knowledge to the effect that it is not in full compliance with
any of the requirements of ERISA. No Reportable Event or other fact or
circumstance which may have an adverse effect on the Plan's tax qualified status
exists in connection with any Plan. Neither the Borrower nor any of its
Affiliates has:
(a) Any accumulated funding deficiency within the meaning of
ERISA; or
(b) Any liability or knows of any fact or circumstances which
could result in any liability to the Pension Benefit Guaranty Corporation, the
Internal Revenue Service, the Department of Labor or any participant in
connection with any Plan (other than accrued benefits which or which may become
payable to participants or beneficiaries of any such Plan).
Section 5.11 Default. The Borrower is in compliance with all provisions
of all agreements, instruments, decrees and orders to which it is a party or by
which it or its property is bound or affected, the breach or default of which
could have a material adverse effect on the financial condition, properties or
operations of the Borrower.
Section 5.12 Environmental Protection. The Borrower has obtained all
permits, licenses and other authorizations which are required under federal,
state and local laws and regulations relating to emissions, discharges,
releases of pollutants, contaminants, hazardous or toxic materials, or wastes
into ambient air, surface water, ground water or land, or otherwise relating to
the manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of pollutants, contaminants or hazardous or toxic
materials or wastes ("Environmental Laws") at the Borrower's facilities or in
connection with the operation of its facilities. The Borrower shall provide
copies of all such permits, licenses and other authorizations to the Lender upon
the Lender's request. The Borrower also shall provide to the Lender copies of
all environmental investigation and inspection reports available to the Borrower
that pertain to the Borrower's facilities, upon the Lender's request. Except as
previously disclosed to the Lender in writing, the Borrower and all activities
of the Borrower at its facilities comply with all Environmental Laws and with
all terms and conditions of any required permits, licenses and authorizations
applicable to the Borrower with respect thereto. Except as previously disclosed
to the Lender in writing, the Borrower is also in compliance with all
limitations,
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restrictions, conditions, standards, prohibitions, requirements, obligations,
schedules and timetables contained in Environmental Laws or contained in any
plan, order, decree, judgment or notice of which the Borrower is aware. Except
as previously disclosed to the Lender in writing, the Borrower is not aware of,
nor has the Borrower received notice of, any events, conditions, circumstances,
activities, practices, incidents, actions or plans which may interfere with or
prevent continued compliance with, or which may give rise to any liability
under, any Environmental Laws. Except as previously disclosed to the Lender in
writing, the Borrower has received no inquiry from any federal, state or local
agency concerning the Borrower's facilities or any adjacent properties involving
possible environmental contamination or violations of any Environmental Laws,
and has no knowledge of any such inquiry to any party concerning the Borrower's
facilities or any adjacent properties. The Borrower agrees to notify the Lender
promptly in writing of any inquiries by third parties or regulatory agencies
concerning the possible presence of environmental contamination on the
Borrower's facilities or any adjacent properties or concerning any possible
violations of Environmental Laws involving the Borrower's facilities or any
adjacent properties. The Lender shall have the right to enter the Borrower's
facilities for the purpose of conducting environmental investigations, including
taking soil and water samples, during the Borrower's normal business hours of
operation.
Section 5.13 Submissions to the Lender. All financial and other
information provided to the Lender by or on behalf of the Borrower in connection
with the Borrower's request for the credit facilities contemplated hereby is
true and correct in all material respects and, as to projections, valuations or
proforma financial statements, present a good faith opinion as to such
projections, valuations and proforma condition and results.
Section 5.14 Financing Statements. The Borrower has provided to the
Lender signed financing statement sufficient when filed to perfect the Security
Interests and the other security interests created by the Security Documents.
When such financing statements are filed in the offices noted therein, the
Lender will have a valid and perfected security interest in all Collateral and
all other collateral described in the Security Documents which is capable of
being perfected by filing financing statements. None of the Collateral or other
collateral covered by the Security Documents is or will become a fixture on real
estate, unless a sufficient fixture filing is in effect with respect thereto.
Section 5.15 Rights to Payment. Each right to payment and each
instrument, document, chattel paper and other agreement constituting or
evidencing Collateral or other collateral covered by the Security Documents is
(or, in the case of all future Collateral or such other collateral, will be when
arising or issued) the valid, genuine and legally enforceable obligation,
subject to no defense, setoff or counterclaim, of the account debtor or other
obligor named therein or in the Borrower's records pertaining thereto as being
obligated to pay such obligation.
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ARTICLE VI
Affirmative Covenants of the Borrower
So long as the Note shall remain unpaid or the Credit Facility shall be
outstanding, the Borrower will comply with the following requirements, unless
the Lender shall otherwise consent in writing:
Section 6.1 Reporting Requirements. The Borrower will deliver, or
cause to be delivered, to the Lender each of the following, which shall be in
form and detail acceptable to the Lender:
(a) as soon as available, and in any event within 90 days
after the end of each fiscal year of the Borrower, audited financial statements
of the Borrower with the unqualified opinion of independent certified public
accountants selected by the Borrower and acceptable to the Lender, which annual
financial statements shall include the balance sheet of the Borrower as at the
end of such fiscal year and the related statements of income, stockholder's
equity and cash flows of the Borrower for the fiscal year then ended, prepared,
if the Lender so requests, on a consolidating and consolidated basis to include
any Affiliates, all in reasonable detail and prepared in accordance with
generally accepted accounting principles applied on a basis consistent with the
accounting practices applied in the financial statements referred to in Section
5.5 hereof, together with (i) a report signed by such accountants stating that
in making the investigations necessary for said opinion they obtained no
knowledge, except as specifically stated, of any Default or Event of Default
hereunder and all relevant facts in reasonable detail to evidence, and the
computations as to, whether or not the Borrower is in compliance with the
requirements set forth in Sections 6.12 through 6.14, Section 7.10 and Section
7.19 hereof; and (ii) a certificate of the chief financial officer of the
Borrower stating that such financial statements have been prepared in accordance
with generally accepted accounting principles applied on a basis consistent with
the accounting practices reflected in the annual financial statements referred
to in Section 5.5 hereof and whether or not such officer has knowledge of the
occurrence of any Default or Event of Default hereunder and, if so, stating in
reasonable detail the facts with respect thereto;
(b) as soon as available and in any event within 20 days after
the end of each month, an unaudited/internal balance sheet and statements of
income and stockholder's equity of the Borrower as at the end of and for such
month and for the year to date period then ended, prepared, if the Lender so
requests, on a consolidating and consolidated basis to include any Affiliates,
in reasonable detail and stating in comparative form the figures for the
corresponding date and periods in the previous year, all prepared in accordance
with generally accepted accounting principles applied on a basis consistent with
the accounting practices reflected in the financial statements referred to in
Section 5.5 hereof, subject to year-end audit adjustments; and accompanied by a
certificate of the chief financial officer of the Borrower, substantially in the
form of Exhibit D hereto stating (i) that such financial statements have been
prepared in accordance with generally accepted accounting principles applied on
a basis consistent with the accounting practices reflected in the financial
statements referred to in Section 5.5 hereof, subject to year-end audit
adjustments, (ii) whether or not such officer has
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knowledge of the occurrence of any Default or Event of Default hereunder not
theretofore reported and remedied and, if so, stating in reasonable detail the
facts with respect thereto, and (iii) all relevant facts in reasonable detail to
evidence, and the computations as to, whether or not the Borrower is in
compliance with the requirements set forth in Sections 6.12 through 6.14,
Section 7.10 and Section 7.19 hereof;
(c) within 15 days after the end of each month, agings of the
Borrower's accounts receivable and its accounts payable and, within 20 days
after the end of each month an inventory certification report, all of which
shall be dated as of the end of such month;
(d) at least 30 days before the beginning of each fiscal year
of the Borrower, the projected balance sheets and income statements for each
month of such year, each in reasonable detail, representing the good faith
projections of the Borrower and certified by the Borrower's chief financial
officer as being the most accurate projections available and identical to the
projections used by the Borrower for internal planning purposes, together with
such supporting schedules and information as the Lender may in its discretion
require;
(e) immediately after the commencement thereof, notice in
writing of all litigation and of all proceedings before any governmental or
regulatory agency affecting the Borrower of the type described in Section 5.6
hereof or which seek a monetary recovery against the Borrower in excess of
$5,000.00;
(f) as promptly as practicable (but in any event not later
than five business days) after an officer of the Borrower obtains knowledge of
the occurrence of any breach, default or event of default under any Security
Document or any event which constitutes a Default or Event of Default hereunder,
notice of such occurrence, together with a detailed statement by a responsible
officer of the Borrower of the steps being taken by the Borrower to cure the
effect of such breach, default or event;
(g) as soon as possible and in any event within 30 days after
the Borrower knows or has reason to know that any Reportable Event with respect
to any Plan has occurred, the statement of the chief financial officer of the
Borrower setting forth details as to such Reportable Event and the action which
the Borrower proposes to take with respect thereto, together with a copy of the
notice of such Reportable Event to the Pension Benefit Guaranty Corporation;
(h) as soon as possible, and in any event within 10 days after
the Borrower fails to make any quarterly contribution required with respect to
any Plan under Section 412(m) of the Internal Revenue Code of 1986, as amended,
the statement of the chief financial officer of the Borrower setting forth
details as to such failure and the action which the Borrower proposes to take
with respect thereto, together with a copy of any notice of such failure
required to be provided to the Pension Benefit Guaranty Corporation;
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(i) promptly upon knowledge thereof, notice of (i) any
disputes or claims by customers of the Borrower; (ii) any goods returned to or
recovered by the Borrower; and (iii) any change in the persons constituting the
officers and directors of the Borrower;
(j) promptly upon knowledge thereof, notice of any loss of or
material damage to any Collateral or other collateral covered by the Security
Documents or of any substantial adverse change in any Collateral or such other
collateral or the prospect of payment thereof;
(k) promptly upon their distribution, copies of all financial
statements, reports and proxy statements which the Borrower shall have sent to
its stockholders;
(l) promptly after the sending or filing thereof, copies of
all regular and periodic financial reports which the Borrower shall file with
the Securities and Exchange Commission or any national securities exchange;
(m) promptly upon knowledge thereof, notice of the violation
by the Borrower of any law, rule or regulation, the non-compliance with which
could materially and adversely affect its business or its financial condition;
and
(n) from time to time, with reasonable promptness, any and all
receivables schedules, collection reports, deposit records, equipment schedules,
copies of invoices to account debtors, shipment documents and delivery receipts
for goods sold, and such other material, reports, records or information as the
Lender may request.
Section 6.2 Books and Records; Inspection and Examination. The
Borrower will keep accurate books of record and account for itself pertaining to
the Collateral and pertaining to the Borrower's business and financial condition
and such other matters as the Lender may from time to time request in which true
and complete entries will be made in accordance with generally accepted
accounting principles consistently applied and, upon request of the Lender, will
permit any officer, employee, attorney or accountant for the Lender to audit,
review, make extracts from or copy any and all corporate and financial books and
records of the Borrower at all times during ordinary business hours, to send and
discuss with account debtors and other obligors requests for verification of
amounts owed to the Borrower, and to discuss the affairs of the Borrower with
any of its directors, officers, employees or agents. The Borrower will permit
the Lender, or its employees, accountants, attorneys or agents, to examine and
inspect any Collateral, other collateral covered by the Security Documents or
any other property of the Borrower at any time during ordinary business hours.
Section 6.3 Account Verification. The Borrower will at any time and
from time to time upon request of the Lender send requests for verification of
accounts or notices of assignment to account debtors and other obligors.
Section 6.4 Compliance with Laws; Environmental Indemnity. The
Borrower will (a) comply with the requirements of applicable laws and
regulations, the non-compliance with which would materially and adversely affect
its business or its financial condition,
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(b) comply with all applicable Environmental Laws and obtain any permits,
licenses or similar approvals required by any such Environmental Laws, and (c)
use and keep the Collateral, and will require that others use and keep the
Collateral, only for lawful purposes, without violation of any federal, state or
local law, statute or ordinance. The Borrower will indemnify, defend and hold
the Lender harmless from and against any claims, loss or damage to which the
Lender may be subjected as a result of any past, present or future existence,
use, handling, storage, transportation or disposal of any hazardous waste or
substance or toxic substance by the Borrower or on property owned, leased or
controlled by the Borrower. This indemnification agreement shall survive the
termination of this Agreement and payment of the indebtedness hereunder.
Section 6.5 Payment of Taxes and Other Claims. The Borrower will pay or
discharge, when due, (a) all taxes, assessments and governmental charges levied
or imposed upon it or upon its income or profits, upon any properties belonging
to it (including, without limitation, the Collateral) or upon or against the
creation, perfection or continuance of the Security Interests, prior to the date
on which penalties attach thereto, (b) all federal, state and local taxes
required to be withheld by it, and (c) all lawful claims for labor, materials
and supplies which, if unpaid, might by law become a lien or charge upon any
properties of the Borrower; provided, that the Borrower shall not be required to
pay any such tax, assessment, charge or claim whose amount, applicability or
validity is being contested in good faith by appropriate proceedings and so long
as the Collateral and the Lender's lien thereon is not in any manner impaired by
any enforcement remedy available to the tax levying entity during the period of
such contest.
Section 6.6 Maintenance of Properties.
(a) The Borrower will keep and maintain the Collateral, the
other collateral covered by the Security Documents and all of its other
properties necessary or useful in its business in good condition, repair and
working order (normal wear and tear excepted) and will from time to time replace
or repair any worn, defective or broken parts; provided, however, that nothing
in this Section 6.6 shall prevent the Borrower from discontinuing the operation
and maintenance of any of its properties if such discontinuance is, in the
judgment of the Lender, desirable in the conduct of the Borrower's business and
not disadvantageous in any material respect to the Lender.
(b) The Borrower will defend the Collateral against all claims
or demands of all persons (other than the Lender) claiming the Collateral or any
interest therein.
(c) The Borrower will keep all Collateral and other collateral
covered by the Security Documents free and clear of all security interests,
liens and encumbrances except the Security Interests and other security
interests permitted by Section 7.1 hereof.
Section 6.7 Insurance. The Borrower will obtain and at all times
maintain insurance with insurers believed by the Borrower to be responsible and
reputable, in such amounts and against such risks as may from time to time be
required by the Lender, but in all events in such amounts and against such risks
as is usually carried by companies engaged in
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<PAGE> 23
similar business and owning similar properties in the same general areas in
which the Borrower operates. Without limiting the generality of the foregoing,
the Borrower will at all times keep all tangible Collateral insured against
risks of fire (including so-called extended coverage), theft, collision (for
Collateral consisting of motor vehicles) and such other risks and in such
amounts as the Lender may reasonably request, with any loss payable to the
Lender to the extent of its interest, and all policies of such insurance shall
contain a lender's loss payable endorsement for the benefit of the Lender. All
policies of liability insurance required hereunder shall name the Lender as an
additional insured.
Section 6.8 Preservation of Corporate Existence. The Borrower will
preserve and maintain its corporate existence and all of its rights, privileges
and franchises necessary or desirable in the normal conduct of its business and
shall conduct its business in an orderly, efficient and regular manner.
Section 6.9 Delivery of Instruments, etc. Upon request by the Lender,
the Borrower will promptly deliver to the Lender in pledge all instruments,
documents and chattel papers constituting Collateral, duly endorsed or assigned
by the Borrower.
Section 6.10 Lockbox; Collateral Account.
(a) The Borrower will irrevocably direct all present and
future Account debtors and other Persons obligated to make payments constituting
Collateral to make such payments directly to the Lockbox. All of the Borrower's
invoices, account statements and other written or oral communications directing,
instructing, demanding or requesting payment of any Account or any other amount
constituting Collateral shall conspicuously direct that all payments be made to
the Lockbox and shall include the Lockbox address. All payments received in the
Lockbox shall be processed to the Collateral Account.
(b) The Borrower agrees to deposit in the Collateral Account
or, at the Lender's option, to deliver to the Lender all collections on
Accounts, contract rights, chattel paper and other rights to payment
constituting Collateral, and all other cash proceeds of Collateral, which the
Borrower may receive directly notwithstanding its direction to Account debtors
and other obligors to make payments to the Lockbox, immediately upon receipt
thereof, in the form received, except for the Borrower's endorsement when deemed
necessary. Until delivered to the Lender or deposited in the Collateral Account,
all proceeds or collections of Collateral shall be held in trust by the Borrower
for and as the property of the Lender and shall not be commingled with any funds
or property of the Borrower. Amounts deposited in the Collateral Account shall
not bear interest and shall not be subject to withdrawal by the Borrower, except
after full payment and discharge of all Obligations. All such collections shall
constitute proceeds of Collateral and shall not constitute payment of any
Obligation. Collected funds from the Collateral Account shall be transferred to
the Lender's general account, and the Lender may deposit in its general account
or in the Collateral Account any and all collections received by it directly
from the Borrower. The Lender may commingle such funds with other property of
the Lender or any other person. The Lender from time to time at its discretion
may, after allowing (i) two (2) Banking Days after deposit in the Collateral
Account and/or (ii) one (1) Banking Day after direct deposit in Lender's Account
No. 00-28-995 at Norwest Bank
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<PAGE> 24
Minnesota, National Association, apply such funds to the payment of any and all
Obligations, in any order or manner of application satisfactory to the Lender.
All items delivered to the Lender or deposited in the Collateral Account shall
be subject to final payment. If any such item is returned uncollected, the
Borrower will immediately pay the Lender the amount of that item, or such bank
at its discretion may charge any uncollected item to the Borrower's commercial
account or other account. The Borrower shall be liable as an endorser on all
items deposited in the Collateral Account, whether or not in fact endorsed by
the Borrower.
Section 6.11 Performance by the Lender. If the Borrower at any time
fails to perform or observe any of the foregoing covenants contained in this
Article VI or elsewhere herein, and if such failure shall continue for a period
of ten calendar days after the Lender gives the Borrower written notice thereof
(or in the case of the agreements contained in Sections 6.5, 6.7 and 6.10
hereof, immediately upon the occurrence of such failure, without notice or lapse
of time), the Lender may, but need not, perform or observe such covenant on
behalf and in the name, place and stead of the Borrower (or, at the Lender's
option, in the Lender's name) and may, but need not, take any and all other
actions which the Lender may reasonably deem necessary to cure or correct such
failure (including, without limitation, the payment of taxes, the satisfaction
of security interests, liens or encumbrances, the performance of obligations
owed to account debtors or other obligors, the procurement and maintenance of
insurance, the execution of assignments, security agreements and financing
statements, and the endorsement of instruments); and the Borrower shall
thereupon pay to the Lender on demand the amount of all monies expended and all
costs and expenses (including reasonable attorneys' fees and legal expenses)
incurred by the Lender in connection with or as a result of the performance or
observance of such agreements or the taking of such action by the Lender,
together with interest thereon from the date expended or incurred at the
Floating Rate. To facilitate the performance or observance by the Lender of such
covenants of the Borrower, the Borrower hereby irrevocably appoints the Lender,
or the delegate of the Lender, acting alone, as the attorney in fact of the
Borrower (which appointment is coupled with an interest) with the right (but not
the duty) from time to time to create, prepare, complete, execute, deliver,
endorse or file in the name and on behalf of the Borrower any and all
instruments, documents, assignments, security agreements, financing statements,
applications for insurance and other agreements and writings required to be
obtained, executed, delivered or endorsed by the Borrower under this Section
6.11.
Section 6.12 Net Worth. The Borrower will achieve a minimum Net Worth
of $980,000.00 as of March 31, 1996. Thereafter, (i) for each fiscal quarter in
the fiscal year ending March 31, 1997, the Borrower's minimum Net Worth shall be
increased by $20,000.00 as of the end of each fiscal quarter over the previous
fiscal quarter's Net Worth, (ii) for each fiscal quarter in the fiscal year
ending March 31, 1998, the Borrower's minimum Net Worth shall be increased by
$50,000.00 as of the end of each fiscal quarter over the previous fiscal
quarter's Net Worth, and (iii) for each fiscal quarter in the fiscal year ending
March 31, 1999, the Borrower's minimum Net Worth shall be increased by
$75,000.00 as of the end of each fiscal quarter over the previous fiscal
quarter's Net Worth.
Section 6.13 Net Income. Borrower will, for the fiscal quarter ending
June 30, 1996, and for each fiscal quarter through and including the fiscal
quarter ending March 31,
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<PAGE> 25
1997, achieve a minimum Net Income of $20,000.00. Borrower will, for the fiscal
quarter ending June 30, 1997, and for each fiscal quarter through and including
the fiscal quarter ending March 31, 1998, achieve a minimum Net Income of
$50,000.00. Borrower will, for the fiscal quarter ending June 30, 1998, and for
each fiscal quarter through and including the Termination Date achieve a minimum
Net Income of $75,000.00.
Section 6.14 Debt Service Coverage Ratio. The Borrower agrees, that for
each fiscal quarter, beginning with the fiscal quarter ending June 30, 1996, it
shall maintain an average minimum debt service coverage ratio of not less than
1.2 to 1. For the fiscal quarter ending June 30, 1996, said ratio shall be based
upon the immediately preceding three month period. For the fiscal quarter ending
September 30, 1996, said ratio shall be based upon the immediately preceding six
month period. For the fiscal quarter ending December 31, 1996, said ratio shall
be based upon the immediately preceding nine month period. For each fiscal
quarter thereafter, said ratio shall be based upon the immediately preceding
twelve month period. The debt service coverage ratio shall be calculated
according to the following formula:
Funds from Operations + interest expense - unfinanced portion of
Capital Expenditures
----------------------------------------------------------------
current maturities on long term debt actually paid during period
(other than current maturities of the Advances) + interest expense
ARTICLE VII
Negative Covenants
So long as the Note shall remain unpaid or the Credit Facility shall be
outstanding, the Borrower agrees that, without the prior written consent of the
Lender:
Section 7.1 Liens. The Borrower will not create, incur or suffer to
exist any mortgage, deed of trust, pledge, lien, security interest, assignment
or transfer upon or of any of its assets, now owned or hereafter acquired, to
secure any indebtedness; excluding, however, from the operation of the
foregoing:
(a) mortgages, deeds of trust, pledges, liens, security
interests and assignments in existence on the date hereof and listed in Exhibit
C hereto, securing indebtedness for borrowed money permitted under Section 7.2
hereof;
(b) the Security Interests; and
(c) purchase money security interests relating to the
acquisition of machinery and equipment of the Borrower so long as the Borrower
is in, and maintains, compliance with every other provision of this Agreement.
Section 7.2 Indebtedness. The Borrower will not incur, create, assume
or permit to exist any indebtedness or liability on account of deposits or
advances or any indebtedness for borrowed money, or any other indebtedness or
liability evidenced by notes, bonds, debentures or similar obligations, except:
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<PAGE> 26
(a) indebtedness arising hereunder;
(b) indebtedness of the Borrower in existence on the date
hereof and listed in Exhibit C hereto; and
(c) indebtedness relating to liens permitted in accordance
with Section 7.1(c) hereof.
Section 7.3 Guaranties. The Borrower will not assume, guarantee,
endorse or otherwise become directly or contingently liable in connection with
any obligations of any other Person, except:
(a) the endorsement of negotiable instruments by the Borrower
for deposit or collection or similar transactions in the ordinary course of
business; and
(b) guaranties, endorsements and other direct or contingent
liabilities in connection with the obligations of other Persons in existence on
the date hereof and listed in Exhibit C hereto.
Section 7.4 Investments and Subsidiaries.
(a) The Borrower will not purchase or hold beneficially any
stock or other securities or evidences of indebtedness of, make or permit to
exist any loans or advances to, or make any investment or acquire any interest
whatsoever in, any other Person, including specifically but without limitation
any partnership or joint venture, except:
(1) investments in direct obligations of the United
States of America or any agency or instrumentality thereof whose obligations
constitute full faith and credit obligations of the United States of America
having a maturity of one year or less, commercial paper issued by U.S.
corporations rated "A-1" or "A-2" by Standard & Poor's Corporation or "P-1" or
"P-2" by Moody's Investors Service or certificates of deposit or bankers'
acceptances having a maturity of one year or less issued by members of the
Federal Reserve System having deposits in excess of $100,000,000 (which
certificates of deposit or bankers' acceptances are fully insured by the Federal
Deposit Insurance Corporation);
(2) travel advances or loans to officers and
employees of the Borrower not exceeding at any one time an aggregate of
$1,000.00; and
(3) advances in the form of progress payments,
prepaid rent or security deposits.
(b) The Borrower will not create or permit to exist any
Subsidiary, other than any Subsidiary in existence on the date hereof and listed
in Exhibit B hereto.
Section 7.5 Dividends. The Borrower will not declare (other than
accruing dividends on preferred stock which accrue automatically without
affirmative action on the part
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<PAGE> 27
of the Borrower) or pay any dividends (other than dividends payable solely in
stock of the Borrower) on any class of its stock (preferred or otherwise) or
make any payment on account of the purchase, redemption or other retirement of
any shares of such stock or make any distribution in respect thereof, either
directly or indirectly, except pursuant to the Corporate Reorganization
(hereinafter defined) and with the consent of the Lender. The Borrower has
advised the Lender that it will seek shareholder approval of a corporate
reorganization of the Borrower (the "Corporate Reorganization"), the elements of
which will include: (i) conversion of the outstanding Preferred Stock and all
accrued but unpaid dividends thereon to shares of Common Stock; (ii) amendment
of the Borrower's articles of incorporation to accomplish such conversion and to
generally revise the same in accordance with the Arizona Business Corporation
Act adopted by the State of Arizona effective January 1, 1996 (the "Act"); (iii)
amendment of the Borrower's bylaws to comply with the Act; (iv) resignation of
certain directors and election of new directors of the Borrower; and (v) a
possible reverse stock split to decrease the number of shares of Common Stock
outstanding following the Corporate Reorganization. As a result of the Corporate
Reorganization, a change in control of the Borrower will occur. The Borrower
intends to seek shareholder approval of the Corporate Reorganization and to
implement the Reorganization not later than June 30, 1996. The Borrower will
submit the proxy statement with respect to the Corporate Reorganization and the
amendments to the articles of incorporation and bylaws to the Lender for its
consent prior to filing the same with the Securities and Exchange Commission.
Section 7.6 Sale or Transfer of Assets; Suspension of Business
Operations. The Borrower will not sell, lease, assign, transfer or otherwise
dispose of (i) the stock of any Subsidiary, (ii) all or a substantial part of
its assets, or (iii) any Collateral or any interest therein (whether in one
transaction or in a series of transactions) to any other Person other than the
sale of Inventory in the ordinary course of business and will not liquidate,
dissolve or suspend business operations. The Borrower will not in any manner
transfer any property without prior or present receipt of full and adequate
consideration.
Section 7.7 Consolidation and Merger; Asset Acquisitions. The Borrower
will not consolidate with or merge into any Person, or permit any other Person
to merge into it, or acquire (in a transaction analogous in purpose or effect to
a consolidation or merger) all or substantially all the assets of any other
Person.
Section 7.8 Sale and Leaseback. The Borrower will not enter into any
arrangement, directly or indirectly, with any other Person whereby the Borrower
shall sell or transfer any real or personal property, whether now owned or
hereafter acquired, and then or thereafter rent or lease as lessee such property
or any part thereof or any other property which the Borrower intends to use for
substantially the same purpose or purposes as the property being sold or
transferred.
Section 7.9 Restrictions on Nature of Business. The Borrower will not
engage in any line of business materially different from that presently engaged
in by the Borrower and will not purchase, lease or otherwise acquire assets not
related to its business.
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<PAGE> 28
Section 7.10 Capital Expenditures. The Borrower will not expend or
contract to expend more than $50,000.00 in the aggregate during the fiscal year
ending March 31, 1997; (ii) $75,000.00 in the aggregate during the fiscal year
ending March 31, 1998, or (iii) $100,000.00 in the aggregate during the fiscal
year ending March 31, 1999, for the lease, purchase or other acquisition of any
capital asset, or for the lease of any other asset, whether payable currently or
in the future.
Section 7.11 Accounting. The Borrower will not adopt any material
change in accounting principles other than as required by generally accepted
accounting principles. The Borrower will not adopt, permit or consent to any
change in its fiscal year.
Section 7.12 Discounts, etc. The Borrower will not, after notice from
the Lender, grant any discount, credit or allowance to any customer of the
Borrower or accept any return of goods sold, or at any time (whether before
after notice from the Lender) modify, amend, subordinate, cancel or terminate
the obligation of any account debtor or other obligor of the Borrower.
Section 7.13 Defined Benefit Pension Plans. The Borrower will not
adopt, create, assume or become a party to any defined benefit pension plan,
unless disclosed to the Lender pursuant to Section 5.10 hereof.
Section 7.14 Other Defaults. The Borrower will not permit any breach,
default or event of default to occur under any note, loan agreement, indenture,
lease, mortgage, contract for deed, security agreement or other contractual
obligation binding upon the Borrower.
Section 7.15 Place of Business; Name. The Borrower will not transfer
its chief executive office or principal place of business, or move, relocate,
close or sell any business location. The Borrower will not permit any tangible
Collateral or any records pertaining to the Collateral to be located in any
state or area in which, in the event of such location, a financing statement
covering such Collateral would be required to be, but has not in fact been,
filed in order to perfect the Security Interests. The Borrower will not change
its name.
Section 7.16 Organizational Documents; S Corporation Status. The
Borrower will not amend its articles of incorporation or bylaws, except in
connection with the Corporate Reorganization. The Borrower will not become an S
Corporation within the meaning of the Internal Revenue Code of 1986, as amended.
Section 7.17 Salaries. The Borrower will not pay excessive or
unreasonable salaries, bonuses, commissions, consultant fees or other
compensation; or increase the salary, bonus, commissions, consultant fees or
other compensation of any director, officer or consultant, or any member of
their families, by more than 10% in any one year, either individually or for all
such persons in the aggregate, or pay any such increase from any source other
than profits earned in the year of payment.
Section 7.18 Change in Ownership. The Borrower will not issue or sell
any stock of the Borrower except in connection with the Corporate Reorganization
or pursuant to any
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<PAGE> 29
employee stock option plan or arrangement which has been consented to by the
Lender in writing.
Section 7.19 Facilitec Trade Payable. The Borrower will not permit the
Borrower's trade payables owed to Facilitec to fall below $85,000.00.
ARTICLE VIII
Events of Default, Rights and Remedies
Section 8.1 Events of Default. "Event of Default", wherever used
herein, means any one of the following events:
(a) Default in the payment of any interest on or principal of
the Note when it becomes due and payable; or
(b) Default in the payment of any fees, commissions, costs or
expenses required to be paid by the Borrower under this Agreement; or
(c) Default in the performance, or breach, of any covenant or
agreement of the Borrower contained in this Agreement; or
(d) The Borrower shall be or become insolvent, or admit in
writing its inability to pay its or his debts as they mature, or make an
assignment for the benefit of creditors; or the Borrower shall apply for or
consent to the appointment of any receiver, trustee, or similar officer for it
or for all or any substantial part of its property; or such receiver, trustee or
similar officer shall be appointed without the application or consent of the
Borrower or the Borrower shall institute (by petition, application, answer,
consent or otherwise) any bankruptcy, insolvency, reorganization, arrangement,
readjustment of debt, dissolution, liquidation or similar proceeding relating to
it under the laws of any jurisdiction; or any such proceeding shall be
instituted (by petition, application or otherwise) against the Borrower; or any
judgment, writ, warrant of attachment, garnishment or execution or similar
process shall be issued or levied against a substantial part of the property of
the Borrower; or
(e) A petition shall be filed by or against the Borrower under
the United States Bankruptcy Code naming the Borrower as debtor; or
(f) Any representation or warranty made by the Borrower in
this Agreement, or by the Borrower (or any of its officers) in any agreement,
certificate, instrument or financial statement or other statement contemplated
by or made or delivered pursuant to or in connection with this Agreement or any
such guaranty shall prove to have been incorrect in any material respect when
deemed to be effective; or
(g) The rendering against the Borrower of a final judgment,
decree or order for the payment of money in excess of $5,000.00 and the
continuance of such judgment,
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<PAGE> 30
decree or order unsatisfied and in effect for any period of 30 consecutive days
without a stay of execution; or
(h) A default under any bond, debenture, note or other
evidence of indebtedness of the Borrower owed to any Person other than the
Lender, or under any indenture or other instrument under which any such evidence
of indebtedness has been issued or by which it is governed, or under any lease
of any of the Premises, and the expiration of the applicable period of grace, if
any, specified in such evidence of indebtedness, indenture, other instrument or
lease; or
(i) Any Reportable Event, which the Lender determines in good
faith might constitute grounds for the termination of any Plan or for the
appointment by the appropriate United States District Court of a trustee to
administer any Plan, shall have occurred and be continuing 30 days after written
notice to such effect shall have been given to the Borrower by the Lender; or a
trustee shall have been appointed by an appropriate United States District Court
to administer any Plan; or the Pension Benefit Guaranty Corporation shall have
instituted proceedings to terminate any Plan or to appoint a trustee to
administer any Plan; or the Borrower shall have filed for a distress termination
of any Plan under Title IV of ERISA; or the Borrower shall have failed to make
any quarterly contribution required with respect to any Plan under Section
412(m) of the Internal Revenue Code of 1986, as amended, which the Lender
determines in good faith may by itself, or in combination with any such failures
that the Lender may determine are likely to occur in the future, result in the
imposition of a lien on the assets of the Borrower in favor of the Plan; or
(j) An event of default shall occur under any Security
Document or under any other security agreement, mortgage, deed of trust,
assignment or other instrument or agreement securing any obligations of the
Borrower hereunder or under any note; or
(k) The Borrower shall liquidate, dissolve, terminate or
suspend its business operations or otherwise fail to operate its business in the
ordinary course, or sell all or substantially all of its assets, without the
prior written consent of the Lender; or
(l) The Borrower shall fail to pay, withhold, collect or remit
any tax or tax deficiency when assessed or due (other than any tax deficiency
which is being contested in good faith and by proper proceedings and for which
it shall have set aside on its books adequate reserves therefor) except as
allowed by Section 6.5 or notice of any state or federal tax liens shall be
filed or issued; or
(m) On or before June 30, 1996, the Borrower shall fail to
provide the Lender with evidence, in form satisfactory to the Lender, that (i)
all dividends payable on preferred shares of the Borrower have been converted to
equity, or (ii) all dividends payable on preferred shares of the Borrower have
been subordinated to the payment of the Obligations pursuant to a Debt
Subordination Agreement acceptable to the Lender and properly executed by all
owners of such preferred shares, or (iii) the obligation to pay all dividends
payable on preferred shares of the Borrower has been eliminated; or
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<PAGE> 31
(n) Default in the payment of any amount owed by the Borrower
to the Lender other than any indebtedness arising hereunder; or
(o) Any breach, default or event of default by or attributable
to any Affiliate under any agreement between such Affiliate and the Lender.
Section 8.2 Rights and Remedies. Upon the occurrence of an Event of
Default or at any time thereafter, the Lender may exercise any or all of the
following rights and remedies:
(a) The Lender may, by notice to the Borrower, declare the
Credit Facility to be terminated, whereupon the same shall forthwith terminate;
(b) The Lender may, by notice to the Borrower, declare to be
forthwith due and payable the entire unpaid principal amount of the Note then
outstanding, all interest accrued and unpaid thereon, all amounts payable under
this Agreement and any other Obligations, whereupon the Note, all such accrued
interest and all such amounts and Obligations shall become and be forthwith due
and payable, without presentment, notice of dishonor, protest or further notice
of any kind, all of which are hereby expressly waived by the Borrower;
(c) The Lender may, without notice to the Borrower and without
further action, apply any and all money owing by the Lender to the Borrower to
the payment of the Advances, including interest accrued thereon, and of all
other sums then owing by the Borrower hereunder;
(d) The Lender may, exercise and enforce any and all rights
and remedies available upon default to a secured party under the UCC, including,
without limitation, the right to take possession of Collateral, or any evidence
thereof, proceeding without judicial process or by judicial process (without a
prior hearing or notice thereof, which the Borrower hereby expressly waives) and
the right to sell, lease or otherwise dispose of any or all of the Collateral,
and, in connection therewith, the Borrower will on demand assemble the
Collateral and make it available to the Lender at a place to be designated by
the Lender which is reasonably convenient to both parties;
(e) the Lender may exercise and enforce its rights and
remedies under the Loan Documents; and
(f) the Lender may exercise any other rights and remedies
available to it by law or agreement.
Notwithstanding the foregoing, upon the occurrence of an Event of Default
described in Section 8.1(e) hereof, the entire unpaid principal amount of the
Note (whether contingent or funded), all interest accrued and unpaid thereon,
all other amounts payable under this Agreement and any other Obligations shall
be immediately due and payable automatically without presentment, demand,
protest or notice of any kind.
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<PAGE> 32
Section 8.3 Certain Notices. If notice to the Borrower of any intended
disposition of Collateral or any other intended action is required by law in a
particular instance, such notice shall be deemed commercially reasonable if
given (in the manner specified in Section 9.3) at least ten calendar days prior
to the date of intended disposition or other action.
ARTICLE IX
Miscellaneous
Section 9.1 No Waiver; Cumulative Remedies. No failure or delay on the
part of the Lender in exercising any right, power or remedy under the Loan
Documents shall operate as a waiver thereof; nor shall any single or partial
exercise of any such right, power or remedy preclude any other or further
exercise thereof or the exercise of any other right, power or remedy under the
Loan Documents. The remedies provided in the Loan Documents are cumulative and
not exclusive of any remedies provided by law.
Section 9.2 Amendments, Etc. No amendment, modification, termination or
waiver of any provision of any Loan Document or consent to any departure by the
Borrower therefrom or any release of a Security Interest shall be effective
unless the same shall be in writing and signed by the Lender, and then such
waiver or consent shall be effective only in the specific instance and for the
specific purpose for which given. No notice to or demand on the Borrower in any
case shall entitle the Borrower to any other or further notice or demand in
similar or other circumstances.
Section 9.3 Addresses for Notices, Etc. Except as otherwise expressly
provided herein, all notices, requests, demands and other communications
provided for under the Loan Documents shall be in writing and shall be (a)
personally delivered, (b) sent by first class United States mail, (c) sent by
overnight courier of national reputation, or (d) transmitted by telecopy, in
each case addressed to the party to whom notice is being given at its address as
set forth below and, if telecopied, transmitted to that party at its telecopier
number set forth below:
If to the Borrower:
Reconditioned Systems, Inc.
444 West Fairmont
Tempe, Arizona 85282
Telecopier: (602) 894-1907
Attention: Dirk Anderson
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<PAGE> 33
If to the Lender:
Norwest Business Credit, Inc.
Norwest Tower, Mail Station 9025
3300 North Central Avenue
Phoenix, Arizona 85012-2501
Telecopier: (602) 263-6215
Attention: Pete Lowney
or, as to each party, at such other address or telecopier number as may
hereafter be designated by such party in a written notice to the other party
complying as to delivery with the terms of this Section. All such notices,
requests, demands and other communications shall be deemed to have been given on
(a) the date received if personally delivered, (b) when deposited in the mail if
delivered by mail, (c) the date sent if sent by overnight courier, or (d) the
date of transmission if delivered by telecopy, except that notices or requests
to the Lender pursuant to any of the provisions of Article 11 hereof shall not
be effective until received by the Lender.
Section 9.4 Financing Statement. A carbon, photographic or other
reproduction of this Agreement or of any financing statements signed by the
Borrower is sufficient as a financing statement and may be filed as a financing
statement in any state to perfect the security interests granted hereby. For
this purpose, the following information is set forth:
Name and address of Debtor:
Reconditioned Systems, Inc.
444 West Fairmont
Tempe, Arizona 85282
Federal Tax Identification No. 86-0576290
Name and address of Secured Party:
Norwest Business Credit, Inc.
Norwest Tower, Mail Station 9025
3300 North Central Avenue
Phoenix, Arizona 85012-2501
Telecopier: (602) 263-6215
Attention: Pete Lowney
Section 9.5 Further Documents. The Borrower will from time to time
execute and deliver or endorse any and all instruments, documents, conveyances,
assignments, security agreements, financing statements and other agreements and
writings that the Lender may reasonably request in order to secure, protect,
perfect or enforce the Security Interests or the rights of the Lender under this
Agreement (but any failure to request or assure that the Borrower executes,
delivers or endorses any such item shall not affect or impair the validity,
sufficiency or enforceability of this Agreement and the Security Interests,
regardless of whether any such item was or was not executed, delivered or
endorsed in a similar context or on a prior occasion).
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<PAGE> 34
Section 9.6 Collateral. This Agreement does not contemplate a sale of
accounts, contract rights or chattel paper, and, as provided by law, the
Borrower is entitled to any surplus and shall remain liable for any deficiency.
The Lender's duty of care with respect to Collateral in its possession (as
imposed by law) shall be deemed fulfilled if it exercises reasonable care in
physically keeping such Collateral, or in the case of Collateral in the custody
or possession of a bailee or other third person, exercises reasonable care in
the selection of the bailee or other third person, and the Lender need not
otherwise preserve, protect, insure or care for any Collateral. The Lender shall
not be obligated to preserve any rights the Borrower may have against prior
parties, to realize on the Collateral at all or in any particular manner or
order or to apply any cash proceeds of the Collateral in any particular order of
application.
Section 9.7 Costs and Expenses. The Borrower agrees to pay on demand
all costs and expenses, including (without limitation) attorneys' fees, incurred
by the Lender in connection with the Obligations, this Agreement, the Loan
Documents and any other document or agreement related hereto or thereto, and the
transactions contemplated hereby, including without limitation all such costs,
expenses and fees incurred in connection with the negotiation, preparation,
execution, amendment, administration, performance, collection and enforcement of
the Obligations and all such documents and agreements and the creation,
perfection, protection, satisfaction, foreclosure or enforcement of the Security
Interests.
Section 9.8 Indemnity. In addition to the payment of expenses pursuant
to Section 9.7 hereof and the environmental indemnity pursuant to Section 6.4
hereof, the Borrower agrees to indemnify, defend and hold harmless the Lender,
and any of its participants, parent corporations, subsidiary corporations,
affiliated corporations, successor corporations, and all present and future
officers, directors, employees and agents of the foregoing (the "Indemnitees"),
from and against (i) any and all transfer taxes, documentary taxes, assessments
or charges made by any governmental authority by reason of the execution and
delivery of this Agreement and the other Loan Documents or the making of the
Advances, and (ii) any and all liabilities, losses, damages, penalties,
judgments, suits, claims, costs and expenses of any kind or nature whatsoever
(including, without limitation, the reasonable fees and disbursements of
counsel) in connection with any investigative, administrative or judicial
proceedings, whether or not such Indemnitee shall be designated a party thereto,
which may be imposed on, incurred by or asserted against such Indemnitee, in any
manner relating to or arising out of or in connection with the making of the
Advances, this Agreement and all other Loan Documents or the use or intended use
of the proceeds of the Advances (the "Indemnified Liabilities"). If any
investigative, judicial or administrative proceeding arising from any of the
foregoing is brought against any Indemnitee, upon request of such Indemnitee,
the Borrower, or counsel designated by the Borrower and satisfactory to the
Indemnitee, will resist and defend such action, suit or proceeding to the extent
and in the manner directed by the Indemnitee, at the Borrower's sole cost and
expense. Each Indemnitee will use its best efforts to cooperate in the defense
of any such action, suit or proceeding. If the foregoing undertaking to
indemnify, defend and hold harmless may be held to be unenforceable because it
violates any law or public policy, the Borrower shall nevertheless make the
maximum contribution to the payment and satisfaction of each of the Indemnified
Liabilities which is permissible under applicable law. The obligation of the
Borrower under this Section 9.8 shall survive the termination of this Agreement
and the discharge of the Borrower's other Obligations.
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<PAGE> 35
Section 9.9 Participants. The Lender and its participants, if any, are
not partners or joint venturers, and the Lender shall not have any liability or
responsibility for any obligation, act or omission of any of its participants.
All rights and powers specifically conferred upon the Lender may be transferred
or delegated to any of the participants, successors or assigns of the Lender.
Section 9.10 Execution in Counterparts. This Agreement and other Loan
Documents may be executed in any number of counterparts, each of which when so
executed and delivered shall be deemed to be an original and all of which
counterparts, taken together, shall constitute but one and the same instrument.
Section 9.11 Binding Effect; Assignment; Complete Agreement; Sharing
of Information. The Loan Documents shall be binding upon and inure to the
benefit of the Borrower and the Lender and their respective successors and
assigns, except that the Borrower shall not have the right to assign its rights
thereunder or any interest therein without the prior written consent of the
Lender. This Agreement, together with the Loan Documents, comprises the complete
and integrated agreement of the parties on the subject matter hereof and
supersedes all prior agreements, written or oral, on the subject matter hereof.
Without limitation of the Lender's right to share information regarding the
Borrower and its Affiliates with Lender's participants, accountants, lawyers and
other advisors, the Lender may share at any time with Norwest Corporation, and
all direct and indirect subsidiaries of Norwest Corporation, any and all
information the Lender may have in its possession regarding the Borrower and its
Affiliates, and the Borrower waives any right of confidentiality it may have
with respect to such sharing of such information.
Section 9.12 Governing Law; Jurisdiction; Venue; Waiver of Jury Trial.
The Loan Documents shall be governed by and construed in accordance with the
substantive laws (other than conflict laws) of the State of Arizona. Each party
consents to the personal jurisdiction of the state and federal courts located in
the State of Arizona in connection with any controversy related to this
Agreement, waives any argument that venue in any such forum is not convenient
and agrees that any litigation initiated by any of them in connection with this
Agreement shall be venued in either the Superior Court of Maricopa County,
Arizona or the United States District Court, District of Arizona. The parties
waive any right to trial by jury in any action or proceeding based on or
pertaining to this Agreement.
Section 9.13 Severability of Provisions. Any provision of this
Agreement which is prohibited or unenforceable shall be ineffective to the
extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof.
Section 9.14 Headings. Article and Section headings in this Agreement
are included herein for convenience of reference only and shall not constitute a
part of this Agreement for any other purpose.
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<PAGE> 36
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized as of the date
first above written.
RECONDITIONED SYSTEMS, INC., an
Arizona corporation
By /s/
---------------------------------
Its President
------------------------------
NORWEST BUSINESS CREDIT, INC.
By /s/
---------------------------------
Its A.V.P.
------------------------------
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<PAGE> 37
EXHIBIT A TO CREDIT AND
SECURITY AGREEMENT
REVOLVING NOTE
$1,200,000.00 Phoenix, Arizona
__________ __, 1996
For value received, the undersigned, RECONDITIONED SYSTEMS, INC., an
Arizona corporation (the "Borrower"), hereby promises to pay on February 28,
1999, to the order of Norwest Business Credit, Inc., a Minnesota corporation
(the "Lender"), at its main office in Phoenix, Arizona or at any other place
designated at any time by the holder hereof, in lawful money of the United
States of America and in immediately available funds, the principal sum of One
Million Two Hundred Thousand and No/100 Dollars ($1,200,000.00) or, if less, the
aggregate unpaid principal amount of all advances made by the Lender to the
Borrower hereunder, together with interest on the principal amount hereunder
remaining unpaid from time to time, computed on the basis of the actual number
of days elapsed and a 360-day year, from the date hereof until this Note is
fully paid at the rate from time to time in effect under the Credit and Security
Agreement of even date herewith (the "Credit Agreement") by and between the
Lender and the Borrower. The principal hereof and interest accruing thereon
shall be due and payable as provided in the Credit Agreement. This Note may be
prepaid only in accordance with the Credit Agreement.
This Note is issued pursuant, and is subject, to the Credit Agreement,
which provides, among other things, for acceleration hereof. This Note is the
Note referred to in the Credit Agreement.
This Note is secured, among other things, pursuant to the Credit
Agreement and the Security Documents as therein defined, and may now or
hereafter be secured by one or more other security agreements, mortgages, deeds
of trust, assignments or other instruments or agreements.
The Borrower hereby agrees to pay all costs of collection, including
attorneys' fees and legal expenses in the event this Note is not paid when due,
whether or not legal proceedings are commenced.
The Borrower agrees that the interest rate contracted for includes the
interest rate set forth herein plus any other charges or fees set forth herein
and costs and expenses incident to this transaction paid by the Borrower to the
extent the same are deemed interest under applicable law.
A-1
<PAGE> 38
Presentment or other demand for payment, notice of dishonor and protest
are expressly waived.
RECONDITIONED SYSTEMS, INC., an
Arizona corporation
By_________________________________
Its______________________________
A-2
<PAGE> 39
EXHIBIT B TO CREDIT AND
SECURITY AGREEMENT
NAMES
RECONDITIONED SYSTEMS, INC., an Arizona corporation
CHIEF EXECUTIVE OFFICE/PRINCIPAL PLACE OF BUSINESS
444 West Fairmont
Tempe, Arizona 85282
OTHER INVENTORY AND EQUIPMENT LOCATIONS
602 South 16th Street
Suites 8 and 9
Phoenix, Arizona
SUBSIDIARIES
RSI of Minnesota, Inc., a Minnesota corporation
RSI Acquisitions, Inc., a Michigan corporation
Corporate Upholstery, Inc., an Arizona corporation
B-1
<PAGE> 40
EXHIBIT C TO CREDIT AND
SECURITY AGREEMENT
PERMITTED LIENS, INDEBTEDNESS AND GUARANTIES
Liens
First Position Equipment Lien in Favor of
NBA
Lien in favor of Citicorp Dealer Finance as
of the date hereof
Lien in favor of The Manifest Group as of
the date hereof
Lien in favor of Raymond Leasing Corporation
as of the date hereof
Lien in favor of National Bank of Arizona as
of the date hereof
Indebtedness
Loan from NBA with a principal balance
outstanding of $123,329.30 as of the date of
this agreement with monthly payments due
thereon through November 30, 1998 in an
amount not to exceed $4,087.21
Indebtedness owed to Citicorp Dealer Finance
as of the date hereof
Indebtedness owed to The Manifest Group as
of the date hereof
Indebtedness owed to Raymond Leasing
Corporation as of the date hereof
Indebtedness owed to National Bank of
Arizona as of the date hereof
Guaranties
None
C-1
<PAGE> 41
EXHIBIT D TO CREDIT AND
SECURITY AGREEMENT
COMPLIANCE CERTIFICATE
To: _____________________________
Norwest Business Credit, Inc.
Date: _____________________________
Subject: _____________________________
Financial Statements
In accordance with our Credit and Security Agreement dated as
of ________________________, 1996 (the "Credit Agreement"), attached are the
financial statements of Reconditioned Systems, Inc. (the "Borrower") and the
year-to-date period then ended (the "Current Financials"). All terms in this
certificate have the meanings given in the Credit Agreement.
I certify that the Current Financials have been prepared in
accordance with GAAP, subject to year-end audit adjustments, and fairly present
the financial condition of the Borrower as of the date thereof.
Events of Default. (Check one):
___ The undersigned does not have knowledge of the
occurrence of a Default or Event of Default under the Credit
Agreement.
___ The undersigned has knowledge of the occurrence of
a Default or Event of Default under the Credit Agreement and
attached hereto is a statement of the facts with respect to
thereto.
Financial Covenants. I further hereby certify as follows:
___ The Reporting Date does not correspond to the end
of the Borrower's fiscal quarters, hence I am completing only
paragraphs ___ below.
___ The Reporting Date corresponds to the end of one of
the Borrower's fiscal quarters, hence I am completing all
paragraphs below.
1. Minimum Debt Service Coverage Ratio. Pursuant to
Section 6.14 of the Credit Agreement, for the applicable
period ending on the Reporting Date, the Borrower's Debt
Service Coverage Ratio was ___ to 1.00, which ___
D-1
<PAGE> 42
satisfies ___ does not satisfy the requirement that such ratio
be no less than 1.20 to 1.00 for the applicable period ending
on the Reporting Date.
2. Minimum Book Net Worth. Pursuant to Section 6.12 of
the Credit Agreement, as of the Reporting Date, the Borrower's
Net Worth was $_______________, which ___ satisfies ___ does
not satisfy the requirement that such amounts be not less than
$_______________ on the Reporting Date.
3. Minimum Net Income. Pursuant to Section 6.13 of the
Credit Agreement, as of the Reporting Date, the Borrower's Net
Income for the fiscal year ending March 31, 199__, was
$_______________ which ___ satisfies ___ does not satisfy the
requirement that Net Income be not less than $_______________
for such fiscal year
4. Capital Expenditures. Pursuant to Section 7.10 of
the Credit Agreement, for the year-to-date period ending on
the Reporting Date, the Borrower has expended or contracted to
expend during the fiscal year ending March 31, 199__, for
Capital Expenditures, $_______________ in the aggregate which
___ satisfies ___ does not satisfy the requirement that such
expenditures not exceed $_______________ in the aggregate
during such fiscal year.
5. Salaries. As of the Reporting Date, the Borrower ___
is ___ is not in compliance with Section 7.17 of the Credit
Agreement concerning salary increases not to exceed 10% per
annum.
Officers Percentage Increase
_____________________________ _____________________________
_____________________________ _____________________________
_____________________________ _____________________________
(To be completed within 30 days of any officer salary
increase)
6. Facilitec Trade Payable. As of the Reporting Date
the Borrower's trade payable to Facilitec was $_______________
which ___ is ___ is not in compliance with Section 7.19.
D-2
<PAGE> 43
Attached hereto are all relevant facts in reasonable detail to
evidence, and the computations of the financial covenants referred to above.
These computations were made in accordance with GAAP.
RECONDITIONED SYSTEMS, INC., an
Arizona corporation
By_________________________________
Its______________________________
D-3
<PAGE> 44
EXHIBIT E TO CREDIT AND SECURITY
AGREEMENT
PREMISES
The Premises referred to in the Credit and Security Agreement
are legally described as follows:
That portion of Tract 'B' BROADWAY INDUSTRIAL PARK UNIT TWO, according to Book
168 of Maps, page 5, records off Maricopa County, Arizona;
BEGINNING at the Northwest corner of said Tract 'B'; thence Southerly and
Easterly along the Westerly and Southerly lines of said tract as follows:
South 0 degrees 09 minutes 30 seconds East, 274.22 feet; South 44 degrees 59
minutes 36 seconds East, 28.37 feet and South 89 degrees 49 minutes 42 seconds
East, 661.00 feet; thence leaving last said line, North 0 degrees 10 minutes 18
seconds East, at right angles from last described course, 294.43 feet to the
Northerly line of said tract; thence North 89 degrees 50 minutes 48 seconds
West, along last said line, 682.69 feet to the POINT OF BEGINNING;
EXCEPT that portion of said property lying below a depth of 500 feet, measured
vertically from the contour of the surface thereof, as reserved in instrument
recorded in Docket 14127, page 1205.
E-1
<PAGE> 1
[McGLADREY & PULLEN, LLP LETTERHEAD]
April 10, 1996
Securities and Exchange Commission
Mail Stop 9-5
Washington D.C. 20549
Dear Sirs/Madams:
We have read Item 4 of Form 8-K/A of Reconditioned Systems, Inc. (the
"Registrant") as filed with the Securties and Exchange Commission on April 10,
1996.
We agree with the statements contained therein, except that we are not informed
as to whether the Registrant acted at the direction of its Board of Directors.
Sincerely,
/s/ McGladrey & Pullen, LLP
McGladrey & Pullen, LLP
<PAGE> 1
[LETTERHEAD OF SEMPLE & COOPER, P.L.C.]
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified public accountants, we hereby consent to the inclusion
of our report dated May 13, 1996, on the consolidated financial statements of
Reconditioned Systems, Inc. and Subsidiaries for the year ended March 31, 1996,
in the Company's Form 10-KSB for the year then ended.
/s/ Semple & Cooper, P.L.C.
Phoenix, Arizona
July 3, 1996
<PAGE> 2
[LETTERHEAD OF MCGLADREY & PULLEN, LLP]
INDEPENDENT AUDITOR'S CONSENT
To the Board of Directors
Reconditioned Systems, Inc.
and Subsidiaries
Phoenix, Arizona
We hereby consent to the use in the Form 10-KSB and the Proxy Statement of
Reconditioned Systems, Inc. and Subsidiaries of our report dated June 2, 1995,
relating to the financial statements of Reconditioned Systems, Inc. and
Subsidiaries for the year ended March 31, 1995.
/s/ McGladrey & Pullen, LLP
Phoenix, Arizona
July 9, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-START> APR-01-1995
<PERIOD-END> MAR-31-1996
<CASH> 100,698
<SECURITIES> 0
<RECEIVABLES> 564,577
<ALLOWANCES> 8,000
<INVENTORY> 1,376,531
<CURRENT-ASSETS> 2,058,685
<PP&E> 497,361
<DEPRECIATION> 282,444
<TOTAL-ASSETS> 2,336,296
<CURRENT-LIABILITIES> 1,075,791
<BONDS> 0
0
2,156,717
<COMMON> 2,489,143
<OTHER-SE> (3,469,072)
<TOTAL-LIABILITY-AND-EQUITY> 2,336,296
<SALES> 7,971,697
<TOTAL-REVENUES> 7,993,295
<CGS> 6,454,271
<TOTAL-COSTS> 9,645,435
<OTHER-EXPENSES> 88,912
<LOSS-PROVISION> 8,000
<INTEREST-EXPENSE> 88,912
<INCOME-PRETAX> (1,741,052)
<INCOME-TAX> (13,000)
<INCOME-CONTINUING> (1,728,052)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,728,052)
<EPS-PRIMARY> (1.23)
<EPS-DILUTED> (1.23)
</TABLE>
