<PAGE>
<PAGE> 1
[FRONT COVER]
RECONDITIONED SYSTEMS, INC.
1997 ANNUAL REPORT<PAGE>
<PAGE> 2
RSI ANNUAL REPORT ABOUT THE COMPANY 1
- ----------------- ----------------- -
[PICTURE OF WORKSTATION INSERTED HERE]
RECONDITIONED SYSTEMS, INC., a leader in the remanufactured modular
office furniture industry since 1987, reconditions and markets modular
office workstations consisting of panels, work surfaces, file drawers,
book and binder storage and integrated electrical components. The
Company specializes in reconditioning and marketing of workstations
originally manufactured by Haworth, Inc., one of the top modular office
furniture manufacturers in the nation. RSI purchases used workstations
from manufacturers, dealers, brokers and end-users throughout the
United states through competitive bids or directly negotiated
transactions. The used workstations are then transported to RSI s
manufacturing facility in Tempe, Arizona, where they are disassembled
and inventoried. Upon receipt of purchase orders, RSI reconditions and
reassembles the workstations to the customer s specification. The
Company sells the reconditioned workstations throughout the United
States to dealers and end-users at 30% to 50% below new furniture
pricing.<PAGE>
<PAGE> 3
RSI ANNUAL REPORT LETTER TO SHAREHOLDERS 2
- ----------------- ---------------------- -
Dear Fellow Shareholders:
Fiscal 1997 has been a transition and rebuilding year for Reconditioned
Systems, Inc. (RSI). At the annual meeting of shareholders held on
August 5, 1996, the reorganization of RSI s capital structure proposed
in last year s proxy material was approved. As a result, the preferred
stockholders were all converted to common stockholders. In addition, a
one-for-six reverse stock split was effected on August 12, 1996; there
are now 1,473,950 common shares outstanding.
Your management team, Wayne Collignon (Chief Executive Officer) and
Dirk Anderson (Chief Financial Officer), has made great strides in
rebuilding RSI during this last year. They both have worked diligently
under difficult circumstances to restore customer confidence in your
company. For the year, we earned $258,114 on sales of $7,121,637.
This compares to a loss of $1,953,185 on sales of $7,971,697 for the
year ended March 31, 1996.
During the year we opened our first satellite sales office in Tucson,
Arizona. It has been a success and we plan to pursue similar low cost
sales strategies this next year. We continue to believe that as the
largest Haworth reconditioner in the western United States, we have a
competitive advantage over our competition. We are generating
sufficient cash flow to fund our projected internal sales growth and I
am confident that we will not need additional capital to execute our
strategy.
We have been pleased with our relationship with Norwest Business
Credit, Inc.. They have funded our short term cash requirements and we
have been able to reduce our borrowing costs as our credit worthiness
has improved. They have proven to be a good business partner.
The Board of Directors is aware of the disappointment and frustration
all of you have suffered during the last few years and is committed to
rebuilding shareholder value. For Fiscal 1997, we earned a return on
equity of over 20%. We enter the new fiscal year riding the momentum
of the best year in RSI s history! As I write this letter in late
June, 1997, our fiscal first quarter ending June 30, 1997, is likely to
be a record quarter for sales and earnings. I remain very optimistic
about our future.
If any of our shareholders are not getting our quarterly updates,
please give us your name and mailing address. All of us at RSI
appreciate your confidence and continued support of our efforts. We
welcome any suggestions or comments you may have.
/s/ Scott W. Ryan
- ------------------
Scott W. Ryan
Chairman of the Board <PAGE>
<PAGE> 4
RSI ANNUAL REPORT CORPORATE OVERVIEW 3
- ----------------- ------------------ -
OPERATING HIGHLIGHTS
June 1996: Company earns first quarter profits of $100,840 on sales of
$1,887,487.
August 1996: Shareholders approve reorganization of the Company s
capital structure.
September 1996: Company achieves net income of $27,026 on sales of
$1,408,927 for the three month period ended September 30, 1996.
November 1996: Norwest Business Credit, Inc. lowers Company s
borrowing rate and minimum monthly interest requirements.
December 1996: Company earns $32,890 net income on sales of $1,672,569
for the 3 month period ended December 31, 1996.
March 1997: Company exceeds Norwest Business Credit, Inc. s
requirements for further reductions to the Company s borrowing rate and
minimum interest requirements.
FINANCIAL SUMMARY
<TABLE>
<CAPTION> YEAR ENDED YEAR ENDED
MARCH 31, 1997 MARCH 31, 1996
- ----------------- -------------- --------------
<S> <C> <C>
FOR THE YEAR
Net Income (Loss) $258,114 ($1,728,052)
PER COMMON SHARE
Income (Loss) per Share $0.16 ($1.23)
Weighted Average Shares
Outstanding $1,593,704 $1,586,708
AT YEAR END
Sales $7,121,637 $7,971,697
Assets $2,571,209 $2,336,296
Shareholders Equity $1,376,024 $1,176,788
</TABLE>
<PAGE>
<PAGE> 5
[GRAPH INSERTED HERE - CONVERTED TO TABLE BELOW]
ANNUAL SALES**
<TABLE>
<CAPTION>
YEAR SALES IN MILLIONS
- -------- -----------------
<S> <C>
1988 $1.15
1989 $2.1
1990 $2.4
1991 $4.1
1992 $5.5
1993 $5.1
1994 $4.1
1995 $5.7
1996 $6.0
1997 $7.1
</TABLE>
** Above sales figures do not include sales by RSI subsidiary
companies.
QUARTERLY MARKET PRICE
The following table sets forth the high and low closing bid price, as
reported by the Nasdaq Small Cap Market, in dollars per share or
warrant for the quarters then ended:
<TABLE>
<CAPTION>
COMMON STOCK CLASS B WARRANTS
-------------------- ---------------------
<S> <C> <C> <C> <C>
DATE LOW HIGH LOW HIGH
- ------------------- ---- ------- ------- -------
June, 1995 2 3/4 4 1/4 1/4
September, 1995 2 1/8 3 1/4 3/8
December, 1995 1/4 2 1/8 1/4 1/4
March, 1996 1/8 15/16 1/32 1/4
June, 1996 3/8 3/4 not traded not traded
September, 1996 3/8 2 3/4 1/32 1/32
December, 1996 1 3/8 3 not listed not listed
March, 1997 1 1/4 2 not listed not listed
</TABLE>
The above quotations reflect inter-dealer prices, without retail mark-
up, mark-down, or commission and may not represent actual transactions.
The total number of shares of the Company s Common Stock outstanding as
of April 30, 1997 was 1,473,950. The number of record holders of the
Company's Common Stock including beneficial holders of shares held in
street name as of the close of business on June 26, 1997, is estimated
to be 350.<PAGE>
<PAGE> 6
RSI ANNUAL REPORT MANAGEMENT DISCUSSION 4
- ----------------- --------------------- -
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS:
The statements contained in this report which are not historical facts
may constitute "forward-looking statements" within the meaning of
Section 27A of the Securities Exchange Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, and are
subject to the safe harbors created thereby. These forward-looking
statements involve risks and uncertainties, including, but not limited
to, the risk that the Company may not be able to geographically
diversify its operations on a profitable basis, the risk that the
Company will not be able to maintain adequate inventory levels at an
acceptable cost, and the risk that the Company may in the future have
to comply with more stringent environmental laws or regulations, or
more vigorous enforcement policies of regulatory agencies. In
addition, the Company's business, operations and financial condition
are subject to substantial risks which are described in the Company's
reports and statements filed from time to time with the Securities and
Exchange Commission, including this Report.
RESULTS OF OPERATIONS
Reconditioned Systems, Inc. (hereinafter the "Company") reported net
income of $258,114 for the fiscal year ended March 31, 1997
(hereinafter the "reporting period") compared to a net loss of
$1,728,052 for the fiscal year ended March 31, 1996 (hereinafter the
"comparable period"). The improvement to the Company's net income is
attributable to the charges incurred as a result of RSI's restructuring
program which was completed in September, 1995 and the subsequent
positive effect the restructuring has had on the Company's operations.
The charges incurred by the Company as a result of its restructuring
program accounted for 83% of its pre-tax loss for the comparable
period.
The Company's sales for the reporting period were $7,121,637, which
represents a $850,060 or 11% decrease from the $7,971,697 of sales for
the comparable period. This decrease was attributable to the
downsizing that was done in conjunction with the Company's
restructuring program. Sales at RSI, not including subsidiaries closed
as part of the restructuring plan, were $6,029,723 for the comparable
period, and increased $1,091,914 or 18% during the reporting period.
The increase in sales at RSI was primarily a result of increased
marketing efforts in the form of additional sales staff, increased
advertising, and further development of wholesale markets. Following
the restructuring, the Company opened a sales office in Tucson, Arizona
and intends to diversify through opening other low-cost sales offices
or obtaining other local representation in other western markets such
as 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<PAGE>
<PAGE> 7
it has a competitive advantage in some of these markets because its
reconditioning services are more comprehensive than those provided by
the smaller reconditioners that make up the majority of the competition
in these markets.
The Company's gross profit margin for the reporting period was 23% as
compared to a gross profit margin of 19% for the comparable period.
RSI's gross margin during the comparable period, not including the
subsidiaries closed as part of the restructuring plan, was also 19%.
The primary reasons for this 4% increase in the gross profit margin
were operating efficiencies achieved by the new management team and
gains in economies of scale during the reporting period.
The Company's selling and administrative expenses for the reporting and
comparable periods were 19% of sales and 22% of sales, respectively.
The 3% decrease was a result of the elimination of certain duplicated
costs and corporate overhead that was achieved as a result of the
downsizing that was done in conjunction with the Company's
restructuring program.
The Company's other income and expenses, which consists primarily of
interest expense, increased by $10,891 from the comparable period to
the reporting period. This increase was<PAGE>
<PAGE> 8
RSI ANNUAL REPORT MANAGEMENT DISCUSSION 5
- ----------------- --------------------- -
primarily attributable to the fact that during the first six months of
the reporting period the Company's new lender, Norwest Business Credit,
Inc., charged the Company a higher borrowing rate than the Company's
former lender. The Company was able to lower its borrowing rate
effective November 1, 1996 and again, effective April 1, 1997 as its
financial conditioned improved.
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 fiscal year ended
March 31, 1995. The Company closed down its parts supply operation,
liquidated its parts supply inventory, suspended its Steelcase
remanufacturing operation, began the liquidation of its Steelcase
inventory, and converted CUI to a remanufactured Haworth sales office
by replacing its president and its entire sales staff, training the new
sales staff and changing its showroom from remanufactured Steelcase to
remanufactured Haworth. Subsequently, toward the end of that fiscal
year and in the early part of the comparable period, as the Company was
preparing to convert FOG to a sales office and was working to build CUI
into a successful sales office, the Company's lender was requiring
reductions to the Company's line of credit. The Company's credit line
was reduced from $1,250,000 to $500,000 between August, 1994 and
August, 1995. In addition, during August, 1995, the Company's Chief
Executive Officer and its President resigned and a new President and
Chief Executive Officer and a new Chief Financial Officer were named.
At this time, the burden of the line of credit reductions and the
continuing losses at CUI were making the Company's cash flow position
extremely difficult. In addition, FOG's operating results were
deteriorating and certain key managers at FOG were unhappy with the
management change and were not cooperating with the new management
team. The new management team determined that the Company's cash flow
could not withstand any additional losses at CUI or any potential
losses at FOG and, as such, decided to modify the original
restructuring plan and close CUI and FOG. Modifications made to the
Company's restructuring plan caused the remaining goodwill associated
with the acquisition of FOG to be impaired and caused the Company to
incur a substantial amount of other charges that were not anticipated
when the plan was adopted. See Note 10 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:<PAGE>
<PAGE> 9
<TABLE>
<CAPTION>
ITEM YEAR ENDED YEAR ENDED CASH OR NON-
MARCH 31, 1995 MARCH 31, 1996 CASH CHARGE
-------------- -------------- -------------
<S> <C> <C> <C>
Impairment of 0 563,562 Non-cash
goodwill
Realized loss on the 543,884 531,621 Non-cash
disposal and
liquidation of
inventories
Realized loss on the 0 100,048 Non-cash
sale of equipment
Labor and other costs 122,245 41,644 Cash
to move out of
certain locations
Impairment of certain 0 84,393 Non-cash
prepaid expenses and
other assets
Buy-out of the 65,000 0 Cash
employment contract
of CUI's President
Other 0 112,761 Combination
------- --------
Total 731,129 1,434,029
</TABLE>
INCOME TAXES
During the comparable 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. As a result of restruc-<PAGE>
<PAGE> 10
RSI ANNUAL REPORT MANAGEMENT DISCUSSION 6
- ----------------- --------------------- -
turing its operating units and the substantial operating losses the
Company incurred in prior years, 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 $1,265,000
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 comparable periods. The Company was able to utilize a
portion of its net operating loss carryforwards during the reporting
period, resulting in income tax liability saving of approximately
$119,000.
As of March 31, 1997, the Company had federal loss carryforwards of
approximately $2,990,000 and state loss carryforwards of approximately
$2,790,000. 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
As a result of the net income for the reporting period and the
reorganization of the Company's capital structure that was approved at
the annual shareholders meeting on August 5, 1996, the Company's
financial condition has improved significantly during the reporting
period. The conversion of the Series A Convertible Preferred Stock and
accrued dividends into 13 shares of common stock (see Note 8 of the
Financial Statements) relieved the Company of $337,500 in accrued
dividends and the burden of $56,250 per quarter in dividends going
forward.
As of March 31, 1997, the Company's financial condition and liquidity
are sufficient to sustain current operating levels and pursue gradual
and focused growth. The Company has net worth of $1,376,024 and
working capital of 1,202,365. In addition, as of June 13, 1997 the
Company had approximately $800,000 of availability on its line of
credit.
The primary forces effecting the Company's financial condition and
liquidity are results of operations, collection of accounts receivable,
ability to turn inventory, and rate of growth. The results of
operations during the period were discussed above. The number of days
sales in the Company's accounts receivable as of March 31, 1997 was 51,
compared to 25 days as of March 31, 1996. As the Company's standard
terms are net 30 days for existing customers and 50% down/50% net 30
days for new customers, the Company considers the 25 days sales at
March 31, 1996 as an anomaly and does not expect to maintain a
collection rate below 30 days in the future. The Company hopes to
maintain a collection rate at or near 30 days and management has
implemented certain collection procedures in an attempt to achieve this
goal.<PAGE>
<PAGE> 11
The Company's inventory turns were 4.2 for the year ended March 31,
1997, as compared to 4.7 for the year ended March 31, 1996. During the
comparable period, the Company's poor working capital position
necessitated the use of substituting higher priced inventory items when
certain specified inventory items were not in stock. With the
improvement of the Company's working capital during the reporting
period, the Company was able to maintain adequate inventory levels of
frequently used items, resulting in far fewer high-priced
substitutions. Although inventory turns were negatively affected by
this change in policy, the reduction in substitutions resulted in
improved gross profits during the reporting period. Management hopes
to increase sales while maintaining current inventory levels, thereby
increasing inventory turns in the future periods.
The Company reported negative cash flow from operations of $32,267 for
the reporting period as a result of the Company's need to finance its
sales growth. Management believes the Company's current credit
facility should provide sufficient working capital, assuming the
Company maintains positive results of operations, a collection rate at
or near 30 days, and annual inventory turns of 3 or more.
<PAGE>
<PAGE> 12
RSI ANNUAL REPORT FINANCIAL STATEMENTS 7
- ----------------- -------------------- -
RECONDITIONED SYSTEMS, INC.
Financial Statements
FOR THE YEAR ENDED
MARCH 31, 1997
<PAGE>
<PAGE> 13
RSI ANNUAL REPORT FINANCIAL STATEMENTS 8
- ----------------- -------------------- -
RECONDITIONED SYSTEMS, INC.
BALANCE SHEET
MARCH 31, 1997
ASSETS
<TABLE>
<S> <C> <C>
Current Assets:
Cash and cash equivalents (Note 1) $ 142,124
Accounts receivable - trade, net of
allowance for doubtful accounts of
approximately $31,000 (Notes 2 and 3) 999,087
Inventory (Notes 1, 2 and 3) 1,197,840
Prepaid expenses and other current assets 25,439
----------
Total Current Assets 2,364,490
Property and Equipment: (Notes 1, 2 and 3)
Machinery and equipment $ 221,630
Office furniture and equipment 244,637
Leasehold improvements 35,620
Vehicles 13,632
---------
515,519
Less: accumulated depreciation and
amortization (334,413) 181,106
---------
Other Assets:
Refundable deposits and other 25,613
----------
$2,571,209
==========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THE FINANCIAL STATEMENTS
<PAGE>
<PAGE> 14
RSI ANNUAL REPORT FINANCIAL STATEMENTS 9
- ------------------ -------------------- -
RECONDITIONED SYSTEMS, INC.
BALANCE SHEET
MARCH 31, 1997
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<S> <C> <C>
Current Liabilities:
Note payable (Note 2) $ 444,336
Current maturities of long-term
debt (Note 3) 50,254
Accounts payable 437,333
Accrued expenses and customer deposits 230,202
-----------
Total Current Liabilities 1,162,125
Long-Term Debt, less current maturities
(Note 3) 33,060
Commitments: (Note 4) -
Stockholders' Equity: (Notes 6, 7, 8, and 10)
Common stock, no par value; 20,000,000
shares authorized; 1,474,084 shares
issued and 1,473,950 shares outstanding $4,586,982
Accumulated deficit (3,207,204)
-----------
1,379,778
Less: treasury stock, 134 shares, at cost (3,754) 1,376,024
----------- ---------
$2,571,209
==========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THE FINANCIAL STATEMENTS<PAGE>
<PAGE) 15
RSI ANNUAL REPORT FINANCIAL STATEMENTS 10
- ----------------- -------------------- --
RECONDITIONED SYSTEMS, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 1997 AND 1996
<TABLE>
<CAPTION> 1997 1996
----------- -----------
<S> <C> <C>
Sales $ 7,121,637 $7,971,697
Cost of Sales 5,453,597 6,454,271
------------ ----------
Gross Profit 1,668,040 1,517,426
Selling and Administrative Expenses 1,331,721 1,757,135
Restructuring Charges (Note 11) - 1,434,029
----------- ----------
Income (Loss) from Operations 336,319 (1,673,738)
----------- -----------
Other Income (Expense):
Interest income 10,336 893
Interest expense (96,320) (88,912)
Other 7,779 20,705
----------- ----------
(78,205) (67,314)
------------ -----------
Income (Loss) before Income Taxes 258,114 (1,741,052)
Provision for Income Taxes (Note 5) - 13,000
----------- ----------
Net Income (Loss) 258,114 (1,728,052)
Preferred stock dividends (Notes 7 and 8) - (225,133)
------------ ----------
Net income (loss) attributable to
common stockholders $ 258,114 $(1,953,185)
============ ============
Income (Loss) per Common and Common
Equivalent Share (Notes 1 and 8) $ .16 $ (1.23)
============ ============
Weighted Average Number of Common and
Common Equivalent Shares
Outstanding 1,593,704 1,586,708
============ =============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THE FINANCIAL STATEMENTS<PAGE>
<PAGE> 16
RSI ANNUAL REPORT FINANCIAL STATEMENTS 11
- ----------------- -------------------- --
RECONDITIONED SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1997 AND 1996
<TABLE>
<CAPTION>
Common Stock
---------------- Preferred Retained Treasury
Shares Amount Stock Earnings Stock Total
------ ------ --------- --------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
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 6) 12,000 43,525 - - - 43,525
Purchase of
Corporate
Upholstery,
Inc. (Note 6) 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
Conversion of
preferred stock
to common stock,
net of costs of
$58,878
(Note 8) 7,222,215 2,097,839 (2,156,717) - - (58,878)
Reverse split
of common
stock
(Note 8) (7,369,565) - - - - -
Net income - - - 258,114 - 258,114
---------- ---------- ---------- ----------- ------- ----------
Balance,
March 31, 1997 1,473,950 $4,586,982 $ - $(3,207,204) $(3,754) $1,376,024
========== ========== ========== =========== ======= =========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THE FINANCIAL STATEMENTS<PAGE>
<PAGE> 17
RSI ANNUAL REPORT FINANCIAL STATEMENTS 12
- ----------------- -------------------- --
RECONDITIONED SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1997 AND 1996
<TABLE>
<CAPTION> 1997 1996
---- ----
<S> <C> <C>
Cash Flows from Operating Activities: $6,686,906 $8,701,153
Cash paid to suppliers and employees (6,628,483) (8,170,062)
Interest received 10,336 893
Interest paid (101,026) (88,912)
Income taxes refunded - 303,768
---------- ------------
Net cash provided (used) by
operating activities (32,267) 746,840
---------- ------------
Cash Flows from Investing Activities:
Property and equipment (30,604) (12,270)
Other 37,081 (17,771)
---------- ------------
Net cash provided (used) by
investing activities 6,477 (30,041)
---------- ------------
Cash Flows from Financing Activities:
Proceeds from notes payable and
long-term borrowings 6,400,000 5,196,603
Principal payments on notes payable,
long-term borrowings and
obligations under capital lease (6,273,906) (5,885,787)
Conversion of redeemable common stock - (16,475)
Preferred stock conversion costs (58,878) -
------------ ------------
Net cash provided (used) by
financing activities 67,216 (705,659)
------------ ------------
Net increase in cash and cash
equivalents 41,426 11,140
Cash and cash equivalents at beginning
of year 100,698 89,558
------------ ------------
Cash and cash equivalents at end
of year $ 142,124 $ 100,698
============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THE FINANCIAL STATEMENTS<PAGE>
<PAGE> 18
RSI ANNUAL REPORT FINANCIAL STATEMENTS 13
- ----------------- -------------------- --
RECONDITIONED SYSTEMS, INC.
STATEMENTS OF CASH FLOWS (Continued)
FOR THE YEARS ENDED MARCH 31, 1997 AND 1996
<TABLE>
<CAPTION> 1997 1996
------ ------
<S> <C> <C>
Reconciliation of Net Income (Loss) to Net Cash
Provided (Used) by Operating Activities:
Net income (loss) $ 258,114 $(1,728,052)
Adjustments to reconcile net income (loss) to
net cash provided (used) by operating
activities:
Depreciation and amortization 64,415 103,393
Provision for doubtful accounts 23,198 (9,100)
Deferred income taxes - (13,000)
Restructuring charge - 663,610
Changes in Assets and Liabilities:
Trade receivables (465,708) 717,851
Income tax refund receivable - 303,768
Inventory 178,691 1,120,970
Prepaid expenses and other (560) 150,256
Accounts payable and accrued expenses (90,417) (562,856)
----------- -----------
Net cash provided (used) by operating
activities $ (32,267) $ 746,840
=========== ===========
</TABLE>
Non-Cash Investing and Financing Activities:
During the year ended March 31, 1997, the Company recognized investing
and financing activities that affected its assets, liabilities and
stockholders' equity, but did not result in cash receipts or payments.
These non-cash activities are as follows:
Conversion of 555,555 shares of the Company's Series A Preferred stock
into 7,222,215 shares of common stock (See Note 8).
1 for 6 reverse-split of common stock (see Note 8).
Acquired equipment via trade-in of like-kind equipment.
During the year ended March 31, 1996, the Company recognized investing
and financing 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 6).
Issued 76,300 shares of common stock to an individual pursuant to the
CUI acquisition agreement (See Note 6).
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THE FINANCIAL STATEMENTS
<PAGE>
<PAGE> 19
RSI ANNUAL REPORT NOTES TO FINANCIAL STATEMENTS 14
- ----------------- ----------------------------- --
RECONDITIONED SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies, Nature of Operations and
Use of Estimates:
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 for the year ended March 31,
1996, 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.
All subsidiary entities were closed during the fiscal year ended March
31, 1996; therefore, the financial statements for the year ended March
31, 1997 are not consolidated and did not require eliminating entries.
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 <PAGE>
<PAGE> 20
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,
1997, the Company had established a reserve for damaged and obsolete
inventory in the amount of $25,000.
<PAGE>
<PAGE> 21
RSI ANNUAL REPORT NOTES TO FINANCIAL STATEMENTS 15
- ----------------- ----------------------------- --
1. Summary of Significant Accounting Policies: (Continued)
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:
<TABLE>
<CAPTION> Years
-----
<S> <C>
Machinery and equipment 5 - 7
Office furniture and equipment 5 - 7
Leasehold improvements Lease term
Vehicles 4 - 5
</TABLE>
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 basis. 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.
Earnings (Loss) Per Common and Common Equivalent Share:
The computation of earnings (loss) per common and common equivalent
share is based on the net income (loss) and the weighted average number
of common stock and common stock equivalents outstanding for each
period. Outstanding warrants and certain stock options outstanding are
considered common stock equivalents and are accounted for under the
Treasury Stock method. These common stock equivalents are not included
in the computation of loss per share as of March 31, 1996 because their
effect would be anti-dilutive. (See Note 8)
2. Pledged Assets and Line of Credit:
As of March 31, 1997, the Company had outstanding borrowings of
$444,336 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 four percent (4%), and has a minimum monthly interest
requirement of $4,000. 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, 1997, the
maximum amount available on the line of credit was approximately
$675,000. 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 <PAGE>
<PAGE> 22
the Company, including covenants that the Company will maintain certain
net worth thresholds, will meet certain annual net income requirements,
will maintain certain debt service coverage ratios, and will not enter
into or engage in various types of agreements or business activities
without written approval from Norwest Business Credit, Inc. <PAGE>
<PAGE> 23
RSI ANNUAL REPORT NOTES TO FINANCIAL STATEMENTS 16
- ----------------- ----------------------------- --
RECONDITIONED SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
3. 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, as
of March 31, 1997, the Company was in compliance with these
financial ratios and other covenants. In addition, this note
payable is guaranteed by certain former Board members.
<TABLE>
<S> <C>
$ 76,071
Capital lease obligations 7,243
----------
83,314
Less: current maturities (50,254)
----------
Long-term portion $ 33,060
==========
</TABLE>
Aggregate maturities of long-term debt, are as follows:
<TABLE>
<CAPTION>
March 31, Amount
-------- ------
<S> <C>
1998 $ 50,254
1999 33,060
----------
$ 83,314
==========
</TABLE>
4. Operating Lease Commitments:
The Company leases facilities in Tempe and Tucson, 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 expires in
March, 2001.
The total minimum rental commitment is due as follows:
<PAGE> 24
<TABLE>
<CAPTION>
March 31, Amount
--------- ------
<S> <C>
1998 $ 291,696
1999 282,974
2000 280,971
2001 280,412
------------
$ 1,136,053
============
</TABLE>
Rent expense under operating lease agreements for the years ended March
31, 1997 and 1996 was approximately $277,500 and $425,000,
respectively.
<PAGE>
<PAGE> 25
RSI ANNUAL REPORT NOTES TO FINANCIAL STATEMENTS 17
- ----------------- ----------------------------- --
RECONDITIONED SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. Income Taxes:
Deferred tax assets consist of the following components:
<TABLE>
<S> <C>
Deferred tax assets:
State loss carryforwards $ 250,000
Federal loss carryforward 1,015,000
----------
1,265,000
Less: valuation allowance (1,265,000)
-----------
$ -
===========
</TABLE>
The Company has established a valuation allowance equal to the full
amount of the deferred tax asset due to the uncertainty of the
utilization of operating losses from prior years in future periods.
The Company's tax expense (benefit) differed from the statutory rate,
as follows:
<TABLE>
<CAPTION> 1997 1996
---- ----
<S> <C> <C>
Statutory rate applied to income
(loss) before income taxes $ 97,000 $ (590,000)
Increase (decrease) in income taxes resulting from:
Utilization of net operating
loss deductions (119,000) -
State income taxes - (160,000)
Statutory/actual rate difference - 4,000
Non-deductible goodwill amortization - 190,000
Deductible goodwill impairment - (580,000)
Non-deductible expenses - (20,000)
Deferred tax asset valuation allowance - 1,170,000
Other 22,000 (27,000)
----------- ------------
$ - $ (13,000)
=========== ============
</TABLE>
The Company's approximate net operating loss carryforwards and their
respective expiration dates, are as follows:
<PAGE>
<PAGE> 26
<TABLE>
<CAPTION> Amount Expiration
------ ----------
<S> <C> <C>
Federal $2,990,000 $120,000 in 2010, $2,870,000 in 2011
Arizona 2,790,000 $655,000 in 1999, $2,135,000 in 2001
</TABLE>
6. Common Stock and Common Stock Purchase Warrants:
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.
<PAGE>
<PAGE> 27
RSI ANNUAL REPORT NOTES TO FINANCIAL STATEMENTS 18
- ----------------- ----------------------------- --
RECONDITIONED SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. Common Stock and Common Stock Purchase Warrants: (Continued)
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.
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. The acquisition was accounted for under the purchase method
of accounting. The excess of the purchase price over the fair value of<PAGE>
<PAGE> 28
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.
<PAGE>
<PAGE> 29
RSI ANNUAL REPORT NOTES TO FINANCIAL STATEMENTS 19
- ----------------- ----------------------------- --
RECONDITIONED SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. Common Stock and Common Stock Purchase Warrants: (CONTINUED)
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 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
canceled, 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.
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 canceled shares, no value was
assigned to this non-reciprocal, non-monetary transaction.
<PAGE>
<PAGE> 30
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
6. 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
canceled.
From time to time, 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. The Company's Class A warrants
expired on June 30, 1996, and the Class B warrants are set to expire on
June 30, 1997. As of the date of this report, none of the Company's
Stock Purchase Warrants have been exercised.<PAGE>
<PAGE> 31
RSI ANNUAL REPORT NOTES TO FINANCIAL STATEMENTS 20
- ----------------- ----------------------------- --
RECONDITIONED SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. 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 provided 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 were
cumulative and accrued 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 were 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 was entitled to notice of any stockholders meetings and
was entitled to the number of votes equal to the number of shares of
common stock into which each share of Preferred Stock was convertible.
Each share of Preferred Stock was convertible into such number of fully
paid and non-assessable shares of common stock, as determined by
dividing $4.50 by the conversion price.
The Company granted the holders of Preferred Stock certain protective
provisions which prohibited 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 caused an "Event of Default" in the payment of dividends
to holders of Preferred Stock, then the holders of a majority of the
Preferred Stock had the right to appoint a person to the Board of
Directors until the "Event of Default" was cured. The holders of
Preferred Stock also were 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.
In December, 1995, following the default of three consecutive quarterly
dividend payments on Series A Convertible Preferred Stock, the
preferred stockholders appointed a member to the Company's Board of
Directors.
<PAGE>
<PAGE> 32
8. Reorganization of Capital Structure:
On August 5, 1996, the Company's shareholders approved a reorganization
of the Company's capital structure. The reorganization, which was
effective on August 12, 1996, consisted of the automatic conversion of
each share of the Company's Series A Convertible Preferred Stock into
thirteen shares of common stock. Any and all accrued but unpaid
dividends through the conversion date were waived. In addition, the
shareholders approved a one-for-six reverse stock split effective
immediately following the preferred stock conversion. All fractional
shares resulting from the reverse split were rounded up to the next
whole share.
Giving retroactive application of the reorganization to the year ended
March 31, 1996, the loss per share would have been $1.18 on weighted
average shares outstanding of 1,468,157.<PAGE>
<PAGE> 33
RSI ANNUAL REPORT NOTES TO FINANCIAL STATEMENTS 21
- ----------------- ----------------------------- --
RECONDITIONED SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. Common Stock Options:
On August 10, 1995, the Company issued 200,000 Common Stock Options as
follows: 100,000 options to its current President and Chief Executive
Officer and 100,000 options to its current Chief Financial Officer.
These options were exercisable at $2.75 per share through August 10,
2005.
On August 19, 1996, following a reorganization of the Company's capital
structure, which included a one-for-six reverse stock split, the Board
of Directors approved the repricing of 16,666 stock options held by the
Company's President and Chief Executive Officer, and 16,666 stock
options held by the Company's Chief Financial Officer from $16.50 per
share to $1.00 per share. In addition, at the same time, the Board
issued 83,334, 83,334, and 100,000 stock options with an exercise price
of $1.00 per share to the Company's President and Chief Executive
Officer, Chief Financial Officer and Chairman of the Board,
respectively. All of these stock options are presently exercisable;
provided, however, that the holders may not sell or otherwise transfer
any shares acquired upon exercise of the options until August 19, 1997.
As of the date of this report, none of the stock options have been
exercised. The Company has agreed to register the shares issuable upon
exercise of the options 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 August
19, 1996.
All stock options issued to employees have an exercise price not less
than the fair market value of the Company's common stock on the date of
grant. In accordance with accounting for such options utilizing the
intrinsic value method, there is no related compensation expense
recorded in the Company's financial statements for the years ended
March 31, 1997 and 1996. Had compensation cost for stock-based
compensation been determined based on the fair value of the options at
the grant dates consistent with the method of SFAS 123, the Company's
net income (loss) and earnings (loss) per share for the year ended
March 31, 1997 and 1996 would have been reduced (increased) to the pro
forma amounts presented below:<PAGE>
<PAGE> 34
<TABLE>
<CAPTION> 1997 1996
---- ----
<S> <C> <C>
Net income (loss), as reported $ 258,114 $(1,953,185)
Net income (loss), pro forma $ 253,054 $(1,954,197)
Primary and fully diluted earnings
(loss) per share, as reported $ .16 $ (1.23)
Primary and fully diluted earnings
(loss) per share, pro forma $ .16 $ (1.23)
</TABLE>
The fair value of option grants is estimated as of the date of grant
utilizing the Black-Scholes option-pricing model with the following
weighted average assumptions for grants in 1997 and 1996, expected life
of options of two (2) years, expected volatility of forty percent
(40%), risk-free interest rate of eight percent (8.0%), and a zero
percent (0%) dividend yield. The weighted average fair value at date of
grant for options granted during 1997 and 1996 approximated $.03.
<PAGE>
<PAGE> 35
RSI ANNUAL REPORT NOTES TO FINANCIAL STATEMENTS 22
- ----------------- ----------------------------- --
RECONDITIONED SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. 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. The breakdown of charges is as follows:<PAGE>
<PAGE> 36
<TABLE>
<CAPTION> 1996 1995
---- ----
<S> <C> <C>
Lease buy-out and other costs to
vacate leased premises. $ 41,644 $ 47,245
Buy-out of employment contract of
CUI's President - 65,000
Writedown, abandonment, liquidation
and disposal of inventory 531,621 543,884
Labor and administrative costs to
convert CUI to a remanufactured
Haworth sales office - 75,000
Impairment of FOG Goodwill 563,562 -
Realized loss on sale of equipment 100,048 -
Impairment of certain prepaid expenses
and other current assets 84,393 -
Other 112,761 -
------------ ------------
$1,434,029 $ 731,129
============ ============
</TABLE>
<PAGE>
<PAGE> 37
RSI ANNUAL REPORT INDEPENDENT AUDITOR'S REPORT 23
- ----------------- ---------------------------- --
To The Stockholders and Board of Directors of
Reconditioned Systems, Inc.
We have audited the accompanying balance sheet of Reconditioned
Systems, Inc. as of March 31, 1997, and the related statements of
operations, stockholders' equity, and cash flows for the years ended
March 31, 1997 and 1996. 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits
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 audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of
Reconditioned Systems, Inc. as of March 31, 1997, and the results of
its operations, changes in stockholders' equity, and its cash flows for
the years ended March 31, 1997 and 1996, in conformity with generally
accepted accounting principles.
/s/ Semple & Cooper, P.L.C.
- ----------------------------
Semple & Cooper, P.L.C.
Phoenix, Arizona
May 2, 1997
<PAGE>
<PAGE> 38
RSI ANNUAL REPORT CORPORATE INFORMATION 24
- ----------------- --------------------- --
OFFICERS & DIRECTORS
- --------------------
CORPORATE OFFICERS
Wayne R. Collignon
President and Chief Executive Officer
Dirk D. Anderson [Company Logo here]
Chief Financial Officer
BOARD OF DIRECTORS
Wayne R. Collignon
President and Chief Executive Officer of RSI
Dirk D. Anderson
Chief Financial Officer of RSI
Scott W. Ryan, Chairman
President of
S.W. Ryan & Company, Inc.
SHAREHOLDER INFORMATION
- -----------------------
EXECUTIVE OFFICES REGISTRAR AND TRANSFER AGENT
444 West Fairmont Harris Bank
Tempe, Arizona 85252 Chicago, Illinois
Phone: 602-968-1772
800-280-5000 CONTACT FOR MORE INFORMATION
Fax: 602-894-1907 Investor Relations
Reconditioned Systems, Inc.
SHARE DATA 444 West Fairmont
NASDAQ Small Cap Issue Stock Tempe, Arizona 85282
Symbol RESY
Initial Public Offering Dec. 1992 Phone: 602-968-1772
Common Shares Outstanding Fax: 602-894-1907
1,473,950
ANNUAL MEETING INFORMATION
The annual meeting of shareholders
will be held at Reconditioned
Systems, Inc., 444 West Fairmont, ------------------
Tempe, Arizona, 85282 at REPORT ON FORM 10-KSB
8:00 a.m., August 8, 1997. The Company will furnish to any
shareholder submitting a request
without charge, a copy of
INDEPENDENT PUBLIC ACCOUNTANTS the Company's annual
Semple & Cooper, Certified Public report on Form 10-KSB.
Accountants ---------------------
Phoenix, Arizona
