<PAGE> 1
SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934
Filed by the registrant /X/
Filed by a party other than the registrant
Check the appropriate box:
/ / Preliminary proxy statement
/X/ Definitive proxy statement
/ / Definitive additional materials
/ / Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12
Reconditioned Systems, Inc.
(Name of Registrant as Specified in Its Charter)
Reconditioned Systems, Inc.
(Name of Person(s) Filing Proxy Statement)
Payment of filing fee (Check the appropriate box):
/ / $125 per Exchange Act Rule 0-11(c)(ii), 14a-6(i)(1), or 14a-6(j)(2)
or Item 22(a)(2) of Schedule 14A.
/ /$500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
/ /Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and
0-11.
(1) Title of each class of securities to which transaction applies:
- - --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
- - --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:
- - --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
- - --------------------------------------------------------------------------------
(5) Total fee paid:
- - --------------------------------------------------------------------------------
/X/Fee paid previously with preliminary materials.
/ /Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the form or schedule and the date of its filing.
(1) Amount previously paid:
- - --------------------------------------------------------------------------------
(2) Form, schedule or registration statement no.:
- - --------------------------------------------------------------------------------
(3) Filing party:
- - --------------------------------------------------------------------------------
(4) Date filed:
- - --------------------------------------------------------------------------------
<PAGE> 2
RECONDITIONED SYSTEMS, INC.
444 WEST FAIRMONT
TEMPE, ARIZONA 85282
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD AUGUST 5, 1996
To the Stockholders of Reconditioned Systems, Inc.:
The 1996 Annual Meeting of Stockholders of Reconditioned Systems, Inc.,
an Arizona corporation (the "Company"), will be held at Reconditioned Systems,
Inc., 444 West Fairmont, Tempe, Arizona 85282, on Monday, August 5, 1996 at
10:00 a.m., Mountain Standard Time, for the following purposes:
1. To consider and act upon a proposal (the "Preferred Stock
Proposal") to amend the Company's Articles of Incorporation to
provide for the automatic conversion, on August 12, 1996, of
each outstanding share of the Company's Series A Convertible
Preferred Stock, no par value (the "Preferred Stock"),
together with any and all accrued but unpaid dividends through
the conversion date, into 13 shares of the Company's Common
Stock, no par value (the "Common Stock");
2. If the Preferred Stock Proposal is approved by the
Stockholders, to consider and act upon a proposal to amend the
Company's Articles of Incorporation to effect a six-to-one
reverse stock split of the Company's presently issued shares
of Common Stock (including the shares of Common Stock into
which the Preferred Stock will be converted pursuant to the
Preferred Stock Proposal);
3. Whether or not the Preferred Stock Proposal is approved by the
Stockholders, to consider and act upon a proposal to amend the
Company's Articles of Incorporation to make certain technical
corrections and to eliminate, in certain circumstances, the
liability of directors to the Company and the Stockholders;
4. Whether or not the Preferred Stock Proposal is approved by the
Stockholders, to consider and act upon a proposal to amend and
restate the Company's Bylaws;
5. To elect three directors to the Board of Directors;
6. To consider and act upon a proposal to ratify the appointment
of Semple & Cooper, PLC as the Company's independent public
accountants for the fiscal year ending March 31, 1997; and
7. To transact such other business as may properly come before
the meeting.
Only Stockholders of record at the close of business on June 21, 1996
are entitled to notice of and to vote at the Annual Meeting. Holders of Common
Stock and holders of Preferred Stock as of such date are entitled to vote on all
of the above proposals. Shares can be voted at the meeting only if the holder is
present or represented by proxy. A list of Stockholders entitled to vote at the
Annual Meeting will be open for inspection at the Annual Meeting and will be
open for inspection at the offices of Reconditioned Systems, Inc., 444 West
Fairmont, Tempe, Arizona 85282 during ordinary business hours for ten days prior
to the meeting. Holders of Preferred Stock are entitled to dissenters' rights
under Arizona law with respect to the Preferred Stock Proposal. See "DISSENTERS'
RIGHTS."
IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED AT THIS MEETING. TO
ASSURE YOUR REPRESENTATION AT THE MEETING, PLEASE COMPLETE, DATE, SIGN AND
PROMPTLY MAIL THE ENCLOSED PROXY CARD IN THE ACCOMPANYING ENVELOPE, WHICH
REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES.
By Order of the Board of Directors,
/s/ Edward J. Cain
-----------------------------------
Tempe, Arizona Edward J. Cain, Secretary
July 15, 1996
<PAGE> 3
PROXY STATEMENT
OF
RECONDITIONED SYSTEMS, INC.
444 WEST FAIRMONT
TEMPE, ARIZONA 85282
--------------------------------
GENERAL INFORMATION
This Proxy Statement is furnished in connection with the solicitation
by the Board of Directors of Reconditioned Systems, Inc., an Arizona corporation
(the "Company"), of proxies for use at the 1996 Annual Meeting of Stockholders
to be held on August 5, 1996, at 10:00 a.m., Mountain Standard Time. The Annual
Meeting will be held at Reconditioned Systems, Inc., 444 West Fairmont, Tempe,
Arizona 85282.
This Proxy Statement and the accompanying form of proxy are being first
mailed to Stockholders on or about July 15, 1996. The Stockholder giving the
proxy may revoke it at any time before it is exercised at the meeting by: (i)
delivering to the Secretary of the Company a written instrument of revocation
bearing a date later than the date of the proxy; (ii) duly executing and
delivering to the Secretary a subsequent proxy relating to the same shares; or
(iii) attending the meeting and voting in person (attendance at the meeting will
not in and of itself constitute revocation of a proxy). Any proxy which is not
revoked will be voted at the Annual Meeting in accordance with the Stockholder's
instructions. If a Stockholder returns a properly signed and dated proxy card
but does not mark any choices on one or more items, his or her shares will be
voted in accordance with the recommendations of the Board of Directors as to
such items. The proxy card gives authority to the proxies to vote shares in
their discretion on any other matter properly presented at the Annual Meeting.
Proxies will be solicited from the Company's Stockholders by mail. The
Company will pay all expenses in connection with the solicitation, including
postage, printing and handling, and the expenses incurred by brokers,
custodians, nominees and fiduciaries in forwarding proxy material to beneficial
owners. It is possible that directors, officers and regular employees of the
Company may make further solicitation personally or by telephone, telegraph or
mail. Directors, officers and regular employees of the Company will receive no
additional compensation for any such further solicitation.
Only holders (the "Stockholders") of the Company's Common Stock, no par
value (the "Common Stock"), and the Company's Series A Convertible Preferred
Stock, no par value (the "Preferred Stock"), at the close of business on June
21, 1996 (the "Record Date"), are entitled to notice of, and to vote at, the
Annual Meeting. On the Record Date, there were 1,620,500 shares of Common Stock
outstanding and 555,555 shares of Preferred Stock outstanding. Each share of
Common Stock and each share of Preferred Stock is entitled to one vote on each
matter to be considered at the Annual Meeting. In addition, with respect to
Proposal One only, each holder of Preferred Stock also is entitled to one vote
per share, with the holders of the Preferred Stock voting as a class. A majority
of the outstanding shares of Common Stock and Preferred Stock, present in person
or represented by proxy at the Annual Meeting, will constitute a quorum for the
transaction of business at the Annual Meeting; provided, however, that with
respect to Proposal One, in addition to such quorum there must also be present
in person or represented by proxy at the Annual Meeting a majority of the
outstanding shares of Preferred Stock.
The affirmative vote of holders of a majority of the outstanding shares
of Common Stock and Preferred Stock of the Company entitled to vote and present
in person or by proxy at the Annual Meeting and the affirmative vote of holders
of a majority of the outstanding shares of Preferred Stock of the Company
entitled to vote and present in person or by proxy at the Annual Meeting are
required for approval of Proposal One. The affirmative vote of holders of a
majority of the outstanding shares of Common Stock and Preferred Stock of the
Company entitled to vote and present in person or by proxy at the Annual Meeting
is required for approval of Proposals Two, Three, Four and Six. The affirmative
vote of holders of a plurality of the outstanding shares of Common Stock and
Preferred Stock of the Company entitled to vote and present in person or by
proxy at the Annual Meeting is required for approval of the election of
directors pursuant to Proposal Five. It is expected that shares held by
<PAGE> 4
officers and directors of the Company, which in the aggregate represent
approximately 30.1% of the outstanding shares of Common Stock and Preferred
Stock combined, will be voted in favor of each of Proposals One through Six.
Votes that are withheld will have the effect of a negative vote. Abstentions may
be specified on all proposals except Proposal Five relating to the election of
directors. Abstentions are included in the determination of the number of shares
represented for a quorum. Abstentions will have the effect of a negative vote on
a proposal. Broker non-votes are not counted for purposes of determining whether
a quorum is present or whether a proposal has been approved. With regard to the
election of directors, votes may be cast in favor of or withheld from each
nominee. Stockholders voting on the election of directors may cumulate their
votes and give one candidate a number of votes equal to the number of directors
to be elected multiplied by the number of votes to which the Stockholder's
shares are entitled, or may distribute their votes on the same principle among
as many candidates as they choose, provided that votes cannot be cast for more
than the total number of directors to be elected at the meeting. As indicated in
the proxy accompanying this Proxy Statement, discretionary power to cumulate
votes is being solicited. In order to cumulate votes, at least one Stockholder
must announce, prior to the casting of votes for the election of directors, that
he or she intends to cumulate votes. Proxies will be tabulated by the Company
with the assistance of the Company's transfer agent. The Company will, in
advance of the Annual Meeting, appoint one or more Inspectors of Election to
count all votes and ballots at the Annual Meeting and make a written report
thereof.
SECURITY OWNERSHIP OF CERTAIN PRINCIPAL STOCKHOLDERS AND MANAGEMENT
The following table sets forth certain information, as of June 1, 1996,
with respect to the number of shares of the Company's equity securities
beneficially owned by individual directors, by all directors and officers of the
Company as a group and by persons known to the Company to own more than 5% of
the Company's voting stock, which includes the Common Stock and the Preferred
Stock.
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------------------------------------------------------
Common
Shares and Common
Preferred Shares After
Shares- Automatic
Percent Percent Combined Percent Conversion Percent
Name and Address of Common of Preferred of Voting of and Reverse of
Beneficial Owner Shares Total Shares Total Power(1) Total(1) Stock Split(2) Total(2)
- - ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Charles R. Johnson 300,000 18.5% 0 0% 300,000 13.8% 50,000 3.4%
7458 East Vista
Scottsdale, AZ 85250
- - ----------------------------------------------------------------------------------------------------------------------------
Robert L. Campbell 300,000 18.5% 0 0% 300,000 13.8% 50,000 3.4%
5345 East McLellan, #100
Mesa, AZ 85205
- - ----------------------------------------------------------------------------------------------------------------------------
Edward J. Cain 300,000 18.5% 0 0% 300,000 13.8% 50,000 3.4%
8565 East Peppertree Lane
Scottsdale, AZ 85253
- - ----------------------------------------------------------------------------------------------------------------------------
Larry Henry 136,100 8.4% 0 0% 136,100 6.3% 25,017 1.7%
4000 Vanstone
Commerce Township, MI 48150
- - ----------------------------------------------------------------------------------------------------------------------------
Wayne Collignon 100 * 0 0% 100 * 17 *
444 West Fairmont
Tempe, AZ 85282
- - ----------------------------------------------------------------------------------------------------------------------------
Dirk Anderson 0 0% 0 0% 0 0% 0 0
444 West Fairmont
Tempe, AZ 85282
</TABLE>
-2-
<PAGE> 5
<TABLE>
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Quota Fund N V Balto 0 0% 209,622 37.7% 209,622 9.6% 454,181 30.8%
888 Seventh Avenue
33rd Floor
New York, NY 10106
- - --------------------------------------------------------------------------------------------------------------------------------
Granite Capital 0 0% 106,669 19.2% 106,669 4.9% 231,117 15.7%
126 East 56th Street
25th Floor
New York, NY 10022
- - ---------------------------------------------------------------------------------------------------------------------------------
E. &. W. Zachs 0 0% 66,666 12.0% 66,666 3.1% 144,443 9.8%
Partnership
40 Woodland Street
Hartford, CT 06105
- - ---------------------------------------------------------------------------------------------------------------------------------
Scott W. Ryan 10,110 * 44,444 8.0% 54,554 2.5% 97,979 6.6%
111 Presidential Boulevard
Suite 246
Bala Cynwyd, PA 19004
- - ------------------------------------------------------------------------------------------------------------------------------------
All directors and officers 610,210 37.7% 44,444 8.0% 654,654 30.1% 197,996 13.4%
as a group (five persons)
- - ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- - ---------------
* Less than 1%.
(1) Based on 2,176,055 shares of Common Stock and Preferred Stock
outstanding in the aggregate. This information is provided because the
holders of the Common Stock and the holders of the Preferred Stock vote
together as a single class on each of the proposals presented to the
Stockholders in this Proxy Statement.
(2) 1,473,788 shares of Common Stock will be outstanding after giving
effect to the conversion of each share of Preferred Stock into 13
shares of Common Stock and the subsequent six-to-one reverse stock
split of the Common Stock (including the shares of Common Stock into
which the Preferred Stock was converted). This information is provided
to illustrate the voting power of the named persons following the
conversion of the Preferred Stock into Common Stock and the reverse
stock split.
-3-
<PAGE> 6
PROPOSAL ONE:
CONVERSION OF PREFERRED STOCK INTO COMMON STOCK
THE PREFERRED STOCK PROPOSAL
For the reasons set forth below, the Board of Directors believes that
the best interests of the Company and its Stockholders will be served by
automatically converting, on August 12, 1996 (the "Conversion Effective Date"),
each outstanding share of the Company's Preferred Stock, together with any and
all accrued but unpaid dividends through the Conversion Effective Date, into 13
shares of the Company's Common Stock (the "Preferred Stock Proposal"). The Board
of Directors has unanimously approved and recommends a vote for the Preferred
Stock Proposal.
On the date of this Proxy Statement, there were 555,555 shares of
Preferred Stock outstanding. The holders of the Preferred Stock are entitled to
receive dividends at the rate of $0.405 per share per annum. Such dividends are
payable when and as declared by the Board of Directors, quarterly on February 1,
May 1, August 1, and November 1 of each and every year. For the reasons
described below, the Company has not paid any quarterly dividend payments since
February 1995, and, therefore, was in arrears in the amount of approximately
$280,000 in the payment of accrued dividends on the outstanding Preferred Stock
as of May 21, 1996. As set forth below, the Company is unable to pay the
dividends currently in arrears and will not be able to pay the dividends that
will accrue in the foreseeable future on the Preferred Stock. Because the
Company is and will be unable to make such dividend payments, the Board of
Directors believes that it will be in the best interests of the Company and its
Stockholders, including both the holders of the Preferred Stock and the holders
of the Common Stock, to convert the outstanding Preferred Stock into Common
Stock.
Each share of the Preferred Stock is convertible, at the option of the
holder and without the payment of any additional consideration by the holder, at
any time into such number of fully paid and nonassessable shares of Common Stock
as is determined by dividing $4.50 by the Conversion Price (as defined below) in
effect on the date the certificate representing such share is surrendered for
conversion. The price at which shares of Common Stock are deliverable upon
conversion of shares of the Preferred Stock (the "Conversion Price") initially
was $4.50 per share of Common Stock, subject to adjustment as provided in the
Articles of Incorporation. As of the date of this Proxy Statement, no event has
occurred that would cause any adjustment to the Conversion Price. Accordingly,
each share of Preferred Stock is currently convertible at the option of the
holder thereof into one share of Common Stock. Because the Preferred Stock
Proposal, if approved, will result in each share of Preferred Stock being
converted into 13 shares of Common Stock, each share of Preferred Stock will
receive a premium of 12 shares of Common Stock per share of Preferred Stock as
compared to what would have been received had the Preferred Stock been
voluntarily converted at the option of the holder pursuant to the existing terms
of the Preferred Stock.
Each share of Preferred Stock also is convertible at the option of the
Company into shares of Common Stock at the Conversion Price (as defined in the
previous paragraph) if the average closing bid price of the Common Stock on
Nasdaq for any five consecutive trading days equals or exceeds an amount equal
to 1.75 times the then effective Conversion Price. Because the average bid price
of the Company's Common Stock has not equalled or exceeded such amount at any
time since the issuance of the Preferred Stock, the Preferred Stock has never
become convertible at the option of the Company.
REASONS FOR THE PREFERRED STOCK PROPOSAL AND THE COMPANY'S METHOD OF
ESTABLISHING THE CONVERSION RATIO
The Board of Directors believes that the Preferred Stock Proposal is
critical to the continued viability of the Company. The Board further believes
that future operating income must be invested in the business for the Company to
return to sustained, profitable operations.
During the fiscal years ended March 31, 1995 and March 31, 1996, the
Company incurred net losses of $2,015,008 and $1,728,052 respectively. In
substantial part due to these losses, the Company's lender required principal
reductions to its line of credit from $1,250,000 to $500,000 between August 1994
and August 1995 and then elected not to renew the line. The lack of available
credit, in turn, adversely affected the Company's
-4-
<PAGE> 7
operations in terms of higher inventory costs and lower margins, resulting in
further operating losses. With the advice of an independent consultant, the
Company sought a new credit facility and considered various alternatives to
return to profitable operations, including the sale of certain of its operating
subsidiaries, liquidation of such subsidiaries, and bankruptcy protection for
the Company. The Board of Directors determined to adopt a restructuring plan to
downsize the Company to its original core operations which have historically
been profitable. The restructuring plan resulted in significant charges. For the
quarter ended December 31, 1995, the Company generated net income of
approximately $7,000, although the Preferred Stock dividend accumulation
resulted in a net loss applicable to Common Stock of approximately $50,000. For
the quarter ended March 31, 1996, the Company generated net income of
approximately $29,000, although the Preferred Stock dividend accumulation
resulted in a net loss applicable to Common Stock of approximately $27,000. See
"Financial and Other Information - Management's Discussion and Analysis of
Financial Condition and Results of Operations."
As part of its analysis of the Company's financial condition described
in the preceding paragraph, the Board of Directors discussed with its consultant
the Company's obligations on the outstanding Preferred Stock. The Board
considered that: (i) the Company's operating income was insufficient to make the
four Preferred Stock dividend payments made since the stock was issued; (ii) due
to insufficient operating income, the Company had not made its last five
scheduled dividend payments; (iii) the dividend arrearage on the Preferred Stock
was approximately $280,000 as of May 21, 1996; and (iv) the Company did not have
the operating income or the borrowing capacity to pay this amount or any future
dividends for the foreseeable future. With respect to the conclusion in clause
(iv) of the preceding sentence, the Board considered the Company's internal
financial projections but otherwise conducted no specific financial analysis.
Further, the Board considered that in negotiations with lenders for the
establishment of a new credit facility, all lenders advised the Company that the
loan covenants would include both a prohibition of the payment of dividends and
an affirmative obligation to recapitalize the Company. The Board concluded that
the dividend arrearage and the cumulative nature of the Preferred Stock dividend
had and would continue to have a negative effect on the Company's ability to
borrow money necessary to finance its operations, placed the continued viability
of the Company at risk, and made the Company unattractive to investors,
resulting in decreasing prices of and little trading in the Common Stock to the
detriment of all Stockholders. The Board determined that the Company's only
viable options consisted of a Stockholder-approved reorganization of the capital
structure or a bankruptcy reorganization, in either case removing the burden of
the Preferred Stock dividend. The perceived negative effects of a bankruptcy
reorganization in terms of lost customer confidence and possible loss of key
employees on account of the uncertainty of a bankruptcy action caused the Board
to reject that course of action in favor of a Stockholder-approved
reorganization, the key element of which would be the conversion of the
Preferred Stock to Common Stock.
Any amendment to the terms of the Preferred Stock, including a
conversion to Common Stock, requires the consent of the Preferred Stockholders
as described in this Proxy Statement. The conversion ratio and the resulting
premium to the Conversion Price being offered to the Preferred Stockholders were
determined by negotiations between the Company and the Preferred Stockholders.
In the negotiation process the Board engaged in the liquidation analysis set
forth in the following paragraph. The Board believed that a liquidation analysis
was the most relevant analysis because the Company had no positive earnings or
cash flow to use as the basis for a valuation method and the liquidation
analysis would have been utilized had the Company instead elected to file for
protection under the bankruptcy laws. In establishing the conversion ratio and
determining whether the Preferred Stock Proposal is fair to all Stockholders,
the Board did not seek an independent valuation, did not consider using a
valuation model based on budgeted amounts with estimated growth rates, and did
not consider alternative valuation methods such as comparable ratios based on
revenues or assets because the Board ultimately determined: (i) if the Company
filed for bankruptcy or were to dissolve and liquidate, the holders of Common
Stock would take nothing; (ii) negotiations with the holders of Preferred Stock
were likely to result in some continuing interest of the holders of the Common
Stock; and (iii) the cost of obtaining an independent valuation or seeking
professional financial guidance on the use of alternative valuation methods was
deemed prohibitively expensive in light of factors (i) and (ii) given the cash
position and financial condition of the Company at the time.
At March 31, 1996, the Company's stockholders' equity was $1,176,788.
Under the current situation, stockholders' equity must exceed $2,780,000 for the
holders of Common Stock to share in the Company's assets upon liquidation. The
Company did not engage in an independent appraisal to determine whether the fair
market value of its assets was equal to the book value of those assets, because
the Company believed, based on its experience in restructuring its subsidiaries,
that the liquidation value of inventory and equipment would not exceed the book
value of those assets. If the Company were liquidated currently at book value,
the holders of the Common Stock would take nothing. If the Preferred Stock
Proposal is approved, the current holders of Preferred Stock
-5-
<PAGE> 8
would own 81.7% of the Common Stock and the holders of the existing Common Stock
would own 18.3% after the conversion. In order for the holders of the Common
Stock to receive 18.3% of the distributions to the Stockholders upon liquidation
if the Preferred Stock is not converted into Common Stock as contemplated by the
Preferred Stock Proposal, the Company would have to be able to sell its assets
for approximately $3,400,000 upon liquidation, an amount substantially in excess
of the Company's present book value.
The Preferred Stock Proposal allows all existing Stockholders the
opportunity to participate in the future of the Company. The Board of Directors
believes that the Preferred Stock Proposal is fair to and in the best interests
of the Preferred Stockholders because it provides them a substantial premium to
the Conversion Price, and that it is fair to and in the best interests of the
Common Stockholders because it provides them an 18.3% participation in the
Company's future as compared to the 0% they would take were the Company
liquidated currently at book value.
The Company was able to secure a new credit facility in February 1996.
The new credit facility permits the Company 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. Interest
on the credit facility is payable monthly at prime plus 6%, with a minimum
monthly interest requirement of $9,000. 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. The loan covenants,
however, specifically authorize the Company to seek Stockholder approval of the
Preferred Stock Proposal. If the Preferred Stock Proposal is not approved, the
Company will be in default under its existing line of credit, and will likely be
required to seek a new source of financing. There can be no assurance that a new
source of financing will be available to the Company on reasonable terms or at
all. If no reasonable financing becomes available to the Company, the ability of
the Company to continue its operations will be materially and adversely
impacted.
AMENDMENT TO ARTICLES OF INCORPORATION
If the Stockholders approve the Preferred Stock Proposal, the Company's
Articles of Incorporation will be amended to add the following provision
relating to the automatic conversion of the Preferred Stock into Common Stock on
the Conversion Effective Date:
"(l) Automatic Conversion on August 12, 1996. Notwithstanding
any other provision of Article V.E. of these Articles of
Incorporation, effective at 12:01 MST on August 12, 1996 (the
"Conversion Effective Date"):
(i) the outstanding shares of Series A Convertible Preferred
Stock, together with any and all accrued but unpaid dividends
through the Conversion Effective Date (the "Accrued Dividends"),
shall automatically be converted into shares of Common Stock on
the basis of 13 shares of Common Stock for each share of Series A
Convertible Preferred Stock and Accrued Dividends thereon;
(ii) the holders of Series A Convertible Preferred Stock shall
no longer be entitled to receive dividends on the Series A
Convertible Preferred Stock, shall no longer be entitled to any
liquidation preference, shall no longer be entitled to elect a
Default Director to the Company's Board of Directors during
Dividend Defaults, and shall no longer have any of the other
rights associated with the Series A Convertible Preferred Stock;
(iii) Article V.E. of these Articles of Incorporation shall
terminate and be of no further force or effect, except that the
provisions of this Article V.E.4(l) shall continue to apply;
(iv) each stock certificate representing issued and outstanding
shares of Series A Convertible Preferred Stock will automatically
represent the proportionate number of shares of Common Stock. The
holders of Series A Convertible Preferred Stock may, but are not
required to, exchange their existing Series A Convertible
Preferred Stock certificates for certificates representing the
proportionate number of shares of Common Stock. If not exchanged
earlier, the Series A Convertible Preferred Stock certificates
will be exchanged for certificates representing the proportionate
number of shares of
-6-
<PAGE> 9
Common Stock at such time as a holder surrenders the
certificates for the purpose of transferring shares to another
person; and
(v) the 555,555 shares of Series A Convertible
Preferred Stock which were issued shall be cancelled and shall
not be available for future issuance."
If the Stockholders approve the Preferred Stock Proposal, the above
amendment to the Company's Articles of Incorporation will become effective upon
the filing of articles of restatement with the Arizona Corporation Commission
(the "Corporation Commission"). The articles of restatement will restate the
Company's Articles of Incorporation to give effect to the amendment made
pursuant to this Preferred Stock Proposal and, to the extent such amendments are
approved by the Stockholders, to the amendments made pursuant to Proposals Two
and Three. The Company's Fourth Amended and Restated Articles of Incorporation
(the "Restated Articles"), as they will appear if each of Proposals One, Two,
and Three is approved by the Stockholders, are attached as Exhibit 1. If any of
such proposals is not approved by the Stockholders, the Articles of
Incorporation will be restated to give effect only to such of those proposals as
are approved by the Stockholders.
EFFECTS OF PREFERRED STOCK PROPOSAL
If the Stockholders approve the Preferred Stock Proposal, on the
Conversion Effective Date the outstanding shares of Preferred Stock, together
with any and all accrued but unpaid dividends through the Conversion Effective
Date, will automatically be converted into shares of Common Stock on the basis
of 13 shares of Common Stock for each share of Preferred Stock AND THE HOLDERS
OF PREFERRED STOCK WILL NO LONGER BE ENTITLED TO RECEIVE DIVIDENDS ON THE
PREFERRED STOCK, WILL NO LONGER BE ENTITLED TO ANY LIQUIDATION PREFERENCE, WILL
NO LONGER BE ENTITLED TO ELECT A DIRECTOR TO THE COMPANY'S BOARD OF DIRECTORS
DURING CERTAIN DIVIDEND DEFAULTS, AND WILL NO LONGER HAVE ANY OF THE OTHER
RIGHTS ASSOCIATED WITH THE PREFERRED STOCK. Each stock certificate representing
issued and outstanding shares of Preferred Stock will automatically represent
the proportionate number of shares of Common Stock. The holders of Preferred
Stock may, but are not required to, exchange their existing Preferred Stock
certificates for certificates representing the proportionate number of shares of
Common Stock. If not exchanged earlier, the Preferred Stock certificates will be
exchanged for certificates representing the proportionate number of shares of
Common Stock at such time as a holder surrenders the certificates for the
purpose of transferring shares to another person.
LISTING OF SHARES AND RESALE RIGHTS
If the Preferred Stock Proposal is approved, the Company will seek to
cause the additional shares of Common Stock issued in the conversion to be
listed on the Nasdaq Small Cap Market. Nasdaq has advised the Company that it is
out of compliance with certain requirements of its listing. The Board of
Directors believes that the Nasdaq listing is a valuable asset for the
Stockholders because it increases the liquidity of the Common Stock and makes it
easier for Stockholders to obtain accurate quotations as to the market value of
the Common Stock. Accordingly, the Board will use reasonable efforts to cause
the Company to comply with the requirements of continued listing. There can be
no assurance, however, that the Board will be successful in maintaining the
Company's Common Stock listing on the Nasdaq Small Cap Market. In this regard,
the Company is aware of recent pronouncements by Nasdaq in response to unusual
trading in certain lower-priced securities on the Small Cap Market to
significantly increase the continued listing requirements. While no specific
proposals have been communicated to date, any material increase in the
quantitative listing standards likely will have an adverse effect on the
Company's ability to maintain its Small Cap Market listing.
The shares of Common Stock to be issued to the holders of the Preferred
Stock will be restricted securities within the meaning of Rule 144 promulgated
pursuant to the Securities Act of 1933, as amended. Under Rule 144, the period
during which the shares of Preferred Stock was held will be treated as the
holding period for the new shares of Common Stock to be issued, so that any
Preferred Stockholder who desires to publicly resell shares of Common Stock may
do so in reliance upon and subject to the terms and conditions of Rule 144.
Under Rule 144 as presently in effect, a person (or persons whose shares are
aggregated), including persons deemed to be affiliates
-7-
<PAGE> 10
of the Company, whose restricted securities have been fully paid for and held at
least two years from the latter of the date of issuance by the Company or
acquisition from an affiliate, may sell such shares in brokers' transactions or
directly to market makers, provided that the number of shares sold within any
three-month period does not exceed the greater of 1% of the then outstanding
shares of Common Stock (approximately 88,427 shares after approval of the
Preferred Stock Proposal but before approval of Proposal Two and approximately
14,738 shares after approval of both the Preferred Stock Proposal and Proposal
Two) or the average weekly trading volume in the Common Stock in the
over-the-counter market during the four calendar weeks preceding the date on
which notice of such sale was filed under Rule 144. Sales under Rule 144 are
also subject to certain provisions relating to notice of sale and availability
of current public information about the Company. Further, under Rule 144(k),
after three years have elapsed from the latter of the issuance of the restricted
securities by the Company or their acquisition from an affiliate, a holder of
such restricted shares who is not an affiliate of the Company at the time of the
sale and has not been an affiliate of the Company for at least three months
prior to the sale would be entitled to sell the shares immediately without
regard to the volume limitations and the other conditions described above.
Under Arizona law, the holders of the Preferred Stock may dissent from
and obtain payment of the fair value of their shares if the Preferred Stock
Proposal is consummated. See "DISSENTERS' RIGHTS."
THE COMPANY'S CAPITAL STRUCTURE
The following table illustrates the principal effects on the Company's
outstanding capital stock, without giving effect to the six-to-one reverse stock
split contemplated by Proposal Two, of converting the Preferred Stock into
Common Stock:
<TABLE>
<CAPTION>
NUMBER OF SHARES OF CAPITAL STOCK
Prior to After
Common Conversion Conversion
- - ------ ---------- ----------
<S> <C> <C>
Authorized 20,000,000 20,000,000
Issued(1) and outstanding 1,620,500 8,842,728
Available for
future issuance 18,379,500 11,157,272
Preferred
- - ---------
Authorized 10,000,000 10,000,000
Issued and outstanding -
Series A 555,555 0
Cancelled 0 555,555
Available for
future issuance 9,444,444 9,444,444
</TABLE>
- - ---------------
(1) Excludes 800 shares held in treasury.
The following table illustrates the principal effects on the loss per
share and book value of the Company's capital stock, without giving effect to
the six-to-one reverse stock split contemplated by Proposal Two, of converting
the Preferred Stock into Common Stock.
-8-
<PAGE> 11
<TABLE>
<CAPTION>
LOSS AND BOOK VALUE OF CAPITAL STOCK PER COMMON SHARE
After
Prior to Conversion
Conversion (Pro Forma)
---------- -----------
<S> <C> <C>
Loss per common share
for the year ended
March 31, 1995 (1.38) (0.25)
Loss per common share
for the year ended
March 31, 1996 (1.23) (0.22)
Book value per common share
as of March 31, 1996 0.73 0.13
</TABLE>
THE COMPANY'S COMMON STOCK
There is no public market for the Company's Preferred Stock. The
Company's Common Stock is quoted on the Nasdaq Small Cap Market under the symbol
"RESY." The table below summarizes the high and low bid quotations, as reported
by Nasdaq, for the Common Stock during the quarters then ended:
<TABLE>
<CAPTION>
Period Low Bid High Bid
- - ------ ------- --------
<S> <C> <C>
Fiscal Year Ended March 31, 1994
Quarter Ended 6/30/93 3.250 4.000
Quarter Ended 9/30/93 3.000 3.750
Quarter Ended 12/31/93 3.000 4.375
Quarter Ended 3/31/94 3.875 5.625
Fiscal Year Ended March 31, 1995
Quarter Ended 6/30/94 4.500 4.750
Quarter Ended 9/30/94 3.750 4.250
Quarter Ended 12/31/94 3.750 4.000
Quarter Ended 3/31/95 3.750 4.250
Fiscal Year Ended March 31, 1996
Quarter Ended 6/30/95 2.750 4.000
Quarter Ended 9/30/95 2.125 3.000
Quarter Ended 12/31/95 0.250 2.125
Quarter Ended 3/31/96 0.125 0.9375
</TABLE>
The above quotations represent inter-dealer quotations, do not reflect
applicable markups, markdowns or commissions, and do not necessarily represent
actual transactions.
The total number of shares of Common Stock of the Company outstanding
as of May 20, 1996 was 1,620,500. The number of holders of the Common Stock and
Preferred Stock, including beneficial holders of shares held in street name, as
of the close of business on May 20, 1996 is estimated to be 450.
The Nasdaq Small Cap Market has advised the Company that it is out of
compliance with certain requirements of its listing. The Board of Directors
believes that the Preferred Stock Proposal and Proposal Two,
-9-
<PAGE> 12
if approved by the Stockholders, should have the effect of curing the current
deficiencies in order for the Company to retain its listing under current
listing standards. There can be no assurance, however, that the Company will be
successful in retaining its Nasdaq Small Cap Market listing. The Company is
aware of recent pronouncements by Nasdaq in response to unusual trading in
certain lower-priced securities on the Small Cap Market to significantly
increase the continued listing requirements. While no specific Proposals have
been communicated to date, any material increase in the quantitative listing
standards likely will have an adverse effect on the Company's ability to
maintain its Small Cap Market Listing.
The Company has never declared or paid any dividends on its Common
Stock, and it is not anticipated that any cash dividends will be paid on the
Common Stock in the foreseeable future. In addition, as of May 21, 1996, the
Company's Preferred Stock dividends were $280,000 in arrears. As a result, the
Company cannot pay or declare any dividend or other distribution on the Common
Stock or other equity securities of the Company. Further, under the Company's
new credit facility with Norwest Business Credit Inc., the Company is prohibited
from paying dividends without the consent of the lender.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
A summary of the federal income tax consequences of the conversion of
Preferred Stock into Common Stock as contemplated in this Preferred Stock
Proposal is set forth below. The discussion is based on the present federal
income tax law. The discussion is not intended to be, nor should it be relied on
as, a comprehensive analysis of the tax issues arising from or relating to the
proposed conversion. Income tax consequences to holders of the Preferred Stock
whose shares will be converted into Common Stock may vary from the federal tax
consequences described generally below. HOLDERS OF PREFERRED STOCK SHOULD
CONSULT THEIR OWN TAX ADVISORS AS TO THE EFFECT OF THE PREFERRED STOCK PROPOSAL
UNDER APPLICABLE FEDERAL, STATE AND LOCAL INCOME TAX LAWS.
In general, for federal income tax purposes, the exchange of a
corporation's outstanding preferred stock with dividends in arrears for other
stock of the corporation is treated as a tax-free recapitalization, unless
pursuant to such exchange there is an increase in the proportionate interests of
the preferred stockholders in the assets or earnings and profits of the
corporation, in which case an amount up to the amount of the dividends in
arrears may be treated as a deemed, taxable distribution to the stockholders.
The Company believes that the exchange of Common Stock for Preferred
Stock resulting from the Preferred Stock Proposal will qualify as a tax-free
recapitalization under the Internal Revenue Code of 1986, as amended (the
"Code"). Accordingly, the Company would recognize no gain or loss as a result of
the conversion of Preferred Stock into Common Stock.
With respect to the holders of the Preferred Stock whose shares will be
converted into Common Stock, such holders will take a tax basis in the shares of
Common Stock received equal to the basis of the Preferred Stock surrendered,
decreased by the amount of any money or fair market value of any other property
received, decreased or increased, as the case may be, by any gain or loss
recognized on the exchange. No loss would be recognized by the holders of the
Preferred Stock. Any other property received in the exchange would then have a
basis equal to its fair market value. The Common Stock to be received by the
holders of the Preferred Stock will not have any liquidation preference. The
Company believes that the fair market value of the Common Stock will be less
than or equal to the issue price of the Preferred Stock being exchanged,
resulting in no gain to the holder of Preferred Stock whose Preferred Stock is
converted into Common Stock.
CHANGE OF CONTROL
If the Preferred Stock Proposal is approved, a change in control of the
Company will result with the holders of the Preferred Stock acquiring
approximately 81.7% of the Common Stock of the Company that will be outstanding
immediately following the Conversion Effective Date.
-10-
<PAGE> 13
INTEREST OF CERTAIN PERSONS
Scott Ryan was appointed to the Board of Directors as the
representative of the holders of Preferred Stock pursuant to the relevant
provisions of the Company's Articles of Incorporation. Mr. Ryan indirectly owns
44,444 shares of Preferred Stock, or approximately 8% of the shares of Preferred
Stock outstanding. If the Preferred Stock Proposal is approved, Mr. Ryan's
Preferred Stock will be converted to Common Stock on the same basis as the other
Stockholders. Mr. Ryan also owns 10,110 shares of Common Stock.
VOTING REQUIREMENTS
Each holder of Common Stock and each holder of Preferred Stock is
entitled to one vote per share held. The Preferred Stock is entitled to vote
together with the Common Stock as a single class and is entitled to vote on this
Proposal One only as a separate class.
The affirmative vote of holders of a majority of the outstanding shares
of Common Stock and Preferred Stock of the Company entitled to vote and present
in person or by proxy at the Annual Meeting and the affirmative vote of holders
of a majority of the outstanding shares of Preferred Stock of the Company
entitled to vote and present in person or by proxy at the Annual Meeting are
required for approval of the Preferred Stock Proposal. Proxies solicited by the
Board of Directors will be voted for approval of the Preferred Stock Proposal.
Stockholders are not entitled to cumulate votes.
For this purpose, a Stockholder voting through a proxy who abstains with respect
to approval of the Preferred Stock Proposal is considered to be present and
entitled to vote on the approval of the Preferred Stock Proposal at the meeting,
and is in effect a negative vote, but a Stockholder (including a broker) who
does not give authority to a proxy to vote on the Preferred Stock Proposal shall
not be considered present and entitled to vote on the Preferred Stock Proposal.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL ONE.
-11-
<PAGE> 14
PROPOSAL TWO:
AMENDMENT OF ARTICLES OF INCORPORATION TO
EFFECT REVERSE STOCK SPLIT
THE REVERSE STOCK SPLIT
The Board of Directors believes that, if the Preferred Stock Proposal
is approved, the best interests of the Company and its Stockholders will be
served by further amending the Company's Articles of Incorporation to effect a
six-to-one reverse stock split of the Company's presently issued shares of
capital stock. The Board of Directors has unanimously approved and recommends a
vote for Proposal Two.
If the Stockholders approve the Preferred Stock Proposal and this
Proposal Two, the Company's Articles of Incorporation will be amended to replace
the existing provision relating to the Company's authorized capital with the
following provision relating thereto:
"AUTHORIZED CAPITAL. This Corporation is authorized to issue
two (2) classes of shares to be designated, respectively,
Preferred Stock ("Preferred Stock") and Common Stock ("Common
Stock"). The total number of shares of capital stock that the
Corporation is authorized to issue is thirty million
(30,000,000) shares. The total number of shares of Preferred
Stock that this Corporation shall have authority to issue is
ten million (10,000,000). The total number of shares of Common
Stock that this Corporation shall have authority to issue is
twenty million (20,000,000). Each six (6) shares of the
Corporation's Common Stock issued as of the date and time
immediately following the Conversion Effective Date (as such
term is defined in Article V.E.4(l) of these Articles of
Incorporation) (the "Split Effective Date") shall be
automatically changed and reclassified, as of the Split
Effective Date and without further action, into one (1) fully
paid and nonassessable share of the Corporation's Common
Stock; provided, however, that any fractional interest
resulting from such change and classification shall be rounded
upward to the nearest whole share."
If the Stockholders approve the Preferred Stock Proposal and this
Proposal Two, the above amendment to the Company's Articles of Incorporation
will become effective upon the filing of articles of restatement with the
Corporation Commission. The articles of restatement will restate the Company's
Articles of Incorporation to give effect to the amendment made pursuant to the
Preferred Stock Proposal and this Proposal Two and, to the extent such
amendments are approved by the Stockholders, to the amendments made pursuant to
Proposal Three. The Company's Fourth Amended and Restated Articles of
Incorporation (the "Restated Articles"), as they will appear if each of
Proposals One, Two, and Three is approved by the Stockholders, are attached as
Exhibit 1. If any of such proposals is not approved by the Stockholders, the
Articles of Incorporation will be restated to give effect only to such of those
proposals as are approved by the Stockholders.
The proposed reverse stock split will not affect any Stockholder's
proportionate equity interest in the Company or the rights, preferences,
privileges or priorities of any Stockholder, other than a relatively slight
adjustment which may occur due to the rounding up of fractional shares.
Likewise, the proposed reverse split will not affect the total Stockholders'
equity of the Company or any components of Stockholders' equity as reflected on
the financial statements of the Company except (i) to change the numbers of the
issued and outstanding shares of capital stock and (ii) for a relatively slight
adjustment which will occur due to the costs incurred by the Company in
connection with this Proxy Statement, the Annual Meeting and the implementation
of such of the proposals as are approved by the Stockholders. However, because
the number of shares of capital stock that the Company is authorized to issue
will not be decreased in proportion to the six-to-one decrease in the number of
issued shares, the number of shares which are authorized but unissued, and the
percentage of ownership of the Company represented by such shares if they are
issued in the future in the discretion of the Board of Directors, effectively
will be increased.
-12-
<PAGE> 15
The following table illustrates the principal effects on the Company's
capital stock, after giving effect to the conversion of all issued and
outstanding shares of Preferred Stock into Common Stock contemplated by the
Preferred Stock Proposal, of the reverse stock split:
<TABLE>
<CAPTION>
NUMBER OF SHARES OF CAPITAL STOCK
Prior to After
Reverse Split Reverse Split
------------- -------------
Common
- - ------
<S> <C> <C>
Authorized 20,000,000 20,000,000
Issued(1) and outstanding 8,842,728 1,473,788
Available for
future issuance 11,157,272 18,526,212
Preferred
- - ---------
Authorized 10,000,000 10,000,000
Issued and outstanding 0 0
Cancelled 555,555 555,555
Available for
future issuance 9,444,444 9,444,444
</TABLE>
- - ---------------
(1) Excludes 800 shares held in treasury; 134 shares after the reverse
split.
The following table illustrates the principal effects on the loss per
share and book value of the Company's capital stock, after giving effect to the
conversion of all issued and outstanding shares of Preferred Stock into Common
Stock contemplated by the Preferred Stock Proposal, of the reverse stock split:
<TABLE>
<CAPTION>
LOSS AND BOOK VALUE OF CAPITAL STOCK PER COMMON SHARE
Prior to After
Reverse Split Reverse Split
------------- -------------
<S> <C> <C>
Pro Forma Loss
per common share for the
year ended March 31, 1995 (0.25) (1.51)
Pro Forma Loss
per common share for the
year ended March 31, 1996 (0.22) (1.32)
Pro Forma Book Value
per common share as of
March 31, 1996 0.13 0.80
</TABLE>
-13-
<PAGE> 16
EXCHANGE OF SHARES; NO FRACTIONAL SHARES
Pursuant to the proposed amendment, every six shares of issued capital
stock would be converted and reclassified into one share of post-split capital
stock, and any fractional interests resulting from such reclassification would
be rounded upward to the nearest whole share. For example, a holder of 120
shares prior to the Split Effective Date (defined below) would be the holder of
20 shares at the Split Effective Date, and the holder of 100 shares prior to the
Split Effective Date would be the holder of 17 shares at the Split Effective
Date. The proposed reverse stock split would become effective (the "Split
Effective Date") immediately following the Conversion Effective Date.
Stockholders will be notified on or after the Split Effective Date that the
reverse stock split has been effected. The Company's transfer agent, Harris
Trust and Savings Bank, will act as the Company's exchange agent (the "Exchange
Agent") for Stockholders in implementing the exchange of their certificates.
As soon as practicable after the Split Effective Date, Stockholders
will be notified and requested to surrender their certificates to the Exchange
Agent in exchange for certificates representing post-split Common Stock.
Stockholders will not receive certificates for shares of post-split Common Stock
unless and until the certificates representing their shares of pre-split Common
Stock or Preferred Stock are surrendered and they provide such evidence of
ownership of such shares as the Company or the Exchange Agent may require.
Stockholders should not forward their certificates to the Exchange Agent until
they have received notice from the Company that the reverse stock split has
become effective. Beginning on the Split Effective Date, each certificate
representing shares of the Company's pre-split Common Stock or Preferred Stock
will be deemed for all corporate purposes to evidence ownership of the
appropriate number of shares of post-split Common Stock.
No service charge will be payable by Stockholders in connection with
the exchange of certificates, all costs of which will be borne and paid by the
Company.
Stockholders have no right under Arizona law to dissent from the
reverse stock split or to dissent from the rounding up of fractional interests
resulting from the stock split.
PURPOSES OF THE REVERSE STOCK SPLIT AND EFFECTIVE INCREASE IN AUTHORIZED SHARES
The primary objectives of the reverse stock split are to increase the
market value per share of the Common Stock and to increase the liquidity of the
Common Stock.
The Company has been advised by the Nasdaq Small Cap Market that it is
out of compliance with the $1.00 per share minimum bid requirement currently in
effect for continued listing. Further, the Board of Directors has been advised
that certain securities firms limit the extension of margin credit for, and
otherwise discourage their registered representatives from recommending, the
purchase of corporate securities that have a market value of less than $5.00 per
share. Under the margin regulations of the Federal Reserve Board, brokers,
financial institutions and certain other lenders may extend credit for the
purchase of margin stock in an amount not to exceed 50% of the market value of
such shares. For purposes of these regulations, the market value of the Common
Stock is the closing price as reported by Nasdaq on the day preceding the
extension of credit. To increase the market value, preserve the Nasdaq listing
and increase the likelihood of marginability of the Common Stock, the Board of
Directors has determined that a reverse stock split would be in the best
interests of the Company and its Stockholders.
Additionally, the Board of Directors believes that the current price
per share of the Company's Common Stock may reduce the effective marketability
of the Common Stock because of the reluctance of certain brokerage firms to
recommend lower-priced stocks to their clients. Certain institutional investors
have internal policies preventing the purchase of lower-priced stocks and many
brokerage houses do not permit lower-priced stocks to be used as collateral for
margin accounts. Further, a number of brokerage houses have polices and
practices that tend to discourage individual brokers within those firms from
dealing in lower-priced stocks. Some of those policies and practices pertain to
the payment of brokers' commissions and to time-consuming procedures that
function to make the handling of lower-priced stocks unattractive to brokers
from an economic standpoint. In addition, the structure of trading commissions
tends to have an adverse impact upon holders of lower-priced stocks because the
brokerage
-14-
<PAGE> 17
commission on a sale of lower-priced stocks generally represents a higher
percentage of the sales price than the commission on a relatively higher-priced
stock.
The Board of Directors believes that the low, per-share market price of
the Common Stock impairs the marketability of the Common Stock to institutional
investors and members of the investing public and creates a negative impression
with respect to the Company. Many investors and market makers look upon
lower-priced stocks as unduly speculative in nature and, as a matter of policy,
avoid investment and trading in such stocks. The foregoing factors adversely
affect both the pricing and the liquidity of the Common Stock. Thus, the
potential increase in trading price is expected to be attractive to the
financial community and the investing public.
The Board of Directors is hopeful that the decrease in the number of
shares outstanding as a consequence of the proposed reverse stock split, and the
resulting anticipated increased price level, will stimulate interest in the
Company's Common Stock and possibly promote greater liquidity for the Company's
Stockholders. There can be no assurance, however, that there will be any greater
liquidity, and it is possible that the liquidity could even be adversely
affected by the reduced number of shares which would be outstanding after the
proposed reverse stock split is effected.
If the reverse stock split becomes effective, the quoted market price
of the Company's stock should increase as a result of decreasing the number of
shares outstanding without altering the aggregate economic interest in the
Company represented by such shares. The Board believes that the increased price
would be a more appropriate trading price for a company that is traded on Nasdaq
and is concerned with long-term development of its business opportunities. In
addition, the increase in the market price may cure the Nasdaq minimum bid price
deficiency and may serve to mitigate the present reluctance, policies and
practices on the part of brokerage firms referred to above and diminish the
adverse impact of trading commissions on the potential market for the Company's
shares. There can be no assurance, however, that the reverse stock split will
achieve these desired results, that any such increase would be in proportion to
the six-to-one reverse split ratio or that the per-share price level of the
Common Stock immediately after the proposed reverse stock split can be
maintained for any period of time. The Company is aware of recent pronouncements
by Nasdaq in response to unusual trading in certain lower-priced securities on
the Small Cap Market to significantly increase the continued listing
requirements. While no specific proposals have been communicated to date, any
material increase in the quantitative listing standards, including the minimum
price, likely will have an adverse effect on the Company's ability to maintain
its Small Cap Market Listing.
A reverse stock split may result in some Stockholders owning "odd lots"
of less than 100 shares. The costs, including brokerage commissions, of
transactions in odd lots are generally higher than the costs in transactions in
"round lots" of even multiples of 100.
The primary objective of the effective increase in the number of shares
which are authorized but unissued, and in the percentage of ownership of the
Company represented by such shares if they are issued in the future in the
discretion of the Board of Directors, is for the Company to have additional
shares of Common Stock authorized and available for issuance as the need arises
for possible future financing transactions, stock acquisitions, asset purchases,
stock dividends or splits, issuances under any stock option plan that may be
adopted in the future, and other general corporate purposes. The Board believes
that the effective increase in the number and percentage of authorized but
unissued shares will provide the Company additional flexibility to issue
additional shares of Common Stock to meet the Company's future financing needs.
In order to avoid the delay and expense involved in obtaining Stockholder
approval, the Board believes it to be in the best interests of the Company and
its Stockholders to have shares of Common Stock authorized and available for
issuance without further action by the Stockholders. If Proposal Two is
approved, Stockholders will have no preemptive rights with respect to the
additional authorized shares of Common Stock. Such shares may be issued on such
terms, at such times and on such conditions as the Board may determine in its
discretion. The Board of Directors has not entered into any negotiations,
agreements or understandings, nor made any other determinations, with respect to
the issuance of any shares of such Common Stock, except in connection with
presently outstanding warrants and shares or options that may be issued in the
future to employees or directors of the Company either individually or under
employee benefit plans that may be adopted in the future.
-15-
<PAGE> 18
Although the reverse stock split and the effective increase in the
number and percentage of authorized but unissued shares are not intended to be
anti-takeover devices, the effective increase in the authorized capital together
with a subsequent issuance of equity securities could impede a potential
takeover for various reasons including, but not limited to, diluting the stock
ownership of persons attempting to gain control of the Company and issuing
securities to individuals or entities favorable to management. Moreover, the
availability of such additional shares in and of itself might have the effect of
discouraging an attempt to acquire control of the Company other than through
negotiations with the Board of Directors. Except as described in this paragraph
and the provisions of Arizona law providing for cumulative voting in the
election of directors, there are no provisions of the Articles of Incorporation
or Bylaws, either as currently in effect or as proposed to be amended and
restated in this Proxy Statement, which would act to discourage a change in
control of the Company. The Company has no plans to adopt any measures, other
than the reverse stock split, which may be deemed to be anti-takeover devices.
Except as contemplated by the Preferred Stock Proposal, the Board of
Directors is not aware of any present efforts by any person to accumulate the
Company's capital stock or to obtain control of the Company through tender
offer, merger or other business combination, proxy contest or otherwise. The
Board has not formulated any program, nor entered into any agreement or
understanding, and has no current intention, to issue any unissued and
unreserved shares of Common Stock for the purpose of impeding or preventing any
proposed takeover. Stockholders should note, however, that a change of control
will result if the Preferred Stock Proposal One is adopted. See "PROPOSAL ONE:
CONVERSION OF PREFERRED STOCK INTO COMMON STOCK-Change of Control."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
A summary of the federal income tax consequences of the reverse stock
split as contemplated in Proposal Two is set forth below. The discussion is
based on the present federal income tax law. The discussion is not intended to
be, nor should it be relied on as, a comprehensive analysis of the tax issues
arising from or relating to the proposed split. Income tax consequences to
Stockholders may vary from the federal tax consequences described generally
below. STOCKHOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE EFFECT OF
THE CONTEMPLATED REVERSE STOCK SPLIT UNDER APPLICABLE FEDERAL, STATE AND LOCAL
INCOME TAX LAWS.
The proposed reverse stock split constitutes a "recapitalization" to
the Company and its Stockholders to the extent that issued shares of Common
Stock are exchanged for a reduced number of shares of Common Stock. Therefore,
neither the Company nor its Stockholders will recognize any gain or loss for
federal income tax purposes as a result thereof.
The shares of Common Stock to be issued to each Stockholder will have
an aggregate basis, for computing gain or loss, equal to the aggregate basis of
the shares of such stock held by such Stockholder immediately prior to the Split
Effective Date. A Stockholder's holding period for the shares of Common Stock to
be issued will include the holding period for the shares of Common Stock held
thereby immediately prior to the effective date provided that such shares of
stock were held by the Stockholder as capital assets on the effective date.
VOTING REQUIREMENTS
Each holder of Common Stock and each holder of Preferred Stock is
entitled to one vote per share held. The Preferred Stock is entitled to vote
together with the Common Stock as a single class.
The affirmative vote of holders of a majority of the outstanding shares
of Common Stock and Preferred Stock of the Company entitled to vote and present
in person or by proxy at the Annual Meeting is required for approval of Proposal
Two. Proxies solicited by the Board of Directors will be voted for approval of
the Proposal Two. Stockholders are not entitled to cumulate votes.
-16-
<PAGE> 19
For this purpose, a Stockholder voting through a proxy who abstains with respect
to approval of Proposal Two is considered to be present and entitled to vote on
the approval of Proposal Two at the meeting, and is in effect a negative vote,
but a Stockholder (including a broker) who does not give authority to a proxy to
vote on the approval of Proposal Two shall not be considered present and
entitled to vote on Proposal Two.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL TWO.
-17-
<PAGE> 20
PROPOSAL THREE
AMENDMENT OF ARTICLES OF INCORPORATION TO
MAKE CERTAIN TECHNICAL CORRECTIONS AND TO
ELIMINATE, IN CERTAIN CIRCUMSTANCES, THE LIABILITY OF
DIRECTORS TO THE COMPANY AND THE STOCKHOLDERS
THE TECHNICAL CORRECTIONS
The Board of Directors believes that the best interests of the Company
and its Stockholders will be served by further amending the Company's Articles
of Incorporation as described below. Approval of Proposal Three will constitute
approval of such amendments to the Company's Articles of Incorporation. The
Board of Directors has unanimously approved and recommends a vote for Proposal
Three.
If the Stockholders approve this Proposal Three, the Company's Articles
of Incorporation will be amended to replace the existing provisions relating to
(1) the objects, purposes and nature of the Company's business, (2) the
determination of the preferences, limitations and relative rights of series of
the Company's preferred stock, (3) distributions and share repurchases, (4)
indemnification, and (5) the size of the Company's Board of Directors, with the
following provisions relating thereto:
(1) "The Corporation is organized for the purpose of transacting
all lawful business for which corporations may be organized
under the laws of the State of Arizona, as amended from time
to time. The Corporation initially intends to conduct in the
State of Arizona (and elsewhere) the business of marketing
reconditioned office work stations, furniture and
furnishings."
(2) "The Board of Directors is hereby authorized, at its option,
from time to time, to divide all or any part of the Preferred
Stock into series thereof and to determine, to the fullest
extent permitted by applicable law, the preferences,
limitations and relative rights of each series of Preferred
Stock."
(3) "Subject to the requirements of applicable law, the Board of
Directors shall have the authority to effect a distribution to
the holders of its capital stock and shall have the authority
to effect a purchase by this Corporation of outstanding shares
of its capital stock."
(4) "The Corporation shall indemnify to the fullest extent
permitted by law any person who incurs expenses or liabilities
by reason of the fact he or she is or was an officer,
director, employee or agent of the Corporation or is or was
serving at the request of the Corporation as a director,
officer, employee or agent of another foreign or domestic
corporation, partnership, limited liability company, joint
venture, trust, employee benefit plan or other entity. The
foregoing indemnification shall be mandatory in all
circumstances in which indemnification is permitted by law."
(5) "The business and affairs of this Corporation shall be
conducted by a Board of Directors of not less than three (3)
nor more than nine (9) members, as established from time to
time by resolution of said Board.
The purpose of the above amendments is to make primarily technical corrections,
necessitated in part by the January 1, 1996 effectiveness of the Arizona
Business Corporation Act, to ensure that: (1) the Company may engage in any
lawful business; (2) the Company's Board of Directors has the authority to
determine, to the maximum extent permitted by Arizona law, the preferences,
limitations and relative rights of any series of preferred stock; (3) the
Corporation may effect distributions to its Stockholders or purchases of stock
from its Stockholders to the maximum
-18-
<PAGE> 21
extent permitted by Arizona law; (4) the Company must indemnify, to the fullest
extent permitted by Arizona law, any person who incurs expenses or liabilities
by reason of the fact that he was an officer, director, employee or agent of the
Corporation; and (5) the size of the Company's Board of Directors is consistent
with the Company's Articles of Incorporation. For the most part, these
amendments are technical rather than substantive, except that the amendment to
the indemnification provisions may impose on the Company somewhat greater
indemnification obligations than it had under the existing Articles of
Incorporation. The Company believes that providing indemnification to the
maximum extent permitted by Arizona law is critical to its ability to attract
and retain qualified directors, officers, employees and agents.
THE AMENDMENT RELATING TO THE ELIMINATION OF THE LIABILITY OF DIRECTORS
In addition to the above amendments to existing provisions of the
Articles of Incorporation, if the Stockholders approve this Proposal Three, the
Company's Articles of Incorporation would be amended to add the following new
provision which would eliminate, to the fullest extent permitted by Arizona law,
the liability of directors of the Company to the Company or its Stockholders for
monetary damages:
"To the fullest extent permitted by the Arizona Revised
Statutes as the same exist or may be hereafter amended, no
director of the Corporation shall be liable to the Corporation
or its Stockholders for monetary damages for any action taken
or any failure to take any action as a director. No repeal,
amendment or modification of this Article X, whether direct or
indirect, shall eliminate or reduce its effect with respect to
any act or failure to act of a director of the Corporation
occurring prior to such repeal, amendment or modification."
Under Arizona law, a corporation may adopt a provision in its Articles of
Incorporation eliminating the liability of a director to the corporation or its
stockholders for monetary damages for any action taken or any failure to take
any action as a director, provided such liability does not arise from certain
proscribed conduct (including intentional misconduct and transactions pursuant
to which the director received an improper personal benefit). Statutes
eliminating such monetary liability were adopted, in Arizona and other states,
in response to recent changes in the market for directors' liability insurance,
including the perceived significant increase in the number and magnitude of
lawsuits against directors and the unavailability of such insurance on
traditional terms or at all.
The proposed provision would not eliminate the directors' duty of care,
but would eliminate the remedy of monetary damage awards occasioned by breaches
of that duty. Thus, any Stockholder would be able to seek to enjoin a proposed
transaction from occurring or to seek other nonmonetary relief. After a
transaction has occurred, however, the Stockholders would no longer have a
remedy for a breach of the duty of care by a director (subject to the exceptions
noted above). Further, the proposed provision would apply only to claims against
a director arising out of his or her role as a director and not, if he or she is
also an officer, his or her role as an officer or in any other capacity.
The Board of Directors believes that this proposed provision which,
subject to the above noted exceptions, would eliminate the liability of
directors to the Corporation or its Stockholders is in the best interests of the
Company and its Stockholders. The Board of Directors further believes that
effective corporate governance is hampered when directors are not assured of the
protections traditionally provided to them against lawsuits "second guessing"
the prudence of business judgment reached in good faith and that the above
provision will help assure the Company's ability to attract and retain competent
directors.
The Company was recently notified that its policy of directors' and
officers' liability insurance would not be renewed. While the insurer gave no
specific reason for its decision not to renew the Company's policy, the Company
believes that the substantial operating losses incurred by the Company over the
past two years contributed to the insurer's decision. While the Company has been
seeking replacement insurance, its proposals to date suggest that the cost will
be greater and the protections will be lesser than the former policy.
Accordingly, the protections offered by Arizona law are critical to the
Company's ability to attract and retain qualified outside directors. However,
there may be an inherent conflict of interest in the Board's recommendation due
to the interest of the
-19-
<PAGE> 22
directors in obtaining the limited liability protection of such provisions at
what might be regarded as the expense of the Stockholders.
EFFECTIVENESS OF THE AMENDMENTS
If the Stockholders approve this Proposal Three, the above amendments
to the Company's Articles of Incorporation will become effective upon the filing
of articles of restatement with the Corporation Commission. The articles of
restatement will restate the Company's Articles of Incorporation to give effect
to the amendments made pursuant to this Proposal Three and, to the extent such
amendments are approved by the Stockholders, to the amendments made pursuant to
the Preferred Stock Proposal and Proposal Two. The Company's Fourth Amended and
Restated Articles of Incorporation (the "Restated Articles"), as they will
appear if each of Proposals One, Two, and Three is approved by the Stockholders,
are attached as Exhibit 1. If any of such proposals is not approved by the
Stockholders, the Articles of Incorporation will be restated to give effect only
to such of those proposals as are approved by the Stockholders.
VOTING REQUIREMENTS
Each holder of Common Stock and each holder of Preferred Stock is
entitled to one vote per share held. The Preferred Stock is entitled to vote
together with the Common Stock as a single class.
The affirmative vote of holders of a majority of the outstanding shares
of Common Stock and Preferred Stock of the Company entitled to vote and present
in person or by proxy at the Annual Meeting is required for approval of Proposal
Three. Proxies solicited by the Board of Directors will be voted for approval of
Proposal Three. Stockholders are not entitled to cumulate votes.
For this purpose, a Stockholder voting through a proxy who abstains with respect
to approval of Proposal Three is considered to be present and entitled to vote
on the approval of Proposal Three at the meeting, and is in effect a negative
vote, but a Stockholder (including a broker) who does not give authority to a
proxy to vote on the approval of Proposal Three shall not be considered present
and entitled to vote on Proposal Three.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL THREE.
-20-
<PAGE> 23
PROPOSAL FOUR
AMENDMENT AND RESTATEMENT OF BYLAWS
The Board of Directors believes that the best interests of the Company
and its Stockholders will be served by amending and restating the Company's
Bylaws. Approval of this Proposal Four will constitute approval of the amended
and restated bylaws attached as Exhibit 2 (the "Amended Bylaws"). The Board of
Directors has unanimously approved and recommends a vote for Proposal Four.
Although the amendment and restatement of the Bylaws is not required to
be submitted to a vote of the Stockholders, the Board of Directors believes it
appropriate to submit this matter to a vote of the Stockholders given the
importance of the Bylaws in corporate governance. If the Stockholders approve
this Proposal Four, the Amended Bylaws will become effective immediately upon
their approval by the Stockholders. If this Proposal Four is not approved, the
Amended Bylaws will be of no effect and the Company will continue to be governed
by its existing Bylaws.
The amendments made to the existing Bylaws by the Amended Bylaws are
for the purpose of modernizing the Company's Bylaws and conforming them to
certain provisions of the new Arizona Business Corporation Act, which became
effective January 1, 1996. Among other things, the amendments would: (1)
eliminate the ability of 10% of the Board of Directors to call a meeting of the
Stockholders; (2) change the 10-50 day notice period for a meeting of the
Stockholders to a 10-60 day notice period; (3) add a provision indicating that a
Stockholder waives notice of a Stockholder's meeting by attending the meeting;
(4) eliminate the prohibition against a single person serving as both the
Company's President and Secretary; (5) allow for the issuance of uncertificated
shares to the full extent provided by law; (6) replace the specific rules
regarding indemnification by the Company of directors and officers with a
provision which requires that the Company, to the full extent permitted by
Arizona law as amended from time to time, indemnify and advance expenses to each
person whom it may indemnify or advance expenses to pursuant to such law; and
(7) change the authorized size of the Board of Directors from not less than five
(5) nor more than nine (9) members to not less than three (3) nor more nine (9)
members.
As noted above, the provision of the Amended Bylaws regarding
indemnification generally requires the Company to indemnify its directors,
officers and others eligible for indemnification under Arizona law to the
fullest extent permitted by Arizona law and is intended to provide the maximum
protection available under Arizona law. Because this provision is tied to
Arizona law, it may be modified in accordance with future changes in such law
without further Stockholder action. At present, there is no pending litigation
or proceeding involving a director, officer, employee or other agent of the
Company for which indemnification is being sought, nor is the Company aware of
any threatened litigation that may result in claims for indemnification by any
director, officer, employee or other agent.
VOTING REQUIREMENTS
Each holder of Common Stock and each holder of Preferred Stock is
entitled to one vote per share held. The Preferred Stock is entitled to vote
together with the Common Stock as a single class.
The affirmative vote of holders of a majority of the outstanding shares
of Common Stock and Preferred Stock of the Company entitled to vote and present
in person or by proxy at the Annual Meeting is required for approval of Proposal
Four. Proxies solicited by the Board of Directors will be voted for approval of
Proposal Four. Stockholders are not entitled to cumulate votes.
For this purpose, a Stockholder voting through a proxy who abstains with respect
to approval of Proposal Four is considered to be present and entitled to vote on
the approval of Proposal Four at the meeting, and is in effect a negative vote,
but a Stockholder (including a broker) who does not give authority to a proxy to
vote on the approval of Proposal Four shall not be considered present and
entitled to vote on Proposal Four.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL FOUR.
-21-
<PAGE> 24
PROPOSAL FIVE
ELECTION OF DIRECTORS
NOMINEES
The Board of Directors currently consists of five members holding seats
to serve as members until the next Annual Meeting of Stockholders or until their
respective successors are duly elected and qualified, unless they earlier resign
or are removed from office. The Company's Articles of Incorporation presently
provide for a Board of Directors of not less than five (5) nor more than nine
(9) in number, with the exact number to be fixed as provided in the Company's
Bylaws. Proposal Three, if approved by the Stockholders, would amend the
Company's Articles of Incorporation to, among other things, permit a
three-member Board.
Robert Campbell and Edward Cain are not standing for re-election to the
Board of Directors. Accordingly, the Board of Directors proposes that Wayne
Collignon, Dirk Anderson and Scott Ryan be elected to serve as the members of
the Board of Directors. Each of the nominees is currently serving as a director,
and a brief description of the business experience of each nominee is set forth
below in the table under the heading "Directors and Executive Officers." UNLESS
OTHERWISE INSTRUCTED, THE PERSONS NAMED IN THE ACCOMPANYING PROXY WILL VOTE FOR
THE ELECTION OF SUCH NOMINEES. All of the nominees have consented to being named
herein and have indicated their intention to serve if elected. If for any reason
any nominee should become unable to serve as a director, the accompanying proxy
may be voted for the election of a substitute nominee designated by the Board of
Directors.
VOTING REQUIREMENTS
The affirmative vote of holders of a plurality of the outstanding
shares of Common Stock and Preferred Stock entitled to vote and present in
person or by proxy at the Special Meeting is required for approval of the
election of directors. Proxies solicited by the Board of Directors will be voted
for approval of the election of directors. Stockholders are entitled to cumulate
their votes with respect to the election of directors and give one candidate a
number of votes equal to the number of directors to be elected multiplied by the
number of votes to which the Stockholder's shares are entitled, or may
distribute their votes on the same principle among as many candidates as they
choose, provided that votes cannot be cast for more than the total number of
directors to be elected. In order to cumulate votes, at least one Stockholder
must announce, prior to the casting of votes for the election of directors, that
he or she intends to cumulate votes. As is indicated in the proxy, discretionary
power to cumulate votes is being solicited. With regard to the election of
directors, votes may be cast in favor of or withheld from each nominee.
For this purpose, a Stockholder voting through a proxy who abstains with respect
to approval of the election of directors is considered to be present and
entitled to vote on the approval of the election of directors at the meeting,
and is in effect a negative vote, but a Stockholder (including a broker) who
does not give authority to a proxy to vote on the election of directors shall
not be considered present and entitled to vote on the election of directors.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL FIVE.
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the
directors and executive officers of the Company as of June 1, 1996.
-22-
<PAGE> 25
<TABLE>
<CAPTION>
Name Age Position, Tenure and Experience
- - ---- --- -------------------------------
<S> <C> <C>
Wayne R. Collignon 42 Mr. Collignon has been the Company's President and Chief Executive
Officer since August 10, 1995 and a director since August 31, 1995.
He was the Company's general manager from June 1993 through
August 10, 1995. Previously, he served as Vice President of All
Makes Office Furniture in Omaha, Nebraska, where his career spanned
nineteen years.
Dirk D. Anderson 32 Mr. Anderson has been the Company's Chief Financial Officer since
August 10, 1995 and a director since December 1995. He was the
Company's controller from August 1993 through August 10, 1995.
Previously, he served as an Audit Manager at Semple & Cooper, PLC,
where his career spanned seven years.
Scott W. Ryan 50 Mr. Ryan has been a director since December 1995. He was appointed
to the Board of Directors by the Company's Preferred Stockholders as
a result of the nonpayment of Preferred Stock dividends. Mr. Ryan is
the President of S.W. Ryan & Company, Inc., which is a securities
brokerage and asset management firm located in Bala Cynwyd,
Pennsylvania founded by Mr. Ryan in 1988. Previously, Mr. Ryan
was with other securities brokerage firms including Walsh Greenwood
& Co., Merrill Lynch, and Goldman, Sachs & Co. Mr. Ryan also is
a Board member of NASD District # 9.
</TABLE>
BOARD MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
During the fiscal year ended March 31, 1996, the Board of Directors met
seven times. The Board of Directors has established an Audit Committee and a
Compensation Committee. The Board does not have a Nominating Committee, and the
entire Board is responsible for recommending nominees to serve on the Board.
The Audit Committee did not meet during the fiscal year ended March 31,
1996 and presently has no members. The Board of Directors intends to appoint
members of the Audit Committee at the Board of Directors meeting following the
Annual Meeting. The Audit Committee receives reports with respect to loss
contingencies, the public disclosure of which may be legally required; annually
reviews and examines those matters that relate to the financial audit of the
Company; recommends to the Company's Board of Directors the selection, retention
and termination of the Company's independent public accountants; reviews the
professional services, proposed fees and independence of such accountants; and
provides for the periodic review and examination of management performance in
selected aspects of corporate responsibility.
The Compensation Committee did not meet during the fiscal year ended
March 31, 1996 and presently has no members. The Board of Directors intends to
appoint members of the Compensation Committee at the Board of Directors meeting
following the Annual Meeting. The Compensation Committee reviews annually the
performance of the Chief Executive Officer and President and of the other
principal officers whose compensation is subject to the Committee's review and
reports thereon to the Company's Board of Directors. In addition, the
Compensation Committee reviews the compensation of outside directors for their
services on the Board of Directors and reports thereon to the Board of
Directors.
During the fiscal year ended March 31, 1996, all incumbent directors
attended 75% or more of the aggregate of (i) the total number of meetings of the
Board of Directors (held during the period for which such person was a director)
and (ii) the total number of meetings held by all committees on which such
director served (during the period for which such person was a director).
-23-
<PAGE> 26
COMPENSATION OF DIRECTORS
The Company generally does not compensate its directors for services as
such, but reimburses them for reasonable expenses involved in attending
meetings.
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid to the current
Chief Executive Officer of the Company and the former Chief Executive Officer
who served as such during a portion of fiscal 1996 (collectively, the "Named
Executive Officers") for services rendered in all capacities to the Company
during the periods indicated. Compensation for each of the Company's other
executive officers was less than $100,000 during such periods.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
------------------- ----------------------
Awards
----------------------
Name and Principal Securities Underlying
- - ------------------
Position Year Ended Salary ($) Bonus ($) Options (#)
- - -------- ---------- ---------- --------- ------------
<S> <C> <C> <C> <C>
Robert L. Campbell March 31, 1996 $ 0 $ 0 $ 0
CEO(1) March 31, 1995 90,000 0 0
March 31, 1994 60,000 0 0
Wayne R. Collignon March 31, 1996 105,000 0 100,000
CEO and President(2) March 31, 1995 80,000 25,000 0
March 31, 1994 80,000 25,000 0
</TABLE>
- - ----------
(1) Mr. Campbell ceased to be the Chief Executive Officer of the Company in
August 1995.
(2) Mr. Collignon became Chief Executive Officer and President of the
Company in August 1995. From June 1993 through August 1995, Mr.
Collignon was the Company's general manager.
OPTION GRANTS
The Company has not adopted any stock option plan. The following table
provides information with respect to non-qualified stock option grants made to
the Named Executive Officers during the fiscal year ended March 31, 1996.
<TABLE>
<CAPTION>
OPTION GRANTS IN LAST FISCAL YEAR
- - -------------------------------------------------------------------------------------------------------
Number of Percent of Total
Securities Options Granted
Underlying Options to Employees in Exercise or Base
Name Granted (#) Fiscal Year Price ($/share) Expiration Date
- - -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Robert L. 0 N/A N/A N/A
Campbell
- - -------------------------------------------------------------------------------------------------------
Wayne R. 100,000 (1) 50% $2.75 August 10, 2005
Collignon
- - -------------------------------------------------------------------------------------------------------
</TABLE>
- - ----------
(1) Such options are presently exercisable; provided, however, that Mr.
Collignon may not sell or otherwise transfer any shares acquired upon
exercise of the option until August 10, 1996. The Company has agreed to
register the shares issuable upon exercise of the option by filing a
registration statement on Form S-8 with the Securities and Exchange
Commission. The option exercise price equals the fair market value of
the underlying common stock on the date of grant.
-24-
<PAGE> 27
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES
The following table sets forth information with respect to the number
of unexercised options held by the Named Executive Officers at March 31, 1996.
None of such options are in-the-money and no Named Executive Officer exercised
any options during the fiscal year ended March 31, 1996.
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES
- - ------------------------------------------------------------------------------------------
<S> <C>
Name Number of Securities Underlying Unexercised
Options at FY-End (#) -- Exercisable/Unexercisable
- - ------------------------------------------------------------------------------------------
Robert L. Campbell N/A
- - ------------------------------------------------------------------------------------------
Wayne R. Collignon 100,000/0
- - ------------------------------------------------------------------------------------------
</TABLE>
EMPLOYMENT AGREEMENTS AND TERMINATION OF EMPLOYMENT ARRANGEMENTS
The Company has entered into an employment agreement with Mr. Collignon
pursuant to which he serves as the Company's President and Chief Executive
Officer. Unless sooner terminated, the agreement continues through August 10,
1998, and is automatically extended for successive one year periods unless
either the Board of Directors or Mr. Collignon gives written notice to the other
at least ninety days prior to the end of the initial or any renewal term of its
or his intention not to renew. Under the agreement, Mr. Collignon receives an
annual base salary of $105,000. Increases in the base salary and bonuses are at
the discretion of the Board of Directors. Mr. Collignon is entitled to
participate in all retirement and employee benefit plans that the Company may
adopt for the benefit of its senior executives, and is entitled to a car
allowance of $300 per month. The agreement also entitled Mr. Collignon to
receive the options described above under the heading "Option Grants."
Under the agreement, if Mr. Collignon's employment is terminated by
reason of death, Disability or Retirement, upon expiration of the term of the
agreement, by the Company for Cause or by Mr. Collignon without Good Reason (in
each case as such terms are defined in the agreement), the Company shall: (a)
pay Mr. Collignon any base salary which has accrued but not been paid as of the
termination date (the "Accrued Base Salary"); (b) reimburse Mr. Collignon for
expenses incurred by him prior to termination which are subject to reimbursement
pursuant to applicable Company policies (the "Accrued Reimbursable Expenses");
(c) provide to Mr. Collignon any accrued and vested benefits required to be
provided by the terms of any Company-sponsored benefit plans (the "Accrued
Benefits"); (d) pay Mr. Collignon 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) permit Mr. Collignon to exercise all vested, unexercised
stock options outstanding at the termination date; and (f) to the extent
permitted by the terms of the policies then in effect, give Mr. Collignon a
right of first refusal to cause the transfer of the ownership of all key-man
life insurance policies maintained by the Company on Mr. Collignon to Mr.
Collignon at Mr. Collignon's expense (the "Right of First Refusal"). If Mr.
Collignon's employment is terminated by the Company without Cause or by Mr.
Collignon for Good Reason, the Company shall: (a) pay Mr. Collignon the Accrued
Base Salary; (b) pay Mr. Collignon the Accrued Reimbursable Expenses; (c) pay
Mr. Collignon the Accrued Benefits; (d) pay Mr. Collignon the Accrued Bonus; (e)
pay Mr. Collignon his base salary, as and when it would have been paid had the
termination not occurred, for a period of six months following the termination
date; (f) maintain in effect, until the first to occur of (i) his attainment of
comparable benefits upon alternative employment or (ii) six months following the
termination date, the employee benefits in which he was entitled to participate
immediately prior to such termination; (g) permit Mr. Collignon to exercise all
vested, unexercised stock options in accordance with the terms of the plans and
agreements pursuant to which they were issued; and (g) give Mr. Collignon the
Right of First Refusal.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's directors and officers, and persons who
own more than 10% of a registered class of the Company's
-25-
<PAGE> 28
equity securities, to file with the Securities and Exchange Commission ("SEC")
initial reports of ownership and reports of changes in ownership of the
Company's equity securities. Officers, directors and greater than 10%
stockholders are required by SEC regulations to provide the Company with copies
of all Section 16(a) reports they file. To the Company's knowledge, based solely
upon a review of the copies of such reports furnished to the Company and written
representations that no other reports were required, the Company believes that
all Section 16(a) filing requirements applicable to the Company's officers,
directors and greater than 10% stockholders were satisfied during the fiscal
year ended March 31, 1996.
CERTAIN TRANSACTIONS
RELATIONSHIP WITH FACILITEC, INC. The Company has maintained in the
past and anticipates that it will maintain in the future, certain business
relationships with Facilitec, Inc., which is owned by Edward J. Cain and Robert
L. Campbell, both of whom were directors and executive officers of the Company
during the year ended March 31, 1996. Messrs. Cain and Campbell are no longer
executive officers of the Company and are not standing for re-election to the
Board of Directors at the Annual Meeting. The Company occasionally sells
reconditioned workstations to Facilitec to enable Facilitec to satisfy demands
by its customers for reconditioned workstations to supplement their orders for
new workstations. The Company also purchases from Facilitec new Haworth
component parts to satisfy the Company's needs for such parts in its
reconditioning activities. From time to time, the Company purchases used
workstations and used component parts obtained by Facilitec as trade-ins so as
to fulfill a portion of the Company's needs for these items in its
reconditioning activities.
The Company believes that its relationship with Facilitec has been a
positive factor in the Company's operations. This relationship has enabled the
Company to satisfy its requirements for new and used component parts which are
necessary to recondition used workstations, to obtain used workstations for
reconditioning and sale to its customers and to obtain used workstations for
resale.
Further, the Company does not believe that it encounters any
significant competition from Facilitec. The Company is a reconditioner of used
workstations and Facilitec is a distributor of new Haworth workstations. There
are significant differences in the two markets in terms of customer preferences,
price, product availability and delivery time. While potential customers for
workstations occasionally may consider either new or used workstations, the
Company believes that the decision to purchase new or used workstations
generally is made before requests for proposals are submitted to either new
product distributors such as Facilitec or to reconditioners such as the Company.
In addition, the business of Facilitec is limited to the State of Arizona, while
the Company conducts its business on a nationwide basis. The Company believes
that the relatively small population of the State of Arizona mitigates the
importance of any competition from Facilitec on the overall business of the
Company even if the Company should encounter any unanticipated competition from
Facilitec in the future.
The Company had sales to Facilitec in the amounts of $175,963 and
$111,387 for the fiscal years ended March 31, 1995 and March 31, 1996,
respectively, and the Company's purchases from Facilitec were $318,919 and
$212,020 in the fiscal years ended March 31, 1995 and March 31, 1996,
respectively. At March 31, 1996, the Company owed Facilitec $117,530 and
Facilitec owed the Company $5,932.
The Company believes that the terms of the above transactions with
Facilitec are no less favorable to the Company than could have been obtained
from non-affiliated parties.
-26-
<PAGE> 29
PROPOSAL SIX
RATIFICATION OF APPOINTMENT OF INDEPENDENT PUBLIC ACCOUNTANTS
CHANGES IN THE COMPANY'S INDEPENDENT PUBLIC ACCOUNTANTS
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. 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 through McGladrey
& Pullen, LLP's issuance of their 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 this Proxy Statement. 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 Form 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.
RATIFICATION OF APPOINTMENT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Company's Board of Directors has selected, and is submitting to the
Stockholders for ratification, the appointment of Semple & Cooper, PLC to serve
as independent public accountants to audit the financial statements of the
Company for the fiscal year ending March 31, 1997 and to perform other
accounting services as may be requested by the Company. Semple & Cooper, PLC has
acted as independent public accountants for the Company since its appointment
effective March 28, 1996.
Representatives of Semple & Cooper, PLC are expected to be present at
the Annual Meeting, will be available to respond to appropriate questions, and
will have the opportunity to make a statement if they desire to do so.
Although it is not required to do so, the Board of Directors has
submitted the selection of Semple & Cooper, PLC to the Stockholders for
ratification.
VOTING REQUIREMENTS
Each holder of Common Stock and each holder of Preferred Stock is
entitled to one vote per share held. The Preferred Stock is entitled to vote
together with the Common Stock as a single class.
-27-
<PAGE> 30
The affirmative vote of holders of a majority of the outstanding shares
of Common Stock and Preferred Stock of the Company entitled to vote and present
in person or by proxy at the Annual Meeting is required for approval of Proposal
Six. Proxies solicited by the Board of Directors will be voted for approval of
Proposal Six. Stockholders are not entitled to cumulate votes.
For this purpose, a Stockholder voting through a proxy who abstains with respect
to approval of Proposal Six is considered to be present and entitled to vote on
the approval of Proposal Six at the meeting, and is in effect a negative vote,
but a Stockholder (including a broker) who does not give authority to a proxy to
vote on the approval of Proposal Six shall not be considered present and
entitled to vote on Proposal Six.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL SIX.
-28-
<PAGE> 31
OTHER BUSINESS
The Company's Board of Directors is not aware of any other business to
be considered or acted upon at the Annual Meeting of the Stockholders other than
those described above. If other business requiring a vote of Stockholders is
properly presented at the meeting, proxies will be voted in accordance with the
judgment on such matters of the person or persons acting as proxy. If any matter
not appropriate for action at the Annual Meeting should be presented, the
holders of the proxies will vote against consideration thereof or action
thereon.
STOCKHOLDER PROPOSALS
The Company welcomes comments or suggestions from its Stockholders. If
a Stockholder desires to have a proposal formally considered at the 1997 Annual
Meeting of Stockholders, and evaluated by the Board for possible inclusion in
the Proxy Statement for that meeting, the proposal (which must comply with the
requirements of Rule 14a-8 promulgated under the Exchange Act) must be received
in writing by the Secretary of the Company at the address set forth on the first
page hereof on or before March 14, 1997.
ANNUAL REPORT
The Company's Annual Report to Stockholders, with audited financial
statements, accompanies this Proxy Statement and was mailed this date to all
Stockholders of record as of the Record Date. The Company will furnish to any
Stockholder submitting a request, without charge, a copy of the Company's Annual
Report on Form 10-KSB. Any exhibit to the Annual Report on Form 10-KSB will be
furnished to any Stockholder of the Company. The fee for furnishing a copy of
any exhibit will be 25 cents per page plus $3.00 for postage and handling.
FINANCIAL AND OTHER INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The statements contained in this Proxy Statement 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 Company's success in obtaining
additional financing, if necessary, the Company's ability to conclude a
corporate reorganization of its capital structure on terms that will eliminate
the arrearage of the Preferred Stock dividend as contemplated by Proposal One,
and the Company's ability to geographically diversify its operations on a
profitable basis. 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. These reports and statements include the Company's Annual Report on
Form 10-KSB for the year ended March 31, 1996.
RESULTS OF OPERATIONS
Reconditioned Systems, Inc. and its wholly-owned subsidiaries (the
"Company") reported a net loss of $1,728,052 for the fiscal year ended March 31,
1996 (the "reporting period") compared to a net loss of $2,015,008 for the
fiscal year ended March 31, 1995 (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.
-29-
<PAGE> 32
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 the
parent corporation, which is the Company's only operating entity 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 the parent level 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 the 2% decrease in the gross profit margin was the Company's lack of
working capital as its former lender reduced and then terminated the Company's
operating line of credit. 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 comparable
and reporting 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 consist 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
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. Because
this goodwill impairment occurred 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 ("FOG") was impaired because 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. Because 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.
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
-30-
<PAGE> 33
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. 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. 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 original restructuring plan was adopted. See 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>
================================================================================
Item Year Ended Year Ended Cash or
March 31, 1995 March 31, 1996 Non-Cash Charge
-------------- -------------- ---------------
- - --------------------------------------------------------------------------------
<S> <C> <C> <C>
Impairment of goodwill $ -- $ 563,562 Non-cash
- - --------------------------------------------------------------------------------
Realized loss on the 543,884 531,621 Non-cash
disposal and liquidation
of inventories
- - --------------------------------------------------------------------------------
Realized loss on the sale -- 100,048 Non-cash
of equipment
- - --------------------------------------------------------------------------------
Labor and other costs to 122,245 41,644 Cash
move out of certain
locations
- - --------------------------------------------------------------------------------
Impairment of certain -- 84,393 Non-cash
prepaid expenses and
other assets
- - --------------------------------------------------------------------------------
Buy-out of the 65,000 -- Cash
employment contract of
CUI's president
- - --------------------------------------------------------------------------------
Other -- 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
-31-
<PAGE> 34
operations have generated 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 from operations and its new
credit facility to fund its short-term growth plans. Under these plans, the
Company 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 much 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 available
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 period 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 operation 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 permitted 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 any dividends
(other than dividends payable solely in stock of the Company) or make any other
distributions
-32-
<PAGE> 35
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 the Preferred Stock Proposal, 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 monthly 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 the 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 pleased with its improved accounts receivable and
inventory turns and will seek 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 May 21, 1996, the
Company's Preferred Stock dividend arrearage was approximately $280,000 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 current dividends any time
in the near future. Despite the new Norwest credit facility, the Company's
improved operating results and its improved accounts receivable and inventory
turns, the Company believes that its financial condition and liquidity will
continue to deteriorate unless it is able to dramatically increase its income
from operations and its Preferred Stock dividend requirement is removed. As a
result of the dividend default, the Preferred Stockholders have appointed a
representative to the Company's Board of Directors.
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 existing growth plans, the Company believes the burden of the Preferred
Stock dividend requirement must be eliminated. At the Annual Meeting of the
Stockholders, the Stockholders will be asked to approve, among other things, a
reorganization of the Company's capital structure. Under the proposed
reorganization, the holders of the Preferred Stock as a class would convert each
share of Preferred Stock, together with any and all accrued but unpaid dividends
through the conversion date, into 13 shares of the Company's Common Stock and,
as a result, 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.
If the Stockholders do not approve the Preferred Stock Proposal and the
Company is unable to convert the Preferred Stock into Common Stock, the Company
will fall out of compliance with the covenants under the new Norwest credit
facility and likely will 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 that 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.
-33-
<PAGE> 36
FINANCIAL STATEMENTS
The following financial statements are attached in Exhibit 3:
<TABLE>
<CAPTION>
Page Number
-----------
RECONDITIONED SYSTEMS, INC. AND SUBSIDIARIES
<S> <C>
Consolidated Financial Statements -- March 31, 1996....................... 3-1
Independent Auditors' Reports....................................... 3-2
Consolidated Balance Sheet as of March 31, 1996..................... 3-4
Consolidated Statements of Operations for the
years ended March 31, 1996 and 1995................................. 3-6
Consolidated Statements of Stockholders' Equity
for the years ended March 31, 1996 and 1995......................... 3-7
Consolidated Statements of Cash Flows for the
years ended March 31, 1996 and 1995................................. 3-8
Notes to Consolidated Financial Statements......................... 3-10
</TABLE>
-34-
<PAGE> 37
DISSENTERS' RIGHTS
Under Arizona law, the holders of the Preferred Stock may dissent from
and obtain payment of the fair value of their shares if the Preferred Stock
Proposal is consummated. HOLDERS OF COMMON STOCK HAVE NO DISSENTERS' RIGHTS WITH
RESPECT TO ANY OF THE PROPOSALS UNDER ARIZONA LAW. A copy of Sections 10-1320
through 10-1328 of the Arizona Business Corporation Act (the "ABCA"), which
governs the procedures for the exercise of such dissenters' rights, is attached
as Exhibit 4. The description of dissenters' rights set forth below is a summary
only and is qualified in its entirety by reference to the text of Sections
10-1320 through 10-1328 of the ABCA.
Any Preferred Stockholder who wishes to dissent and obtain payment of
the fair value of his or her shares must: (1) cause the Company to receive,
before the vote is taken on the Preferred Stock Proposal, written notice of the
Stockholder's intention to demand payment for his or her shares if the Preferred
Stock Proposal is effectuated; and (2) not vote the shares in favor of the
Preferred Stock Proposal.
If the Preferred Stock Proposal is approved, the Company will, no later
than ten days after the Conversion Effective Date or the effective date of the
reverse stock split, as the case may be, deliver a written notice (the
"Dissenters' Notice") to all Preferred Stockholders who are entitled to demand
payment for their shares (i.e., who have satisfied the above requirements). The
Dissenters' Notice will: (1) state where the payment demand must be sent and
where and when share certificates shall be deposited; (2) supply a form for
demanding payment that includes the date of the first announcement to news media
or to Stockholders of the terms of the proposed corporate action and that
requires that the person asserting dissenters' rights certify whether or not the
person acquired beneficial ownership of the shares before that date; (3) set a
date by which the Company must receive the payment demand, which date shall be
at least thirty but not more than sixty days after the date the Dissenters'
Notice is delivered; and (4) be accompanied by a copy of Sections 10-1320
through 10-1328 of the ABCA.
A Stockholder who is given the Dissenters' Notice and desires to assert
dissenters' rights must demand payment, certify whether the Stockholder acquired
beneficial ownership of the shares before the date required to be set forth in
the Dissenters' Notice pursuant to item (2) above, and deposit the Stockholder's
certificates in accordance with the terms of the Dissenters' Notice. A
Stockholder who demands payment and deposits his or her certificates in this
manner retains all other rights of a Stockholder until these rights are canceled
or modified by the taking of the proposed corporate action.
ANY STOCKHOLDER WHO VOTES IN FAVOR OF THE PREFERRED STOCK PROPOSAL, WHO
DOES NOT DEMAND PAYMENT OR WHO DOES NOT DEPOSIT THE STOCKHOLDER'S CERTIFICATES
BY THE DATE SET IN THE DISSENTERS' NOTICE IS NOT ENTITLED TO PAYMENT FOR THE
STOCKHOLDER'S SHARES OF PREFERRED STOCK UNDER SECTIONS 10-1320 THROUGH 10-1328
OF THE ABCA.
Subject to certain exceptions, upon the Conversion Effective Date or
the effective date of the reverse stock split, as the case may be, the Company
will pay each dissenter who complies with the above procedures the amount the
Company estimates to be the fair value of the dissenters' shares of Preferred
Stock plus accrued interest (the "Payment"). The Payment will be accompanied by:
(1) certain financial statements of the Company; (2) a statement of the
Company's estimate of the fair value of the shares of Preferred Stock; (3) an
explanation of how the interest was calculated; (4) a statement of the
dissenter's right to demand payment under Section 10-1328 of the ABCA; and (5) a
copy of Sections 10-1320 through 10-1328 of the ABCA.
The Company may elect to withhold payment from a dissenter unless the
dissenter was the beneficial owner of the shares before the date set forth in
the Dissenters' Notice as the date of the first announcement to news media or to
Stockholders of the proposed corporate action. To the extent the Company elects
to so withhold payment, after taking the proposed corporate action, it shall
estimate the fair value of the shares plus accrued interest and shall pay this
amount to each dissenter who agrees to accept it in full satisfaction of his
demand. The Company shall
-35-
<PAGE> 38
send with its offer a statement of its estimate of the fair value of the shares,
an explanation of how the interest was calculated and a statement of the
dissenters' right to demand payment under Section 10-1328.
If a dissenter believes that the amount paid or offered is less than
the fair value of the shares or that the interest was incorrectly calculated, if
the Company fails to make payment within sixty days after the date set by the
Company by which the Company must receive the payment demand, or if the Company,
having failed to take the proposed action, does not return the deposited
certificates or does not release the transfer restrictions imposed on
uncertificated shares within sixty days after the date set for demanding
payment, the dissenter may give written notice (the "Additional Payment Notice")
to the Company of the dissenter's estimate of the fair value of the dissenter's
shares and of the amount of interest due and may demand payment of such
estimate, less any payment made by the Company. A DISSENTER WAIVES THE RIGHT TO
DEMAND ADDITIONAL PAYMENT UNLESS HE OR SHE CAUSES THE COMPANY TO RECEIVE THE
ADDITIONAL PAYMENT NOTICE WITHIN THIRTY DAYS AFTER THE COMPANY MADE OR OFFERED
PAYMENT FOR THE DISSENTER'S SHARES. If an Additional Payment Notice remains
unsettled, the Company shall commence a proceeding within sixty days after
receiving the Additional Payment Notice and shall petition the court to
determine the fair value of the shares of Preferred Stock and accrued interest.
If the Company does not commence such a proceeding within the sixty-day period,
it shall pay to each dissenter whose Additional Payment Notice remains unsettled
the amount demanded therein.
By Order of the Board of Directors,
/s/ Edward J. Cain
-----------------------------------
Edward J. Cain, Secretary
Tempe, Arizona
July 15, 1996
-36-
<PAGE> 39
EXHIBIT 1
FOURTH AMENDED AND RESTATED
ARTICLES OF INCORPORATION OF
RECONDITIONED SYSTEMS, INC.
Pursuant to A.R.S. Sections 10-1003, 10-1004 and 10-1007, Reconditioned
Systems, Inc., an Arizona corporation (the "Corporation"), hereby adopts the
following Articles of Incorporation amending and restating in their entirety the
Articles of Incorporation filed with the Arizona Corporation Commission (the
"Commission") on March 23, 1987, as amended and restated by filings with the
Commission on September 14, 1992, on December 16, 1992, on February 23, 1994,
and as further amended to date. The Fourth Amended and Restated Articles of
Incorporation hereinafter appearing correctly set forth without change the
provisions of the Articles of Incorporation as heretofore amended and amended
hereby, and supersede the original Articles of Incorporation filed March 23,
1987, the First Amended and Restated Articles of Incorporation filed September
14, 1992, the Second Amended and Restated Articles of Incorporation filed
December 16, 1992, the Certificate filed February 23, 1994 and the Third Amended
and Restated Articles of Incorporation filed February 23, 1994.
ARTICLE I
The name of the Corporation shall be Reconditioned Systems, Inc.
ARTICLE II
The incorporators of the Corporation were Edward J. Cain, Robert L.
Campbell and Charles R. Johnson, and their current addresses are as follows:
Edward J. Cain
8565 East Peppertree Lane
Scottsdale, Arizona 85253
Robert L. Campbell
5345 East McLellan, #100
Mesa, Arizona 85205
Charles R. Johnson
7458 East Vista
Scottsdale, Arizona 85250
ARTICLE III
The known place of business of the Corporation is 444 West Fairmont,
Tempe, Arizona 85282. Said place of business shall be subject to change
hereafter in accordance with applicable law.
ARTICLE IV
The Corporation is organized for the purpose of transacting all lawful
business for which corporations may be organized under the laws of the State of
Arizona, as amended from time to time. The Corporation initially intends to
conduct in the State of Arizona (and elsewhere) the business of marketing
reconditioned office work stations, furniture and furnishings.
1-1
<PAGE> 40
ARTICLE V
A. AUTHORIZED CAPITAL. This Corporation is authorized to issue two (2)
classes of shares to be designated, respectively, Preferred Stock ("Preferred
Stock") and Common Stock ("Common Stock"). The total number of shares of
capital stock that the Corporation is authorized to issue is thirty million
(30,000,000) shares. The total number of shares of Preferred Stock that this
Corporation shall have authority to issue is ten million (10,000,000). The
total number of shares of Common Stock that this Corporation shall have
authority to issue is twenty million (20,000,000). Each six (6) shares of the
Corporation's Common Stock issued as of the date and time immediately following
the Conversion Effective Date (as such term is defined in Article V.E.4(l) of
these Articles of Incorporation) (the "Split Effective Date") shall be
automatically changed and reclassified, as of the Split Effective Date and
without further action, into one (1) fully paid and nonassessable share of the
Corporation's Common Stock; provided, however, that any fractional interest
resulting from such change and reclassification shall be rounded upward to the
nearest whole share.
B. DETERMINATION OF PREFERENCES, LIMITATIONS AND RELATIVE RIGHTS OF
PREFERRED STOCK. The Board of Directors is hereby authorized, at its option,
from time to time, to divide all or any part of the Preferred Stock into series
thereof and to determine, to the fullest extent permitted by applicable law,
the preferences, limitations and relative rights of each series of Preferred
Stock.
C. NO PREEMPTIVE RIGHTS; STOCK OPTIONS AND RIGHTS. No Stockholder of this
Corporation shall have any preemptive or other similar right or option with
respect to shares of capital stock proposed to be offered or issued by this
Corporation. The Board of Directors shall have the authority to create and
issue rights and options entitling the holders thereof to purchase from this
Corporation shares of its capital stock.
D. DISTRIBUTION; REPURCHASE OF SHARES. Subject to the requirements of
applicable law, the Board of Directors shall have the authority to effect a
distribution to the holders of its capital stock and shall have the authority
to effect a purchase by this Corporation of outstanding shares of its capital
stock.
E. SERIES A CONVERTIBLE PREFERRED STOCK. Five Hundred Fifty-Five
Thousand Five Hundred Fifty-Five (555,555) of the Preferred Shares authorized
to be issued by this Corporation are hereby divided into a separate series
hereby established and designated as "Series A Convertible Preferred Stock." In
addition to those otherwise provided by law and the Articles of Incorporation,
each share in such series is hereby fixed and determined to be subject to the
restrictions and qualifications, and to have the following powers, preferences,
rights and limitations.
1. Dividends.
(a) The holders of the Series A Convertible
Preferred Stock shall be entitled to receive dividends, at the rate of $0.405
per share (as adjusted for any stock dividends, combinations or splits with
respect to such shares) per annum payable out of funds legally available
therefor prior and in preference to any declaration or payment of any dividend
on the Common Stock or other equity securities of the Corporation. Such
dividends on the Series A Convertible Preferred Stock shall be payable, in cash,
when and as declared by the Board of Directors, quarterly, on February 1, May 1,
August 1, and November 1 of each and every year (each such quarterly date being
hereinafter referred to as a "Dividend Date"), commencing February 1, 1994.
Dividends shall accrue on each share of Series A Convertible Preferred Stock
from the date of issuance of the Series A Convertible Preferred Stock and shall
accrue from day to day, whether or not earned or declared. Such dividends shall
be cumulative so that if such dividends in respect of any previous or current
quarterly period, at the annual rate specified above, shall not have been paid
or declared and a sum sufficient for the payment thereof set apart, the
deficiency shall first be fully paid before any dividend or other distribution
shall be paid on or declared and set apart for the Common Stock or other equity
securities of this Corporation.
(b) No dividends (other than those payable solely in
the Common Stock of the Corporation) shall be paid on any Common Stock of the
Corporation during any fiscal year of the Corporation unless and until full
cumulative dividends on the Series A Convertible Preferred Stock in the total
amount of $0.405 per share (as adjusted for any stock dividends, combinations or
1-2
<PAGE> 41
splits with respect to such shares) per annum shall have been either (i) paid
or (ii) declared with a sum sufficient for the payment thereof set apart during
and for that quarter and for any prior quarter in which dividends accumulated
but remain unpaid.
2. Liquidation Preference.
(a) In the event of any liquidation, dissolution or
winding up of the Corporation, whether voluntary or involuntary, the holders of
the Series A Convertible Preferred Stock shall be entitled to receive, prior and
in preference to any distribution of any of the assets or surplus funds of the
Corporation to the holders of the Common Stock by reason of their ownership
thereof, the amount of $4.50 per share (as adjusted for any stock dividends,
combinations or splits with respect to such shares), plus an amount equal to the
accrued but unpaid dividends whether or not earned or declared on each share of
Series A Convertible Preferred Stock then held by them. If upon the occurrence
of such event, the assets and funds then distributed among the holders of the
Series A Convertible Preferred Stock shall be insufficient to permit the payment
to such holders of the full aforesaid preferential amount, then the entire
assets and funds of the Corporation legally available for distribution shall be
distributed ratably among the holders of the Series A Convertible Preferred
Stock in proportion to the preferential amount each such holder is otherwise
entitled to receive.
(b) Upon completion of the distributions described in
Subsection (a) of this Section 2, the remaining assets of the Corporation
available for distribution to shareholders shall be distributed among the
holders of Common Stock pro rata based on the number of shares of Common Stock
held by each of them.
(c) For purposes of this Section 2, (i) any
acquisition of the Corporation by means of merger or other form of corporate
reorganization in which outstanding shares of the Corporation are exchanged for
securities or other consideration issued, or caused to be issued, by the
acquiring corporation or its subsidiary (other than a mere reincorporation
transaction), or (ii) a sale of all or substantially all of the assets of the
Corporation (such transactions described in clauses (i) and (ii) being referred
to as "Sale Transactions") shall not be treated as a liquidation, dissolution or
winding up of the Corporation unless holders of fifty percent (50%) of the
shares of Series A Convertible Preferred Stock outstanding at such time elect to
treat such event within the provisions of this Section 2. In any event, any Sale
Transaction shall be subject to the provisions of Section 6 hereof. In the event
that the holders of the Series A Convertible Preferred stock elect to have a
Sale Transaction treated as a liquidation, dissolution or winding up covered by
Subsection (a) of this Section 2, the holders of the Series A Convertible
Preferred Stock and Common Stock of the Corporation shall be entitled to receive
at the closing of such Sale Transaction in cash, securities or other property
(valued as provided in Subsection (d) of Section 2 below) in the amounts as
specified in Sections 2(a) and 2(b) above, respectively.
(d) Whenever the distribution provided for in this
Section 2 shall be payable in securities or property other than cash, the value
of such distribution shall be the fair market value of such securities of other
property as determined in good faith by the Board of Directors.
3. Voting Rights.
(a) In addition to the rights specified in Subsection
(c) of this Section 3, each holder of Series A Convertible Preferred Stock shall
be entitled to the number of votes equal to the number of shares of Common Stock
into which such shares of Series A Convertible Preferred Stock could be
converted at the time of the taking of such vote or other action and, except as
otherwise set forth in Subsection (c) of this Section 3, shall have voting
rights and powers equal to the voting rights and powers of the Common Stock (and
such Series A Convertible Preferred Stock shall, except as otherwise provided
herein or as required by law, vote together with the Common Stock as a single
class) and shall be entitled to notice of any stockholders' meeting in
accordance with the Bylaws of the Corporation. Fractional votes shall not,
however, be permitted and any fractional voting rights resulting from the above
formula (after aggregating all shares into which shares of Series A Convertible
Preferred Stock held by each holder could be converted) shall be rounded to the
nearest whole number (with one-half being rounded upward). Each holder of Common
Stock shall be entitled to one (1) vote for each share of Common Stock held.
1-3
<PAGE> 42
(b) The holders of shares of Series A Convertible
Preferred Stock shall be entitled to vote as a class where provided by Arizona
law.
(c) For so long as any shares of the Series A
Convertible Preferred Stock shall remain outstanding, it shall be a "Dividend
Default" if the Corporation shall fail to pay all or any portion of the
dividends accrued on the Series A Convertible Preferred Stock pursuant to
Subsection (a) of Section 1 hereof on any quarterly Dividend Date (any such
Dividend Date on which all or any portion of a dividend is not paid at the rate
specified in Subsection (a) of Section 1 hereof, being hereinafter referred to
as a "Defaulted Dividend Date"), whether or not declared and whether or not
funds are legally available therefor. It shall be an "Event of Default"
hereunder if (i) the Corporation fails to pay to the holders of the Series A
Convertible Preferred Stock, in cash, an amount equal to the sum of (A) one-half
(1/2) or more of the amount of such accrued but unpaid dividend which was
accrued on the Defaulted Dividend Date, plus (B) the entire amount of the
dividend accrued from the Defaulted Dividend Date on the Dividend Date
immediately following a Defaulted Dividend Date, whether or not declared and
whether or not funds are legally available therefor, or (ii) on or prior to the
second Dividend Date immediately following a Defaulted Dividend Date, the
Corporation fails to pay to the holders of the Series A Convertible Preferred
Stock, in cash, an amount equal to all accrued and unpaid dividends from the
applicable Defaulted Dividend Date through and including such second Dividend
Date, whether or not declared and whether or not funds are legally available
therefor. During the continuance of any Event of Default (a "Voting Period"),
until the voting rights provided for herein shall have terminated in accordance
with Subsection (d) of this Section 3, of the Board of Directors shall
automatically and without any Board or stockholder action be increased by one
(1) director, and a majority of the holders of the Series A Convertible
Preferred Stock shall have the right, acting through their Designated Agent (as
defined below), to appoint to the Board of Directors a person to serve as such
additional director of the Corporation (the "Default Director"), to hold such
position for the term of the Voting Period or until such director's successor
shall have been replaced by the Designated Agent or the holders of the Series A
Convertible Preferred Stock as set forth in Subsection (e) of this Section 3.
(d) If all Events of Default shall have been cured
(i.e., all accrued and unpaid dividends through the date of such cure shall have
been paid), then the holders of the Series A Convertible Preferred Stock shall
be immediately divested of the special voting rights specified in Subsection (c)
of Section 3 hereof. Such special voting rights shall again accrue to the
holders of the Series A Convertible Preferred Stock in the event that there
occurs any further Event of Default. Upon the termination of any special voting
rights as hereinabove provided, the number of members of the Board of Directors
shall automatically and without any Board or stockholder action revert to the
number of members in effect immediately prior to the increase in the size of the
Board of Directors pursuant to Subsection (c) of this Section 3 and the Default
Director shall automatically be divested of his position as a director of the
Corporation.
(e) In the case of any vacancy in the position of the
Default Director, the Designated Agent shall have the right to appoint a new
Default Director to serve in such capacity for the term of the Voting Period.
Any Default Director may be removed and replaced during any Voting Period by the
Designated Agent or by the vote of the holders of two-thirds (2/3) of shares of
Series A Convertible Preferred Stock then outstanding, either for or without
cause, given at a special meeting of such stockholders called for that purpose
or pursuant to written consent of such stockholders.
(f) The holders of a majority of the Series A
Convertible Preferred Stock shall, upon the issuance of such shares, appoint a
"Designated Agent" who shall be responsible for the appointment and/or removal
of any Default Director. Any Designated Agent may be removed and replaced, at
any time and from time to time, by the vote of holders of two thirds (2/3) of
the then outstanding Series A Convertible Preferred Stock, either for or without
cause, given at a special meeting of such stockholders called for that purpose
or pursuant to a written consent of such stockholders.
4. Conversion.
The holders of Series A Convertible Preferred Stock shall have
conversion rights as follows (the "Conversion Rights"):
1-4
<PAGE> 43
(a) Right to Convert. Each share of Series A
Convertible Preferred Stock shall be convertible, at the option of the holder
thereof and without the payment of any additional consideration, at any time
after the date of issuance of such share, at the office of the Corporation or
any transfer agent for such stock, into such number of fully paid and
nonassessable shares of Common Stock as is determined by dividing $4.50 by the
Conversion Price (as hereinafter defined) applicable to such share, determined
as hereinafter provided, in effect on the date the certificate representing any
such share(s) is surrendered for conversion. The price at which shares of Common
Stock shall be deliverable upon conversion of shares of the Series A Convertible
Preferred Stock (the "Conversion Price") shall initially be $4.50 per share of
Common Stock. Such initial Conversion Price shall be adjusted as hereafter
provided in subsection (d) of this Section 4.
(b) Mandatory Conversion. Each share of Series A
Convertible Preferred Stock shall, at the option of the Corporation and subject
to the provisions of this Subsection (b), automatically be converted into shares
of Common Stock at the then-effective Conversion Price, in the event that the
average Closing Price (as hereinafter defined) for the Corporation's Common
Stock as reported on the Nasdaq system for any five (5) consecutive Trading Days
(as hereinafter defined) occurring after the date of issuance of the Series A
Convertible Preferred Stock shall equal or exceed an amount equal to 1.75
multiplied by the then effective Conversion Price. The term "Trading Day" shall
mean a day on which securities are traded on the Nasdaq system. The term
"Closing Price" shall mean the closing bid price for each day as furnished by
Nasdaq. It shall be a condition precedent to such mandatory conversion by the
Corporation that there shall become effective a registration statement covering
the shares of Common Stock into which the Series A Convertible Preferred Stock
is convertible (the "Registrable Shares") which would permit the continuous sale
and distribution of all of the Registrable Shares. In connection with the
Corporation filing and causing of the registration statement covering the
Registrable Shares to become effective, the Corporation shall take all such
other actions as are reasonably necessary to effect registration of such
Registrable Shares, including without limitation, the filing of post-effective
amendments and supplements, appropriate qualifications under applicable blue sky
or other state securities laws, and appropriate compliance with the Securities
Act of 1933, as amended.
(c) Mechanics of Conversion. Before any holder of
Series A Convertible Preferred Stock shall be entitled to convert the same into
shares of Common Stock, such holder shall surrender the certificate or
certificates therefor, duly endorsed, at the office of the Corporation or of any
transfer agent for such stock, and shall give written notice to the Corporation
at such office that he elects to convert the same and shall state therein the
name or names in which he wishes the certificate or certificates representing
shares of Common Stock to be issued. The Corporation shall, as soon as
practicable thereafter, issue and deliver at such office to such holder of
Series A Convertible Preferred Stock, a certificate or certificates for the
number of shares of Common Stock to which such holder shall be entitled as
aforesaid. Such conversion shall be deemed to have been made immediately prior
to the close of business on the date of surrender of the shares of Series A
Convertible Preferred Stock to be converted, and the person or persons entitled
to receive the shares of Common Stock issuable upon such conversion shall be
treated for all purposes as the record holder or holders of such shares of
Common Stock on such date. It shall be a condition precedent to the
effectiveness of the conversion of shares of Series A Convertible Preferred
Stock that all accumulated and unpaid dividends on the shares to be so converted
be paid by the Corporation to the holder of the Series A Convertible Preferred
stock being so converted.
(d) Conversion Price Adjustments. The Conversion
Price of the Series A Convertible Preferred Stock shall be subject to adjustment
from time to time as follows:
(i)In the event that the Corporation should
at any time or from time to time after the issuance of the Series A Convertible
Preferred Stock fix a record date for the effectuation of a split or subdivision
of the outstanding shares of Common Stock or the determination of holders of
Common Stock entitled to receive a dividend or other distribution payable in
additional shares of Common Stock or other securities or rights convertible
into, or entitling the holder thereof to receive directly or indirectly,
additional shares of Common Stock ("Common Stock Equivalents") without payment
of any consideration by such holder for the additional shares of Common Stock or
the Common Stock Equivalents (including the additional shares of Common Stock
issuable upon conversion or exercise thereof), then, as of such record date (or
the date of such dividend distribution, split or subdivision if no record date
is fixed), the Conversion Price of the Series A Convertible Preferred Stock
shall be
1-5
<PAGE> 44
appropriately decreased so that the number of shares of Common Stock issuable on
conversion of the Series A Convertible Preferred Stock shall be increased in
proportion to such increase of outstanding shares (including the aggregate
maximum number of shares of Common Stock deliverable upon exercise of such
Common Stock Equivalents).
(ii) If the number of shares of Common Stock outstanding at
any time after the date of issuance of the Series A Convertible Preferred Stock
is decreased by a combination of the outstanding shares of Common Stock, then,
following the record dates of such combination, the Conversion Price for the
Series A Convertible Preferred Stock shall be appropriately increased so that
the number of shares of Common Stock issuable on conversion of the Series A
Convertible Preferred Stock shall be decreased in proportion to such decrease in
outstanding shares.
(e) Other Distributions. In the event this Corporation shall declare a
distribution payable in securities of other persons, evidences of indebtedness
issued by this Corporation or other persons, assets (excluding cash dividends)
or options or rights not referred to in Subsection (d)(i) of Section 4, then, in
each such case for the purposes of this Subsection (e) of this Section 4, the
holders of the Series A Convertible Preferred Stock shall be entitled to a
proportionate share of any such distribution as though they were the holders of
the number of shares of Common Stock of the Corporation into which their shares
of Series A Convertible Preferred Stock are convertible as of the record date
fixed for the determination of the holders of Common Stock of the Corporation
entitled to receive such distribution.
(f) Recapitalization. If at any time or from time to time there shall
be a recapitalization of the Common Stock (other than a subdivision or
combination of assets provided for elsewhere in this Section 4), provision shall
be made so that the holders of the Series A Convertible Preferred Stock shall
thereafter be entitled to receive upon conversion of the Series A Convertible
Preferred Stock the number of shares of stock or other securities or property of
the Corporation or otherwise, to which a holder of Common Stock deliverable upon
conversion would have been entitled on such recapitalization. In any such case,
appropriate adjustment shall be made in the application of the provisions of
this Section 4 with respect to the rights of the holders of the Series A
Convertible Preferred Stock after the recapitalization to the end that the
provisions of this Section 4 (including adjustment of the Conversion Price then
in effect and the number of shares purchasable upon conversion of the Series A
Convertible Preferred Stock) shall be applicable after that event as nearly
equivalent as may be practicable.
(g) No Impairment. This Corporation will not, by amendment of its
Articles of Incorporation or through any reorganization, recapitalization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms to be observed or performed hereunder by this
Corporation, but will at all times in good faith assist in the carrying out of
all the provisions of this Section 4 and in the taking of all such action as may
be necessary or appropriate in order to protect the Conversion Rights of the
holders of the Series A Convertible Preferred Stock against impairment.
(h) No Fractional Shares and Certificate as to Adjustments.
(i) No fractional shares shall be issued upon conversion of
the Series A Convertible Preferred Stock, and the number of shares of Common
Stock to be issued shall be rounded to the nearest whole share. Whether or not
fractional shares are issuable upon such conversion shall be determined on the
basis of the total number of shares of Series A Convertible Preferred Stock the
holder is at the time converting into Common Stock and the number of shares of
Common Stock issuable upon such aggregate conversion.
(ii) Upon the occurrence of each adjustment or readjustment of
the Conversion Price of Series A Convertible Preferred Stock pursuant to this
Section 4, the Corporation, at its expense, shall promptly compute such
adjustment or readjustment in accordance with the terms hereof and prepare and
furnish to each holder of Series A Convertible Preferred Stock a certificate
setting forth such adjustment or readjustment and showing in detail the facts
upon which such adjustment or readjustment is based. The Corporation
1-6
<PAGE> 45
shall, upon the written request at any time of any holder of Series A
Convertible Preferred Stock, furnish or cause to be furnished to such holder a
like certificate setting forth (A) such adjustment and readjustment, (B) the
Conversion Price at the time in effect, and (C) the number of shares of Common
Stock and the amount, if any, of other property which at the time would be
received upon the conversion of a share of Series A Convertible Preferred Stock.
(i) Notices of Record Date. In the event of any taking by the
Corporation of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend or other distribution, any right to subscribe for, purchase or
otherwise acquire any shares of stock of any class or any over securities or
property, or to receive any other right, or to participate as a holder of Common
Stock in any Sale Transaction, the Corporation shall mail to each holder of
Series A Convertible Preferred Stock, at least twenty (20) days prior to the
date specified therein, a notice specifying the date on which any such record is
to be taken for the purpose of such dividend, distribution, Sale Transaction or
right, and the amount and character of (i) such dividend, distribution or right
or (ii) the consideration to be received by holders of Common Stock pursuant to
such Sale Transaction.
(j) Reservation of Stock Issuable Upon Conversion. This Corporation
shall at all times reserve and keep available out of its authorized but unissued
shares of Common Stock solely for the purpose of effecting the conversion of the
shares of the Series A Convertible Preferred Stock such number of its shares of
Common Stock as shall from time to time be sufficient to effect the conversion
of all then outstanding shares of the Series A Convertible Preferred Stock; and
if at any time the number of authorized but unissued shares of Common Stock
shall not be sufficient to effect the conversion of all then outstanding shares
of the Series A Convertible Preferred Stock, in addition to such other remedies
as shall be available to the holder of such Preferred Stock, this Corporation
will take such corporate action as may, in the opinion of its counsel, be
necessary to increase its authorized but unissued shares of Common Stock to such
number of shares as shall be sufficient for such purposes.
(k) Notices. Any notice required by the provisions of this Section 4 to
be given to the holders of shares of Series A Convertible Preferred Stock shall
be deemed given if deposited in the United States mail, postage prepaid, and
addressed to each holder of record at this address appearing on the books of
this Corporation.
(l) Automatic Conversion on August 12, 1996. Notwithstanding any other
provision of Article V.E. of these Articles of Incorporation, effective at 12:01
MST on August 12, 1996 (the "Conversion Effective Date"):
(i) the outstanding shares of Series A Convertible Preferred
Stock, together with any and all accrued but unpaid dividends through the
Conversion Effective Date (the "Accrued Dividends") shall automatically be
converted into shares of Common Stock on the basis of 13 shares of Common Stock
for each share of Series A Convertible Preferred Stock and Accrued Dividends
thereon;
(ii) the holders of Series A Convertible Preferred Stock shall
no longer be entitled to receive dividends on the Series A Convertible Preferred
Stock, shall no longer be entitled to any liquidation preference, shall no
longer be entitled to elect a Default Director to the Company's Board of
Directors during Dividend Defaults, and shall no longer have any of the other
rights associated with the Series A Convertible Preferred Stock;
(iii) Article V.E. of these Articles of Incorporation shall
terminate and be of no further force or effect, except that the provisions of
this Article V.E.4(l) shall continue to apply;
(iv) each stock certificate representing issued and
outstanding shares of Series A Convertible Preferred Stock will automatically
represent the proportionate number of shares of Common Stock. The holders of
Series A Convertible Preferred Stock may, but are not required to, exchange
their existing Series A Convertible Preferred Stock certificates for
certificates representing the proportionate number of shares of Common Stock. If
not exchanged earlier, the Series A Convertible Preferred Stock certificate will
be exchanged
1-7
<PAGE> 46
for certificates representing the proportionate number of shares of Common Stock
at such time as a holder surrenders the certificates for the purpose of
transferring shares to another person; and
(v) the 555,555 shares of Series A Convertible
Preferred Stock which were issued shall be cancelled and shall not be available
for future issuance.
5. Protective Provisions. So long as any shares of Series A Convertible
Preferred Stock are outstanding, this Corporation shall not, without first
obtaining the approval (by vote or written consent, as provided by law) of the
holders of at least a majority of the then outstanding shares of Series A
Convertible Preferred Stock:
(a) effect or agree to effect a Sale Transaction or any
reclassification or other change of any stock, or any recapitalization of the
Corporation;
(b) alter or change the rights, preferences or privileges of
the shares of Series A Convertible Preferred Stock so as to affect adversely the
shares;
(c) increase the authorized number of shares of Series A
Convertible Preferred Stock;
(d) create any new class or series of stock having a
preference over, being on a parity with, the Series A Convertible Preferred
Stock with respect dividends or upon liquidation;
(e) redeem, purchase or otherwise acquire for value (or pay
into or set aside for a sinking fund for such purpose) any share or shares of
Series A Convertible Preferred Stock otherwise than by conversion in accordance
with Section 4 above;
(f) redeem, purchase or otherwise acquire for value (or pay
into or set aside for a sinking fund for such purpose) any share or shares of
Common Stock; or
(g) amend its Articles of Incorporation if such amendment
would change any of the rights, preferences or privileges provided for herein
for the benefit of any shares of Series A Convertible Preferred Stock. Without
limiting the generality of the preceding sentence, the Corporation shall not
amend its Articles of Incorporation or Bylaws without the approval of the
holders of the Series A Convertible Preferred Stock as aforesaid if such
amendment would:
(i) reduce the dividend rate on the Series A
Convertible Preferred stock provided for herein, or make such dividends
non-cumulative, or defer the date from which dividends will accrue, or cancel
accrued and unpaid dividends, or change the relative seniority rights of the
holders of the Series A Convertible Preferred Stock as to the payment of
dividends in relation to the holders of any other capital stock of the
Corporation;
(ii) reduce the amount payable to the holders of the
Series A Convertible Preferred Stock upon the voluntary or involuntary
liquidation, dissolution, or winding up of the Corporation, or change the
relative seniority of the liquidation preferences of the holders of the Series A
Convertible Preferred Stock to the rights upon liquidation of the holders of any
other capital stock of the Corporation;
(iii) make the Series A Convertible Preferred Stock
redeemable at the option of the Corporation;
(iv) cancel or modify the Conversion Rights of the
Series A Convertible Preferred Stock provided for in Section 5 hereof; or
(v) change the authorized number of directors of the
Corporation.
1-8
<PAGE> 47
6. Amendment and Waivers. Any term of Article V.E. of these
Articles of Incorporation may be amended and the observance of any term of
Article V.E. of these Articles of Incorporation may be waived (either generally
or in a particular instance and either retroactively or prospectively), only
with the approval by written consent of the Corporation and the written consent
of the holders of a majority of all shares of Series A Convertible Preferred
Stock then outstanding. Any amendment or waiver so effected shall be binding
upon the Corporation and any holder of Series A Convertible Preferred Stock.
ARTICLE VI
The business and affairs of this Corporation shall be conducted by a
Board of Directors of not less than three (3) nor more than nine (9) members, as
established from time to time by resolution of said Board. The names and
addresses of the persons who are to serve as directors until the next annual
meeting of shareholders or until their successors are elected and qualify are:
Wayne R. Collignon
444 West Fairmont
Tempe, Arizona 85282
Dirk D. Anderson
444 West Fairmont
Tempe, Arizona 85282
Scott W. Ryan
111 Presidential Boulevard
Suite 246
Bala Cynwyd, Pennsylvania 19004
ARTICLE VII
The Corporation shall indemnify to the fullest extent permitted by law
any person who incurs expenses or liabilities by reason of the fact he or she is
or was an officer, director, employee or agent of the Corporation or is or was
serving at the request of the Corporation as a director, officer, employee or
agent of another foreign or domestic corporation, partnership, limited liability
company, joint venture, trust, employee benefit plan or other entity. The
foregoing indemnification shall be mandatory in all circumstances in which
indemnification is permitted by law.
ARTICLE VIII
The Corporation elects not to be subject to Title 10, Chapter 23,
Article 2 of the Arizona Revised Statutes relating to "Control Share
Acquisitions" and elects not to be subject to Title 10, Chapter 23, Article 3 of
the Arizona Revised Statutes relating to "Business Combinations."
ARTICLE IX
FC Service Corporation, an Arizona corporation, Two North Central
Avenue, Suite 2200, Phoenix, Arizona 85004-2390, is hereby appointed the
statutory agent for the Corporation for the State of Arizona.
ARTICLE X
To the fullest extent permitted by the Arizona Revised Statutes as the
same exist or may be hereafter amended, no director of the Corporation shall be
liable to the Corporation or its Stockholders for monetary damages for any
action taken or any failure to take any action as a director. No repeal,
amendment or modification of this Article X, whether direct or indirect, shall
eliminate or reduce its effect with respect to any act or failure to act of a
director of the Corporation occurring prior to such repeal, amendment or
modification.
1-9
<PAGE> 48
IN WITNESS WHEREOF, the President and Secretary of the Corporation,
acting for and on behalf of the Corporation and at the direction of the Board of
Directors of the Corporation, have hereunto set their hands this ___ day of
________, 1996.
RECONDITIONED SYSTEMS, INC.,
an Arizona corporation
- - ------------------------------ ------------------------------
Wayne Collignon, President Edward J. Cain, Secretary
1-10
<PAGE> 49
EXHIBIT 2
AMENDED AND RESTATED
BYLAWS
of
RECONDITIONED SYSTEMS, INC.,
an Arizona corporation
ARTICLE I
Articles of Incorporation
Section 1.01. Reference to Articles. Any reference herein made to the
corporation's articles shall be deemed to refer to its articles of incorporation
and all amendments thereto as of any given time on file with the Arizona
Corporation Commission (or any successor to its functions).
Section 1.02. Seniority. The articles shall in all respects be
considered senior and superior to these bylaws, with any inconsistency to be
resolved in favor of the articles, and with these bylaws to be deemed
automatically amended from time to time to eliminate any such inconsistency
which may then exist.
ARTICLE II
Corporation Offices
Section 2.01. Known Place of Business. The known place of business of
the corporation in the State of Arizona shall be the office of its statutory
agent unless otherwise designated in the articles or as provided in Section 2.02
hereof. The corporation may have such other offices, either within or outside of
the State of Arizona, as the board of directors may designate or as the business
of the corporation may require from time to time.
Section 2.02. Changes. The board of directors may change the
corporation's known place of business or its statutory agent from time to time
by filing a statement with the Arizona Corporation Commission pursuant to
applicable law.
ARTICLE III
Shareholders
Section 3.01. Annual Meetings. An annual meeting of the shareholders
shall be held at such date, time and place as determined by the board of
directors, which date shall be within thirteen (13) months of the last annual
meeting of the shareholders, or in the absence of action by the board, as set
forth in the notice given, or waiver signed, with respect to such meeting
pursuant to Section 3.03 below. At the annual meeting, shareholders shall elect
a board of directors and transact such other business as may be properly brought
before the meeting. If for any reason any annual meeting is not held during the
period set forth above, a deferred annual meeting may thereafter be called and
held in lieu thereof, at which the same proceedings (including the election of
directors) may be conducted. The failure to hold an annual meeting during the
period set forth above shall not affect the validity of any corporate action.
Any director elected at any annual meeting, deferred annual meeting or special
meeting shall continue in office until the election of his successor, subject to
his earlier resignation pursuant to Section 7.01 below or his removal by the
shareholders pursuant to Section 4.10 below.
2-1
<PAGE> 50
Section 3.02. Special Meetings. Special meetings of the shareholders
may be held whenever and wherever called for by the chairman of the board, the
president or the board of directors, the written demand of the holders of not
less than ten percent (10%) of all issued and outstanding shares of each voting
group of the corporation entitled to vote at any such meeting, or as otherwise
required by state law. Any written demand by shareholders shall state the
purpose or purposes of the proposed meeting, and business to be transacted at
any such meeting shall be confined to the purposes stated in the notice thereof,
and to such additional matters as the chairman of the meeting may rule to be
germane to such purposes.
Section 3.03. Notices. Not less than ten (10) nor more than sixty (60)
days before the date of any meeting of the shareholders and at the direction of
the person or persons calling the meeting, the secretary of the corporation, or
any other officer of the corporation or other person directed by the board of
directors, shall cause a written notice setting forth the date, time and place,
and, with respect to special meetings only, a description of the purpose or
purposes for which the meeting is called, to be delivered to each shareholder of
record at his last address as it appears on the corporation's records on the
applicable record date; provided that notice may be communicated orally if it is
reasonable to do so under the circumstances. Notice may be communicated in
person, by telephone, telegraph, teletype, facsimile or other form of wire or
wireless communication or by mail or private carrier, and shall be deemed given
and effective as provided by law.
When a meeting is adjourned to another date, time or place, written
notice need not be given of the adjourned meeting, if the date, time and place
thereof are announced at the meeting at which adjournment is taken; provided,
however, that if the date of any adjourned meeting is more than thirty (30) days
after the date for which the meeting was originally noticed, or if a new record
date is set for the adjourned meeting, written notice of the date, time and
place of the adjourned meeting shall be given in conformity with these bylaws.
At any adjourned meeting, any business may be transacted which might have been
transacted at the original meeting.
Section 3.04. Waiver of Notice. Any shareholder may waive call or
notice of any annual, deferred annual or special meeting (and any adjournment
thereof) at any time before, during which, or after it is held. Attendance of a
shareholder at any such meeting in person or by proxy shall: (i) waive objection
to lack of notice or defective notice of the meeting, unless the shareholder at
the beginning of the meeting objects to holding the meeting or transacting
business at the meeting; and (ii) waive objection to consideration of a
particular matter at the meeting that is not within the purpose or purposes
described in the meeting notice, unless the shareholder objects to considering
the matter when it is presented. No call or notice of a meeting of the
shareholders shall be necessary if each shareholder waives the same in writing
or by attendance.
Section 3.05. Shareholders of Record. For the purpose of determining
shareholders entitled to notice of or to vote at any meeting of shareholders
(and at any adjournment of such meeting), or shareholders entitled to consent to
corporate action without a meeting or shareholders entitled to receive payment
of any dividend, or for any other lawful action, the board of directors may fix
in advance a record date which shall not be more than seventy (70) nor less than
ten (10) days before the date of any meeting of shareholders, nor more than
seventy (70) days before the date of any such other action.
If no record date is fixed by the board of directors for determining
shareholders entitled to notice of, and to vote at, a meeting of shareholders,
the record date shall be at 4:00 in the afternoon on the day before the day on
which notice is given, or, if notice is waived, at the commencement of the
meeting. If no record date is fixed for determining shareholders entitled to
express written consent to corporate action without a meeting, the record date
shall be the time of the day on which the first written consent is served upon
an officer or director of the corporation.
A determination of shareholders of record entitled to notice of, and to
vote at, a meeting of shareholders shall apply to any adjournment of the
meeting; provided, however, that the board of directors may fix a new record
date for the adjourned meeting; and provided further that the board of directors
shall fix a new record date for any meeting adjourned to a date more than one
hundred twenty (120) days after the date fixed for the original meeting.
Section 3.06. Shareholder List for Meeting. After fixing a record date
for a meeting, the corporation shall prepare an alphabetical list of the names
of all of its shareholders who are entitled to notice of the meeting. The
2-2
<PAGE> 51
list shall be arranged by voting group, and within each voting group by class or
series of shares, and shall show the address of and number of shares held by
each shareholder. The shareholders' list shall be available for inspection by
any shareholder, beginning two (2) business days after notice of the meeting is
given for which the list was prepared and continuing through the meeting, at the
corporation's principal office, the office of the corporation's transfer agent
if specified in the meeting notice or at another place identified in the meeting
notice in the city where the meeting will be held. A shareholder, his agent or
his attorney, on written demand, may inspect and, subject to Arizona law, copy
the list during regular business hours and at his expense during the period it
is available for inspection. The corporation shall make the shareholders' list
available at the meeting, and any shareholder, his agent or his attorney may
inspect the list at any time during the meeting or any adjournment thereof. The
corporation's refusal or failure to prepare or make available the shareholders'
list does not affect the validity of action taken at the meeting. The
shareholders' list shall presumptively determine the identity of the
shareholders entitled to vote at the meeting and the number of shares held by
each of them.
Section 3.07. Proxies. Any shareholder entitled to vote may vote by
proxy at any meeting of the shareholders (and at any adjournment thereof) which
is specified in such proxy, provided that the proxy is executed in writing by
such shareholder or his duly authorized attorney-in-fact. An appointment of a
proxy is effective when received by the secretary or other officer or agent
authorized to tabulate votes. No proxy shall be valid after eleven (11) months
from the date of its execution, unless otherwise specifically provided thereon.
The burden of proving the validity of any undated, irrevocable or otherwise
contested proxy at a meeting of the shareholders shall rest with the person
seeking to exercise the proxy. A telegram, cablegram or facsimile appearing to
have been transmitted by a shareholder or by his duly authorized
attorney-in-fact may be accepted as a sufficiently written and executed proxy.
Section 3.08. Voting. Except for the election of directors (which shall
be governed by cumulative voting pursuant to applicable law) and except as may
otherwise be required by the corporation's articles, these bylaws or by statute,
each issued and outstanding share of the corporation (specifically excluding
shares held in the treasury of the corporation) represented at any meeting of
the shareholders in person or by a proxy given pursuant to Section 3.07 above,
shall be entitled to one vote on each matter submitted to a vote of the
shareholders at such meeting. Unless otherwise required by the corporation's
articles or by applicable law and except for the election of directors (which
shall be by a plurality of the votes cast), any question submitted to the
shareholders shall be resolved by a majority of the votes cast thereon, provided
that such votes constitute a majority of the quorum of that particular meeting,
whether or not such quorum is then present. Voting shall be by ballot on any
question as to which a ballot vote is demanded before the voting begins, by any
person entitled to vote on such question; otherwise, a voice vote shall suffice.
No ballot or change of vote shall be accepted after the polls have been declared
closed following the ending of the announced time for voting.
Section 3.09. Voting of Shares by Certain Holders. Shares of the
corporation held by another corporation may be voted by such corporation's
officer, agent or proxy as its bylaws may prescribe, or in the absence of such
bylaw provision, by any other person designated by resolution of its board of
directors, and such officer, agent or other person so designated may vote such
corporation's shares in this corporation in person or by proxy appointed by him.
Shares held by an administrator, executor, legal representative,
guardian, conservator or other legal representative may be voted by such
representative, either in person or by proxy, without a transfer of such shares
into his name. Shares standing in the name of a trustee, other than a trustee in
bankruptcy, may be voted by such representative, either in person or by proxy,
but no such trustee shall be entitled to vote shares held by him without a
transfer of such shares into his name.
Shares standing in the name of a receiver, trustee in bankruptcy or
assignee for the benefit of creditors may be voted by such representative,
either in person or by proxy. Shares held by or under the control of such a
receiver or trustee may be voted by such receiver or trustee, either in person
or by proxy, without the transfer thereof into his name if authority so to do is
contained in an appropriate order of the court by which such receiver or trustee
was appointed.
2-3
<PAGE> 52
A shareholder whose shares are pledged shall be entitled to vote such
shares until the shares have been transferred into the name of the pledgee, and
thereafter the pledgee shall be entitled to vote the shares so transferred.
If shares stand in the names of two or more persons, whether
fiduciaries, members of a partnership, joint tenants, tenants in common, tenants
by the entirety or tenants by community property or otherwise, or if two or more
persons have the same fiduciary relationship respecting the same shares, unless
the corporation is given a written instrument or order appointing them or
creating the relationship wherein it is so provided, their acts with respect to
voting shall have the following effect: (i) if only one votes, his act binds;
(ii) if more than one votes, the act of the majority so voting binds all; and
(iii) if more than one votes, but the vote is evenly split on any particular
matter, each faction may vote the shares in question proportionally.
Section 3.10. Quorum. At any meeting of the shareholders, the presence
in person or by proxy of the holders of a majority of the shares of the
corporation issued, outstanding and entitled to vote at the meeting shall
constitute a quorum of the shareholders for all purposes. Where a separate vote
by class or classes is required, a majority of the shares of such class or
classes present in person or by proxy shall constitute a quorum entitled to take
action with respect to the vote on that matter. In the absence of a quorum, any
meeting may be adjourned from time to time by its chairman, without notice other
than by announcement at the meeting, until a quorum is formed. At any such
adjourned meeting at which a quorum is present, any business may be transacted
which might have been transacted at the meeting as originally noticed. Once a
quorum has been formed at any meeting, the shareholders from time to time
remaining in attendance may continue to transact business properly brought
before the meeting until adjournment, notwithstanding the prior departure of
enough shareholders to leave less than a quorum.
Section 3.11. Election Inspectors. The board of directors, in advance
of any meeting of the shareholders, may appoint an election inspector or
inspectors to act at such meeting (and at any adjournment thereof). If an
election inspector or inspectors are not so appointed, the chairman of the
meeting may, or upon request of any person entitled to vote at the meeting
shall, make such appointment. If any person appointed as an inspector fails to
appear or to act, a substitute may be appointed by the chairman of the meeting.
If appointed, the election inspector or inspectors (acting through a majority of
them if there are more than one) shall determine the number of shares
outstanding, the authenticity, validity and effect of proxies and the number of
shares represented at the meeting in person and by proxy; the election
inspector(s) shall receive and count votes, ballots and consents and announce
the results thereof; the election inspector(s) shall hear and determine all
challenges and questions pertaining to proxies and voting; and, in general, the
election inspector(s) shall perform such acts as may be proper to conduct
elections and voting with complete fairness to all shareholders. No such
election inspector need be a shareholder of the corporation. Each inspector,
before entering upon the discharge of his duties, shall take and sign an oath
faithfully to execute the duties of inspector with strict impartiality and
according to the best of his ability. Every vote taken by ballot pursuant to
Section 3.08 shall be counted by an inspector or inspectors.
Section 3.12. Organization and Conduct of Meetings. Each meeting of the
shareholders shall be called to order and thereafter chaired by the chairman of
the board of directors if there is one; or, if not, or if the chairman of the
board is absent or so requests, then by the president; or if both the chairman
of the board and the president are unavailable, then by such other officer of
the corporation or such shareholder as may be appointed by the board of
directors. The corporation's secretary shall act as secretary of each meeting of
the shareholders; in his absence the chairman of the meeting may appoint any
person (whether a shareholder or not) to act as secretary for the meeting. After
calling a meeting to order, the chairman thereof may require the registration of
all shareholders intending to vote in person and the filing of all proxies with
the election inspector(s), if one or more have been appointed (or, if not, with
the secretary of the meeting). After the announced time for such filing of
proxies has ended, no further proxies or changes, substitutions or revocations
of proxies shall be accepted. If directors are to be elected, a tabulation of
the proxies so filed shall, if any person entitled to vote in such election so
requests, be announced at the meeting (or adjournment thereof) before the
closing of the election polls. Absent a showing of bad faith on his part, the
chairman of a meeting shall, among other things, have absolute authority to fix
the period of time allowed for the registration of shareholders and the filing
of proxies, to determine the order of business to be conducted at such meeting
and to establish reasonable rules for expediting the business of the meeting
(including any informal, or question and answer portions thereof).
2-4
<PAGE> 53
Section 3.13. Shareholder Approval or Ratification. The board of
directors may submit any contract or act for approval or ratification of the
shareholders, either at a duly constituted meeting of the shareholders or by
unanimous written consent to corporate action without a meeting pursuant to
Section 3.15 below. If any contract or act so submitted is approved or ratified
by a majority of the votes cast thereon at such meeting or by such unanimous
written consent, the same shall be valid and as binding upon the corporation and
all of its shareholders as it would be if it were the act of the shareholders.
Section 3.14. Informalities and Irregularities. All informalities or
irregularities in any call or notice of a meeting of the shareholders or in the
areas of credentials, proxies, quorums, voting and similar matters shall be
deemed waived if no objection is made at the meeting.
Section 3.15. Action by Shareholders Without a Meeting. Any action
required or permitted to be taken at a meeting of the shareholders of the
corporation may be taken without a meeting and without notice if a consent in
writing, setting forth the action so taken, is signed by all of the shareholders
entitled to vote with respect to the subject matter thereof. Such consent may be
executed in counterparts and shall have the same effect as a unanimous vote of
the shareholders of the corporation at a duly convened meeting.
Section 3.16. Meetings by Alternative Communications. The board of
directors may permit any or all of the shareholders to participate in any annual
or special meeting of shareholders or conduct the meeting through use of any
means of communication by which all of the shareholders participating may
simultaneously hear each other during the meeting. If the board elects to permit
participation by such means of communication, the notice of the meeting shall
specify how a shareholder may participate in the meeting by such means of
communication. The participation may be limited by the board of directors to
specified locations or means of communication. A shareholder participating in a
meeting by this means is deemed to be present in person at the meeting.
ARTICLE IV
Board of Directors
Section 4.01. Membership. The board of directors shall be comprised of
not less than three (3) nor more than nine (9) members who need not be
shareholders of the corporation. The directors shall be elected at each annual
meeting of the shareholders. The board of directors shall have the power to
increase or decrease its size within the aforesaid limits and to fill any
vacancies that may occur in its membership in the interval between the annual
meetings of the shareholders, whether resulting from an increase in the size of
the board or otherwise. Each director elected by the shareholders or the board
of directors shall hold office until his successor is duly elected and
qualified; provided, however, that the shareholders entitled to vote for the
election of directors at a shareholders' meeting may fill any vacancy in the
board of directors, if not already filled, or substitute another person to fill
the vacancy, in which case the term of office of the person elected by the board
of directors shall forthwith terminate. Any decrease in the size of the board
shall not become effective until the expiration of the term of the directors
then in office, unless at the time of such decrease there are vacancies on the
board which are being eliminated by the decrease.
Section 4.02. General Powers. All corporate powers shall be exercised
by or under the authority of and the business and affairs of the corporation
shall be managed under the direction of the board of directors.
Section 4.03. Regular Meetings. A regular annual meeting of the board
of directors shall be held as soon as practicable after the adjournment of each
annual meeting of the shareholders, either at the place of the shareholders'
meeting or at such other place as the directors elected at the shareholders'
meeting may have been informed of at or before the time of their election.
Additional regular meetings may be held at regular intervals on such dates and
at such places and times as the board of directors may determine.
Section 4.04. Special Meetings. Special meetings of the board of
directors may be held whenever and wherever called for by the chairman of the
board, the president, or one-third (1/3) of the directors then in office
(rounded up to the nearest whole number).
2-5
<PAGE> 54
Section 4.05. Notices. No notice need be given of regular meetings of
the board of directors. Notice of the date, time and place of any special
meeting shall be given to each director in person, by telephone, telegraph,
teletype, facsimile or other form of wire or wireless communication or by mail
or private carrier addressed to him at his latest address appearing on the
corporation's records, and shall be given at least two days before the meeting.
Notice must be in writing unless oral notice is reasonable under the
circumstances. Any person who has given notice hereunder may make an affidavit
that notice was given, which shall be conclusive that notice was so given.
Section 4.06. Waiver of Notice. Any director may waive call or notice
of any meeting (and any adjournment thereof) at any time before, during which,
or after it is held. A director's attendance or participation in a meeting
waives any required notice to him of the meeting unless the director at the
beginning of the meeting or promptly on his arrival objects to holding the
meeting or transacting business at the meeting and does not thereafter vote for
or assent to action taken at the meeting. No call or notice of a meeting of
directors shall be necessary if each of them waives the same in writing or by
attendance. Any meeting, once properly called and noticed (or as to which call
and notice have been waived) and at which a quorum is formed, may be adjourned
to another time and place by a majority of those in attendance.
Section 4.07. Quorum. A quorum for the transaction of business at any
meeting or adjourned meeting of the board of directors shall consist of a
majority of the directors then in office, except that when a vacancy or
vacancies exist in the board, a majority of the directors then in office shall
constitute a quorum. Once a quorum has been formed at any meeting, the directors
from time to time remaining in attendance may continue to transact business
properly brought before the meeting until adjournment, notwithstanding the prior
departure from the meeting of enough directors to leave less than a quorum. If a
quorum shall fail to attend any meeting, a majority of those present may adjourn
the meeting to another place, date or time without further notice or waiver
thereof.
Section 4.08. Voting. Any matter submitted to a meeting of the board of
directors shall be resolved by a majority of the votes cast thereon.
Section 4.09. Power to Act Notwithstanding Vacancy. Pending the filling
of vacancies in the board of directors, a majority of a full board of directors
may exercise the powers of the board of directors.
Section 4.10. Removal. Any director may be removed from the board of
directors, with or without cause, subject only to limitations provided by law.
Section 4.11. Executive Committee. The board of directors, by
resolution adopted by a majority of the full board, may name one or more of its
members as an executive committee. An executive committee shall have and may
exercise the powers of the board of directors in the management of the business
and affairs of the corporation while the board is not in session, subject to
such limitations as may be included in the board's resolution; provided,
however, that an executive committee shall not have the authority of the board
of directors in reference to the following matters: (i) the authorization of
distributions; (ii) the approval or submission to shareholders of any action
that requires shareholder approval under applicable law; (iii) the filling of
vacancies on the board of directors or on any committee of the board of
directors; (iv) the amendment of the articles of incorporation; (v) the
adoption, amendment or repeal of the bylaws; (vi) approval of a plan of merger
not requiring shareholder approval; (vii) authorization or approval of a
reacquisition of shares, except according to a formula or method prescribed by
the board of directors; (viii) authorization or approval of the issuance, sale
or contract for sale of shares or determination of the designation and relative
rights, preferences and limitations of a class or series of shares, except that
the board of directors may authorize the executive committee or an executive
officer of the corporation to do so within limits specifically prescribed by the
board of directors; and (ix) fixing the compensation of directors for serving on
the board or on any committee of the board of directors. Any member of the
executive committee may be removed, with or without cause, by the board of
directors. If any vacancy occurs in the executive committee, it shall be filled
by the board of directors. The board of directors, with or without cause, may
dissolve any committee or remove any member thereof at any time.
Section 4.12. Other Committees. The board of directors, from time to
time, by resolution adopted by a majority of the full board, may appoint other
standing or temporary committees from its membership and vest such committees
with such powers as the board may include in its resolution; provided, however,
that such committees
2-6
<PAGE> 55
shall be restricted in their authority as specifically set forth with respect to
the executive committee in Section 4.11 above.
Section 4.13. Tenure of Committee Members. Except in the case of
resignation, disqualification, removal or the inability to serve for any reason,
each member of any committee established under this Article IV shall hold office
until the next regular annual meeting of the board of directors and until his
successor is elected and qualified.
Section 4.14. Meetings of Committees. Regular meetings of committees
established under this Article IV may be held without notice on such days and at
such times and places as the committees may fix from time to time by resolution.
Special meetings of a committee may be called by any member thereof upon notice
to other members of the committee in the manner provided in Section 4.04 for
special meetings of the board of directors.
Section 4.15. Quorum of Committee Members. One-third (1/3) of the
members of a committee shall constitute a quorum for the transaction of business
at any meeting thereof, unless the committee shall consist of one (1) or two (2)
members, in which case one (1) member shall constitute a quorum. Action of any
committee must be authorized by the affirmative vote of a majority of the
members present at a meeting at which a quorum is present.
Section 4.16. Presumption of Assent. A director of the corporation who
is present at a meeting of the board of directors or of any committee at which
action is taken on any matter shall be deemed to have assented to the action
taken unless: (i) the director objects at the beginning of the meeting or
promptly upon the director's arrival to holding it or transacting business at
the meeting; (ii) the director's dissent or abstention from the action taken is
entered in the minutes of the meeting; or (iii) the director delivers written
notice of his dissent or abstention to the presiding officer of the meeting
before its adjournment or to the corporation before 5:00 p.m. on the next
business day after the meeting. The right of dissent or abstention shall not be
available to a director who voted in favor of the action.
Section 4.17. Compensation. By resolution of the board of directors,
each director may be paid his expenses, if any, of attendance at each meeting of
the board of directors or of any committee, and may be paid a fixed sum for
attendance at each such meeting and/or a stated salary as a director or
committee member. No such payment shall preclude any director from serving the
corporation in any other capacity and receiving compensation therefrom.
Section 4.18. Action by Directors Without a Meeting. Any action
required or permitted to be taken at a meeting of the board of directors or of
any committee thereof may be taken without a meeting if the action is taken by
the all of the directors or committee members. The action shall be evidenced by
one or more written consents describing the action taken and signed by all
directors or committee members. Such consent may be executed in counterparts and
shall have the same effect as a unanimous vote of the directors or committee
members of the corporation at a duly convened meeting.
Section 4.19. Meetings by Alternative Communications. The board of
directors may permit any or all of the directors to participate in any regular
or special meeting by or conduct the meeting through use of any means of
communication by which all of the directors participating may simultaneously
hear each other during the meeting. A director participating in a meeting by
this means is deemed to be present in person at the meeting.
ARTICLE V
Officers - General
Section 5.01. Elections and Appointments. The board of directors shall
elect or appoint a president, a secretary and a treasurer, and may choose a
chairman of the board, one or more vice presidents or such other officers as the
board of directors shall determine. The regular election or appointment of
officers shall take place at each annual meeting of the board of directors, but
elections of officers may be held at any other meeting of the board. A person
elected or appointed to any office shall continue to hold that office until the
election or
2-7
<PAGE> 56
appointment of his successor, subject to action earlier taken pursuant to
Section 5.04 or 7.01 below. The same individual may simultaneously hold more
than one office in the corporation.
Section 5.02. Additional Appointments. In addition to the officers
contemplated in Section 5.01 above, the board of directors may elect or appoint
other corporate or divisional officers or agents with such authority to perform
such duties as may be prescribed from time to time by the board of directors, by
the president or, in the case of assistant officers (as, for example, one or
more assistant secretaries), by the superior officer of any person so elected or
appointed. Each of such persons (in the order designated by the board) shall be
vested with all of the powers and charged with all of the duties of his superior
officer in the event of such superior officer's absence or disability.
Section 5.03. Bonds and Other Requirements. The board of directors may
require any officer to give bond to the corporation (with sufficient surety, and
conditioned for the faithful performance of the duties of his office) and to
comply with such other conditions as may from time to time be required of him by
the board.
Section 5.04. Removal; Delegation of Duties. The board of directors may
remove an officer of the corporation at any time with or without cause or
temporarily delegate his powers and duties to any other officer or to any
director. Such removal or delegation shall be without prejudice to the contract
rights, if any, of the person so removed or whose powers and duties have been
delegated. Election or appointment of an officer or agent shall not of itself
create contract rights.
Section 5.05. Salaries. The salaries of officers may be fixed from time
to time by the board of directors or (except as to the president's own) left to
the discretion of the president. No officer shall be prevented from receiving a
salary by reason of the fact that he also is a director of the corporation.
ARTICLE VI
Specific Officers
Section 6.01. Chairman of the Board. The board of directors may elect a
chairman to serve as a general executive officer of the corporation, and, if
specifically designated as such by the board, as the chief executive officer of
the corporation. If elected, the chairman shall preside at all meetings of the
board of directors and be vested with such other powers and duties as the board
may from time to time delegate to him.
Section 6.02. President and Vice President. Unless otherwise specified
by resolution of the board of directors, the president shall be the chief
executive officer of the corporation. The president shall supervise the business
and affairs of the corporation and the performance by all of its other officers
of their respective duties, subject to the control of the board of directors
(and of its chairman, if the chairman has been specifically designated as chief
executive officer of the corporation). One or more vice presidents may be
elected by the board of directors to perform such duties as may be designated by
the board or be assigned or delegated to them by the chief executive officer.
Any one of the vice presidents as authorized by the board shall be vested with
all of the powers and charged with all of the duties of the president in the
event of his absence or inability to act. Except as may otherwise be
specifically provided in a resolution of the board of directors, the president
or any vice president shall be a proper officer to sign, on behalf of the
corporation, any deed, bill of sale, assignment, option, mortgage, pledge, note,
bond, evidence of indebtedness, application, consent (to service of process or
otherwise), agreement, indenture or other instrument of any significant
importance to the corporation. The president or any vice president may represent
the corporation at any meeting of the shareholders of or with respect to any
action of the shareholders of any other corporation in which this corporation
then holds shares, and may vote this corporation's shares in such other
corporation in person or by proxy appointed by him and may otherwise exercise
any and all rights and powers which this corporation may possess by reason of
its ownership of securities in such other corporation, provided that the board
of directors may from time to time confer the foregoing authority upon any other
person or persons.
Section 6.03. Secretary. The secretary shall keep the minutes of
meetings of the shareholders, board of directors and any committee, and all
unanimous written consents of the shareholders, board of directors and any
committee of the corporation, and shall see that all notices are duly given in
accordance with the provisions of these
2-8
<PAGE> 57
bylaws or as required by law, and in case of his absence or refusal or neglect
to do so, notices may be served by any person so directed by the president. The
secretary shall be custodian of the corporate seal and corporate records, shall
have the authority to authenticate the corporate records and, in general, shall
perform all duties incident to the office. Except as may otherwise be
specifically provided in a resolution of the board of directors, the secretary
and each assistant secretary shall be a proper officer to take charge of the
corporation's stock transfer books and to compile the shareholder list pursuant
to Section 3.06 above, and to impress the corporation's seal on any instrument
signed by the president, any vice president or any other duly authorized person,
and to attest to the same.
Section 6.04. Treasurer. The treasurer shall keep full and accurate
accounts of receipts and disbursements in books belonging to the corporation,
and shall cause all money and other valuable effects to be deposited in the name
and to the credit of the corporation in such depositories, subject to withdrawal
in such manner as may be designated by the board of directors. He shall render
to the president, the directors and the shareholders at proper times an account
of all his transactions as treasurer and of the financial condition of the
corporation. The treasurer shall be responsible for preparing and filing such
financial reports, financial statements and returns as may be required by law.
ARTICLE VII
Resignations and Vacancies
Section 7.01. Resignations. Any director, committee member or officer
may resign from his office at any time by written notice delivered to the
corporation. A resignation shall be effective when the notice is delivered
unless the notice specifies a later effective date or event. The acceptance of a
resignation shall not be required to make it effective.
Section 7.02. Vacancies. If the office of any director, committee
member or officer becomes vacant by reason of his death, resignation,
disqualification, removal or otherwise, the shareholders or the board of
directors may choose a successor to hold office for the unexpired term as
provided in Section 4.01 and Section 5.01, as the case may be.
ARTICLE VIII
Seal
The board of directors may provide for a seal of the corporation, which
shall have inscribed thereon the name of the corporation and the state and year
of its incorporation.
ARTICLE IX
Certificates Representing Shares
Section 9.01. Form. Shares of the corporation may but need not be
represented by certificates. If certificates are issued, each certificate
representing shares of the corporation shall be in such form as may from time to
time be prescribed by the board of directors, shall be consecutively numbered,
and shall exhibit such information as may be required by applicable law. If
certificates are not issued, then every holder of uncertificated shares shall be
entitled to receive a certificate that complies with applicable law on request
to the corporation.
Section 9.02. Signatures and Seal. All certificates issued for shares
of the corporation (whether new, re-issued, or transferred) shall bear the
manual or facsimile signatures of one or more officers designated by the board
of directors or, in the absence of board designation by the president, a vice
president, or the secretary, and also may bear an impression or facsimile of the
corporation's corporate seal, if any. If the person who signed either manually
or in facsimile a share certificate no longer holds office when the certificate
is issued, the certificate is nevertheless valid.
2-9
<PAGE> 58
Section 9.03. Ownership. The corporation shall be entitled to treat the
registered owner of any share as the absolute owner thereof and, accordingly,
shall not be bound to recognize any beneficial, equitable or other claim to, or
interest in, such share on the part of any other person, whether or not it has
notice thereof, except as may be expressly provided by applicable law.
Section 9.04. Transfers. Transfers of shares of the corporation may be
made on the stock transfer books of the corporation only at the direction of the
person named in the certificate (or by his duly authorized attorney-in-fact) and
upon the surrender of such certificate properly endorsed or accompanied by a
written assignment or power of attorney properly executed, and with such proof
of authority or authenticity of signature as the corporation (or its transfer
agent) may require. The transfer of the shares of the corporation shall be
subject to such restrictions on transfer, if any, as may be imposed by the
articles of incorporation or bylaws of the corporation, or by any amendment
thereof, by applicable law or by an agreement among the shareholders or between
shareholders and the corporation. No transfer shall affect the right of the
corporation to pay any dividend due upon the shares or to treat the holder of
record as the holder-in-fact until the transfer has been recorded in the books
of the corporation.
Section 9.05. Lost, Stolen or Destroyed Certificates. In the event of
the loss, theft or destruction of any certificates representing shares of the
corporation or of any predecessor corporation, the corporation may issue (or, in
the case of any such shares as to which a transfer agent and/or registrar have
been appointed, may direct such transfer agent and/or registrar to countersign,
register and issue) a new certificate, and cause the same to be delivered to the
owner of the shares represented thereby, provided that the owner shall have
submitted such evidence showing, or an affidavit reciting, the circumstances of
the alleged loss, theft or destruction, and his ownership of the certificate, as
the corporation considers satisfactory, together with any other facts that the
corporation considers pertinent, and further provided that a bond of indemnity,
with or without surety, shall have been provided in form and amount satisfactory
to the corporation (and to its transfer agent and/or registrar, if applicable),
unless the board of directors waives the requirement of a bond.
ARTICLE X
Dividends
Subject to such restrictions or requirements as may be imposed by
applicable law or the corporation's articles or as may otherwise be binding upon
the corporation, the board of directors may from time to time declare and the
corporation may pay dividends on shares of the corporation outstanding on the
dates of record fixed by the board, to be paid in cash, in property, or in
shares of the corporation on or as of such payment or distribution dates as the
board may prescribe.
ARTICLE XI
Amendments
These bylaws may be altered, amended, supplemented, repealed or
temporarily or permanently suspended, in whole or in part, or new bylaws may be
adopted, at any duly constituted meeting of the board of directors or the
shareholders or, alternatively, by unanimous written consent to corporate action
without a meeting of the board of directors or the shareholders, as the case may
be, pursuant to these bylaws and applicable law. The shareholders in amending or
repealing a particular bylaw may provide expressly that the board of directors
may not amend or repeal that bylaw.
ARTICLE XII
Indemnification and Insurance
Section 12.01. Indemnification. The corporation shall, to the full
extent permitted by Arizona law as amended from time to time, indemnify and
advance expenses to each person whom it may indemnify or advance expenses to
pursuant to such law.
2-10
<PAGE> 59
Section 12.02. Insurance. The corporation shall have the power to
purchase and maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, partner, trustee,
employee or agent of another foreign or domestic corporation, partnership, joint
venture, trust, employee benefit plan or other enterprise against any liability
asserted against or incurred by such person in such capacity or arising out of
such person's status as such, whether or not the corporation would have the
power to indemnify such person against such liability under the provisions of
Arizona law.
ARTICLE XIII
General Provisions
Section 13.01. Construction. As used in these bylaws, the masculine
includes the feminine and the neuter as the context requires.
Section 13.02. Books and Records. The books and records of the
corporation shall be kept at such places within or outside of Arizona as the
board of directors may from time to time determine.
Certificate of Adoption
The undersigned secretary does hereby certify that the foregoing bylaws
were adopted by vote of the shareholders at the annual meeting of the
shareholders on July 30, 1996.
--------------------------
, Secretary
------------
2-11
<PAGE> 60
Exhibit 3
RECONDITIONED SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1996
3-1
<PAGE> 61
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
3-2
<PAGE> 62
[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
3-3
<PAGE> 63
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
3-4
<PAGE> 64
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
3-5
<PAGE> 65
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
3-6
<PAGE> 66
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
3-7
<PAGE> 67
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
3-8
<PAGE> 68
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
3-9
<PAGE> 69
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:
3-10
<PAGE> 70
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.
3-11
<PAGE> 71
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.
3-12
<PAGE> 72
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.
3-13
<PAGE> 73
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>
3-14
<PAGE> 74
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.
3-15
<PAGE> 75
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.
3-16
<PAGE> 76
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.
3-17
<PAGE> 77
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.
3-18
<PAGE> 78
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.
3-19
<PAGE> 79
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.
3-20
<PAGE> 80
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.
3-21
<PAGE> 81
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>
3-22
<PAGE> 82
EXHIBIT 4
ARTICLE 2. PROCEDURE FOR EXERCISE OF DISSENTERS' RIGHTS
SECTION 10-1320. NOTICE OF DISSENTERS' RIGHTS
A. If proposed corporate action creating dissenters' rights under
Section 10-1302 is submitted to a vote at a shareholders' meeting, the meeting
notice shall state that shareholders are or may be entitled to assert
dissenters' rights under this article and shall be accompanied by a copy of this
article.
B. If corporate action creating dissenters' rights under Section
10-1302 is taken without a vote of shareholders, the corporation shall notify in
writing all shareholders entitled to assert dissenters' rights that the action
was taken and shall send them the dissenters' notice described in Section
10-1322.
SECTION 10-1321. NOTICE OF INTENT TO DEMAND PAYMENT
A. If proposed corporate action creating dissenters' rights under
Section 10-1302 is submitted to a vote at a shareholders' meeting, a shareholder
who wishes to assert dissenters' rights shall both:
1. Deliver to the corporation before the vote is taken written notice
of the shareholder's intent to demand payment for the shareholder's shares if
the proposed action is effectuated.
2. Not vote the shares in favor of the proposed action.
B. A shareholder who does not satisfy the requirements of subsection A
of this section is not entitled to payment for the shares under this article.
SECTION 10-1322. DISSENTERS' NOTICE
A. If proposed corporate action creating dissenters rights under
Section 10-1302 is authorized at a shareholders' meeting, the corporation shall
deliver a written dissenters' notice to all shareholders who satisfied the
requirements of Section 10-1321.
B. State dissenters' notice shall be sent no later than ten days after
the corporate action is taken and shall:
1. State where the payment demand must be sent and where and when
certificates for certificated shares shall be deposited.
2. Inform holders of uncertificated shares to what extent transfer of
the shares will be restricted after the payment demand is received.
3. Supply a form for demanding payment that includes the date of the
first announcement to news media or to shareholders of the terms of the proposed
corporate action and that requires that the person asserting dissenters' rights
certify whether or not the person acquired beneficial ownership of the shares
before that date.
4. Set a date by which the corporation must receive the payment demand,
which date shall be at least thirty but not more than sixty days after the date
the notice provided by subsection A of this section is delivered.
5. Be accompanied by a copy of this article.
4-1
<PAGE> 83
SECTION 10-1323. DUTY TO DEMAND PAYMENT
A. A shareholder sent a dissenters' notice described in Section 10-1322
shall demand payment, certify whether the shareholder acquired beneficial
ownership of the shares before the date required to be set forth in the
dissenters' notice pursuant to Section 10-1322, subsection B, paragraph 3 and
deposit the shareholder's certificates in accordance with the terms of the
notice.
B. A shareholder who demands payment and deposits the shareholder's
certificates under subsection A of this section retains all other rights of a
shareholder until these rights are canceled or modified by the taking of the
proposed corporate action.
C. A shareholder who does not demand payment or does not deposit the
shareholder's certificates if required, each by the date set in the dissenters'
notice, is not entitled to payment for the shareholder's shares under the
article.
SECTION 10-1324. SHARE RESTRICTIONS
A. The corporation may restrict the transfer of uncertificated shares
from the date the demand for their payment is received until the proposed
corporate action is taken or the restrictions are released under Section
10-1326.
B. The person for whom dissenters' rights are asserted as to
uncertificated shares retains all other rights of a shareholder until these
rights are canceled or modified by the taking of the proposed corporate action.
SECTION 10-1325. PAYMENT
A. Except as provided in Section 10-1327, as soon as the proposed
corporate action is taken, or if such action is taken without a shareholder
vote, on receipt of a payment demand, the corporation shall pay each dissenter
who complied with Section 10-1323 the amount the corporation estimates to be the
fair value of the dissenter's shares plus accrued interest.
B. The payment shall be accompanied by all of the following.
1. The corporation's balance shall as of the end of a fiscal year
ending not more than sixteen months before the date of payment, an income
statement for that year, a statement of changes in shareholders' equity for that
year and the latest available interim financial statements, if any.
2. A statement of the corporation's estimate of the fair value of the
shares.
3. An explanation of how the interest was calculated.
4. A statement of the dissenter's right to demand payment under Section
10-1328.
5. A copy of this article.
SECTION 10-1326. FAILURE TO TAKE ACTION
A. If the corporation does not take the proposed action within sixty
days after the date set for demanding payment and depositing share certificates,
the corporation shall return the deposited certificates and release the transfer
restrictions imposed on uncertificated shares.
B. If after returning deposited certificates and releasing transfer
restrictions, the corporation takes the proposed action, it shall send a new
dissenters' notice under Section 10-1322 and shall repeat the payment demand
procedure.
4-2
<PAGE> 84
SECTION 10-1327. AFTER-ACQUIRED SHARES
A. A corporation may elect to withhold payment required by Section
10-1325 from a dissenter unless the dissenter was the beneficial owner of the
shares before the date set forth in the dissenter's notice as the date of the
first announcement to news media or to shareholders of the terms of the proposed
corporate action.
B. To the extent the corporation elects to withhold payment under
subsection A of this section, after taking the proposed corporate action, it
shall estimate the fair value of the shares plus accrued interest and shall pay
this amount to each dissenter who agrees to accept it in full satisfaction of
his demand. The corporation shall send with its offer a statement of its
estimate of the fair value of the shares, an explanation of how the interest was
calculated and a statement of the dissenters' right to demand payment under
Section 10-1328.
SECTION 10-1328. PROCEDURE IF SHAREHOLDER DISSATISFIED WITH PAYMENT OR OFFER
A. A dissenter may notify the corporation in writing of the dissenter's
own estimate of the fair value of the dissenter's shares and amount of interest
due and either demand payment of the dissenter's estimate, less any payment
under Section 10-1325, or reject the corporation's offer under Section 10-1327
and demand payment of the fair value of the dissenter's shares and interest due,
if either:
1. The dissenter believes that the amount paid under Section 10-1325 or
offered under Section 10-1327 is less than the fair value of the dissenter's
shares or that the interest due is incorrectly calculated.
2. The corporation fails to make payment under Section 10-1325 within
sixty days after the date set for demanding payment.
3. The corporation, having failed to take the proposed action, does not
return the deposited certificates or does not release the transfer restrictions
imposed on uncertificated shares within sixty days after the date set for
demanding payment.
B. A dissenter waives the right to demand payment under this section
unless the dissenter notifies the corporation of the dissenter's demand in
writing under subsection A of this section within thirty days after the
corporation made or offered payment for the dissenter's shares.
4-3
<PAGE> 85
[FRONT OF CARD]
RECONDITIONED SYSTEMS, INC. PROXY
444 WEST FAIRMONT, TEMPE, ARIZONA 85282
- - --------------------------------------------------------------------------------
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
The undersigned appoints Wayne Collignon and Dirk Anderson, and each of
them, as proxies, each with the power of substitution, and authorizes them to
represent and vote, as designated on the reverse side hereof, all shares of
Common Stock or Preferred Stock, or both, of Reconditioned Systems, Inc. held by
the undersigned on June 21, 1996, at the 1996 Annual Meeting of Stockholders to
be held on August 5, 1996. In their discretion, the proxies are authorized to
vote such shares upon such other business as may properly come before the Annual
Meeting and are authorized to cumulate votes with respect to the election of
directors.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER
DIRECTED BY THE UNDERSIGNED STOCKHOLDER(S). IF NO DIRECTION IS MADE, THIS PROXY
WILL BE VOTED FOR EACH OF THE LISTED PROPOSALS.
(Continued and to be SIGNED on the reverse side.)
- - --------------------------------------------------------------------------------
[REVERSE OF CARD]
Please mark boxes X in blue or black ink. This Board of Directors recommends a
vote FOR each of the proposals listed below.
1. Approval of the amendment to the Articles of Incorporation to provide for the
automatic conversion of Preferred Stock into Common Stock.
/ / FOR / / AGAINST / / ABSTAIN
2. Approval of the amendment to the Articles of Incorporation to provide for a
six-to-one reverse stock split (conditioned upon approval of Proposal One).
/ / FOR / / AGAINST / / ABSTAIN
3. Approval of the amendment to the Articles of Incorporation to make certain
technical corrections and to eliminate the liability of directors to the Company
and the Stockholders.
/ / FOR / / AGAINST / / ABSTAIN
4. Approval of the amendment and restatement of the Company's Bylaws.
/ / FOR / / AGAINST / / ABSTAIN
5. Election of Directors: Wayne R. Collignon, Dirk D. Anderson, and Scott W.
Ryan
/ / FOR the nominees listed above.
/ / Withhold authority to vote for the following nominees: ________________
6. Ratification of the appointment of Semple & Cooper, PLC as independent public
accountants.
/ / FOR / / AGAINST / / ABSTAIN
Please sign exactly as name appears at left. When
shares are held by joint tenants, both should sign.
When signing as an attorney, executor, administrator,
trustee or guardian, please give full title as such. If
a corporation, please sign in full corporate name by
president or other authorized officer. If a
partnership, please sign in partnership name by
authorized person.
Date _____________________ , 1996
Signature _____________________________________
Signature if held jointly _____________________
(Please mark, sign, date and return the Proxy Card promptly using the enclosed
envelope.)
