U.S. Securities and Exchange Commission
Washington D. C., 20549
Form 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from__________ to ___________.
Commission file number 0-20924
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RECONDITIONED SYSTEMS, INC.
-----------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
ARIZONA 86-0576290
------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
444 WEST FAIRMONT, TEMPE, ARIZONA 85282
----------------------------------------
(Address of principal executive offices)
602-968-1772
--------------------------
(Issuer's telephone number)
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ].
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of October 30, 1998, the number of
shares outstanding of the Registrant's common stock was 1,473,950.
<PAGE>
Item 1
PART 1 - FINANCIAL STATEMENTS
RECONDITIONED SYSTEMS, INC.
UNAUDITED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
2
<PAGE>
RECONDITIONED SYSTEMS, INC.
- --------------------------------------------------------------------------------
BALANCE SHEETS
September 30, 1998 and 1997
(Unaudited)
- --------------------------------------------------------------------------------
1998 1997
---------- ----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 836,411 $ 370,443
Accounts receivable - trade, net of allowance
for doubtful accounts of $35,000 and
$47,500, respectively 1,426,217 981,920
Inventory 793,735 1,039,441
Prepaid expenses and other current assets 57,065 39,444
---------- ----------
TOTAL CURRENT ASSETS 3,113,428 2,431,248
PROPERTY AND EQUIPMENT; net of accumulated
depreciation of $361,996 and
$366,278, respectively 152,945 162,748
OTHER ASSETS
Notes receivable - Officers 150,000 --
Other assets 38,591 15,763
---------- ----------
$3,454,964 $2,609,759
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt 13,248 45,075
Accounts payable 422,477 443,781
Customer deposits 38,356 198,783
Accrued expenses and other current liabilities 276,552 222,688
---------- ----------
TOTAL CURRENT LIABILITIES 750,633 910,327
LONG-TERM DEBT, LESS CURRENT MATURITIES -- 13,522
STOCKHOLDERS' EQUITY 2,704,331 1,685,910
---------- ----------
$3,454,964 $2,609,759
========== ==========
3
<PAGE>
RECONDITIONED SYSTEMS, INC.
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
For the Three and Six Month Periods Ended September 30, 1998 and 1997
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
-------------------------- --------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales $ 3,121,374 $ 2,245,816 $ 5,774,466 $ 4,513,178
Cost of sales 2,451,134 1,707,851 4,479,916 3,396,014
----------- ----------- ----------- -----------
Gross profit 670,240 537,965 1,294,550 1,117,164
Selling & administrative expenses 435,879 371,688 828,763 792,157
----------- ----------- ----------- -----------
Income from operations 234,361 166,277 465,787 325,007
----------- ----------- ----------- -----------
Other income (expense):
Interest income 11,153 181 21,594 352
Interest expense (408) (4,565) (1,047) 18,160)
Other 1,124 (815) 2,443 2,687
----------- ----------- ----------- -----------
11,869 (5,199) 22,990 (15,121)
----------- ----------- ----------- -----------
Net income $ 246,230 $ 161,078 $ 488,777 $ 309,886
=========== =========== =========== ===========
Basic earnings per share
(Notes 1 and 3) 0.17 0.11* 0.33 0.21*
=========== =========== =========== ===========
Basic weighted average number
of shares outstanding 1,473,950 1,473,950* 1,473,950 1,473,950*
=========== =========== =========== ===========
Diluted earnings per common
and common equivalent share
(Notes 1 and 3) 0.14 0.10* 0.29 0.19*
=========== =========== =========== ===========
Diluted weighted average number
of shares outstanding 1,700,481 1,654,571* 1,696,210 1,625,729*
=========== =========== =========== ===========
*Restated to give retroactive effect to SFAS No. 128.
</TABLE>
4
<PAGE>
RECONDITIONED SYSTEMS, INC.
- --------------------------------------------------------------------------------
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED MARCH 31, 1998 AND THE SIX MONTH PERIOD
ENDED SEPTEMBER 30, 1998
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON COMMON RETAINED TREASURY
STOCK STOCK EARNINGS STOCK
SHARE AMOUNT (DEFICIT) (134 SHARES) TOTAL
--------- ---------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Balance at
March 31, 1997 1,473,950 $ 4,586,982 $(3,207,204) $ (3,754) $ 1,376,024
Net income -- 0 839,530 0 839,530
--------- ----------- ----------- ----------- -----------
Balance at
March 31, 1998 1,473,950 4,586,982 (2,367,674) (3,754) 2,215,554
Treasury Stock
Retired -- 0 (3,754) 3,754 0
Net income -- 0 488,777 0 488,777
--------- ----------- ----------- ----------- -----------
Balance at
September 30, 1998 1,473,950 $ 4,586,982 $(1,882,651) $ 0 $ 2,704,331
========= =========== ============ =========== ===========
</TABLE>
5
<PAGE>
RECONDITIONED SYSTEMS, INC.
- --------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
FOR THE THREE AND SIX MONTH PERIODS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
- --------------------------------------------------------------------------------
Three Months Ended Six Months Ended
September 30, September 30,
----------------------- -----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
Cash and cash equivalents
provided by operating
activities $ 183,102 $ 389,566 $ 168,601 $ 710,879
Cash and cash equivalents
used by investing activities (32,560) (7,288) (45,577) (13,507)
Cash and cash equivalents
used by financing activities (9,912) (141,467) (19,644) (469,053)
--------- --------- --------- ---------
Increase in cash and
cash equivalents 140,630 240,811 103,380 228,319
Cash and cash equivalents,
beginning of period 695,781 129,632 733,031 142,124
--------- --------- --------- ---------
Cash and cash equivalents,
end of period $ 836,411 $ 370,443 $ 836,411 $ 370,443
========= ========= ========= =========
6
<PAGE>
RECONDITIONED SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
BASIS OF PRESENTATION:
The unaudited financial statements include only the accounts and
transactions of the Company.
INTERIM FINANCIAL STATEMENTS:
The unaudited interim financial statements include all adjustments
(consisting of normal recurring accruals) which, in the opinion of
management, are necessary in order to make the financial statements not
misleading. Operating results for the six months ended September 30, 1998,
are not necessarily indicative of the results that may be expected for the
entire year ending March 31, 1999. These financial statements have been
prepared in accordance with the instructions to Form 10-QSB and do not
contain certain information required by generally accepted accounting
principles. These statements should be read in conjunction with financial
statements and notes thereto included in the Company's Form 10-KSB for the
year ended March 31, 1998.
EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE:
Basic earnings per share include no dilution and are computed by dividing
income available to common stockholders by the weighted average number of
shares outstanding for the period.
Diluted earnings per share amounts are computed based on the weighted
average number of shares actually outstanding plus the shares that would be
outstanding assuming the exercise of dilutive stock options, all of which
are considered to be common stock equivalents. The number of shares that
would be issued from the exercise of stock options has been reduced by the
number of shares that could have been purchased from the proceeds at the
average market price of the Company's stock.
- --------------------------------------------------------------------------------
NOTE 2.
REVOLVING LINE OF CREDIT
- --------------------------------------------------------------------------------
Effective July 31, 1998 the Company renegotiated and renewed its $1,000,000 line
of credit agreement with M&I Thunderbird Bank. Under this new agreement,
interest is payable at the bank's base rate. Borrowings on the line of credit
may not exceed 75% of eligible accounts receivable and 30% of eligible inventory
up to $300,000. The line of credit is collateralized by accounts receivable,
inventory, property and equipment, and intangibles. The agreement contains
various covenants by the Company, including covenants that the Company will
maintain certain net worth thresholds and ratios, will meet certain debt service
coverage ratios, and will not enter into or engage in various types of
agreements or business activities without approval from M&I Thunderbird Bank. As
of September 30, 1998, there were no outstanding borrowings on the line of
credit.
7
<PAGE>
RECONDITIONED SYSTEMS, INC.
Notes to Financial Statements
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 3.
EARNINGS PER SHARE
- --------------------------------------------------------------------------------
Three Months Ended Six Months Ended
September 30, September 30,
----------------------- ----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
BASIC EPS
Net Income $ 246,230 $ 161,078 $ 488,777 $ 309,886
========== ========== ========== ==========
Weighted average number
of shares outstanding 1,473,950 1,473,950 1,473,950 1,473,950
========== ========== ========== ==========
Basic earnings per share $ 0.17 $ 0.11 $ 0.33 $ 0.21
========== ========== ========== ==========
DILUTED EPS
Net Income $ 246,230 $ 161,078 $ 488,777 $ 309,886
========== ========== ========== ==========
Weighted average number
of shares outstanding 1,473,950 1,473,950 1,473,950 1,473,950
Effect of dilutive securities:
Stock options 226,531 180,621 222,260 151,779
---------- ---------- ---------- ----------
Total common shares + assumed
conversions 1,700,481 1,654,571 1,696,210 1,625,729
========== ========== ========== ==========
Per-Share Amount $ 0.14 $ 0.10 $ 0.29 $ 0.19
========== ========== ========== ==========
8
<PAGE>
RECONDITIONED SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 4.
SUBSEQUENT EVENTS
- --------------------------------------------------------------------------------
On October 30, 1998, the Company's Board of Directors signed a definitive merger
agreement with Cort Investment Group, Inc., a privately-owned Texas corporation
d/b/a Contract Network ("CNI"). Under the terms of the agreement, CNI will
acquire RSI for $8,575,000 in cash. CNI has been a leader in the remanufactured
modular office furniture industry since 1988, specializing in the reconditioning
and marketing of workstations originally manufactured by Steelcase and Herman
Miller. The acquisition, scheduled for closing in early 1999, is subject to,
among other things, RSI meeting certain financial conditions, the completion of
satisfactory due diligence by CNI, approval of the transaction by relevant
regulatory agencies and RSI shareholder approval. The Company is currently
drafting a proxy statement which is expected to be filed with the SEC pursuant
to the requirements of the Securities Exchange Act of 1934 during the month of
November, 1998.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
The statements contained in this report that 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, and the risk that
the Company may not be able to continue to increase sales, maximize its
production capacity, maintain adequate inventory levels at an acceptable cost
and employ qualified personnel in response to rising sales. In addition, the
Company's business, operations and financial condition are subject to
substantial risks that 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 fiscal year ended March 31, 1998 and Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998.
RESULTS OF OPERATIONS
FOR THE QUARTERS ENDED SEPTEMBER 30, 1998 AND 1997
Reconditioned Systems, Inc. (the "Company") reported net income for the three
month period ended September 30, 1998 (hereinafter the "reporting quarter") of
$246,230 as compared to $161,078 for the three month period ended September 30,
1997 (hereinafter the "comparable quarter"). This $85,152 or 52.9% increase is
primarily a result of increased sales volume.
The Company reported sales for the reporting quarter of $3,121,374 as compared
to $2,245,816 for the comparable quarter, resulting in an increase of $875,558
or 39%. This increase was primarily attributable to a significant new wholesale
contract and the addition of new retail sales representatives.
Wholesale sales totaled $2,022,024 for the reporting quarter, an increase of
$608,186 or 43% over the comparable quarter. This increase is primarily
attributable to the continued success of RSI's wholesale marketing plan which
was implemented during fiscal 1998. In addition to actively pursuing new
dealer/broker relationships, the wholesale division was awarded an exclusive
sales contract to provide modular furniture in excess of $1 million over a
period of 18-24 months. The first phase of this contract began in late June with
$135,451 in sales. Sales under this contract totaled $336,426 for the reporting
quarter.
Retail sales in the Phoenix and Tucson markets totaled $1,099,350 during the
reporting quarter, an increase of $267,372 or 32% over the comparable quarter.
During the quarter ended June 30, 1998, the Company hired and trained additional
new sales representatives to add to the existing sales staff. The Company has
developed a formal training program designed to equip new salespeople with the
proper training and product knowledge. While the Company believes the newly
hired sales representatives will be successful in developing the necessary
skills to achieve their sales goals, there can be no certainty that they will
meet those expectations.
10
<PAGE>
The Company's gross profit margin for the reporting quarter was 21.5%, as
compared to a gross profit margin of 23.9% for the comparable quarter. This 2.4%
decrease in the gross margin was primarily attributed to higher product costs
and lower wholesale pricing. Recent tougher competition with newly manufactured
"bargin" product-lines has driven profit margins down. In addition, the
Company's gross margin was negatively impacted by changes in customer demand
which required the Company to supplement and modify its inventory.
The Company's selling and administrative expenses were reduced from 16.6% of
sales in the comparable quarter to 14.0% for the reporting quarter. The 2.6%
decrease was primarily a result of the significant increase in sales.
The Company's other income and expenses, which consists primarily of interest
income and expense, improved by $17,068 from the comparable quarter to the
reporting quarter. This improvement was primarily due to the elimination of the
Company's interest expense and minimum interest requirements associated with its
previous line of credit agreement and increased interest income. At September
30, 1998, the Company carried a zero dollar balance on its line of credit.
FOR THE SIX MONTH PERIOD ENDED SEPTEMBER 30, 1998 AND 1997
The Company reported net income of $488,777 for the six month period ended
September 30, 1998 (hereinafter the "reporting period") as compared to $309,886
for the six month period ended September 30, 1997 (hereinafter the "comparable
period"), an increase of 57.7%.
Sales revenues for the reporting period totaled $5,774,466, a $1,261,288 or 28%
increase over the comparable period. Improved wholesale revenues accounted for
86% of the total increased sales.
Wholesale sales for the reporting period totaled $3,660,608, a $1,090,133 or
42.4% increase over the comparable period. The wholesale division continues to
actively pursue sales growth by targeting the western region of the United
States and has been successful in breaking into some of these markets.
The Company generated $2,113,858 in retail sales during the reporting period.
This represents a $171,156 or 8.81% increase over the comparable period. The
Company continues to pursue growth in the Phoenix and Tucson markets through
advertising and maintaining a well-trained and hard-working sales staff.
Despite the increased revenues, the Company's gross profit margin fell from
24.8% in the comparable period to 22.4% in the reporting period. This was due to
the higher product costs and lower profits margins as a result of increased
competition, changes to the product-mix and greater demand for newer Haworth
product-lines.
Selling and administrative expenses as a percentage of sales improved by 3.3%,
from 17.6% in the comparable period to 14.3% during the reporting period. This
was a result of the overall lower percentage of fixed expenses to increased
sales revenues.
11
<PAGE>
The Company generated an additional $38,111 over the comparable period in other
income by eliminating interest expense and increasing interest income as
discussed above.
INCOME TAXES
As of March 31, 1998, the Company had federal loss carryforwards of
approximately $2,120,000 and state loss carryforwards of approximately
$1,920,000. During the periods ended September 30, 1998 and 1997, the Company
benefited from these loss carryforwards in the approximate amounts of
$195,000and $124,000, respectively.
FINANCIAL CONDITION AND LIQUIDITY
As of September 30, 1998, the Company's cash and cash equivalents totaled
$836,411. In addition, the Company's net worth and working capital totaled
$2,704,331 and $2,362,795, respectively. The Company has no material long-term
debt and $1,000,000 available on its line of credit through M&I Thunderbird
Bank.
The Company reported cash flows from operations of $168,601 during the reporting
period. This was primarily a result of the increase in sales and improved
results of operations as discussed above. The Company's sales growth resulted in
increasing the Company's accounts receivable balances by $464,095 at September
30, 1998 as compared to March 31, 1998. The Company's collection rate improved
from 40 days in the comparable period to 38 days in the reporting period. The
Company's long-term goal is to maintain a collection rate at or near 30 days.
The increased accounts receivables were offset by the Company's strong operating
results and increased inventory turns during the reporting period. Annualized
inventory turns for the reporting period were 10.4, as compared to 6.75 for the
year ended March 31, 1998. This improvement was primarily a result of the
Company's ability to increase sales without increasing inventory levels.
However, management believes any additional sales increases may require the
Company to increase current inventory levels.
YEAR 2000 COMPLIANCE
The Company has completed its assessment of Year 2000 compliance issues and is
currently investigating new computer accounting software programs. The Company
estimates the cost to replace its current hardware and software will total
approximately $100,000 and will take between six and nine months to implement. A
contingeny plan has been adopted which would upgrade the Company's current
systems to Year 2000 Compliance. This plan would require 30 to 60 days to
implement at a cost of approximately $50,000. The Company intends to fund the
project from current cash reserves.
SUBSEQUENT EVENTS
On October 30, 1998, the Board of Directors of Reconditioned Systems, Inc. (RSI)
signed a definitive merger agreement with Cort Investment Group, Inc., a
privately owned Texas corporation d/b/a Contract Network ("CNI"). Under the
terms of the agreement, CNI will acquire RSI for $8,575,000 in cash. CNI has
been a leader in the remanufactured modular office furniture industry since
12
<PAGE>
1988, specializing in the reconditioning and marketing of workstations
originally manufactured by Steelcase and Herman Miller. The acquisition,
scheduled for closing in early 1999, is subject to, among other things, RSI
meeting certain financial conditions, the completion of satisfactory due
diligence by CNI, approval of the transaction by relevant regulatory agencies
and RSI shareholder approval. The Company is currently drafting a proxy
statement which is expected to be filed with the SEC pursuant to the
requirements of the Securities Exchange Act of 1934 during the month of
November, 1998.
13
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not party to any pending legal proceeding other than routine
litigation incidental to the business.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting was held on August 14, 1998. Shareholders voted on
the appointment of the Company's auditors and election of the Company's Board of
Directors. The following table provides the voting results:
Voted Broker
Proposal Shares Eligible Voted For Against Abstentions Non-Votes
- --------------------------------------------------------------------------------
1 - Election of
directors:
- --------------------------------------------------------------------------------
Wayne Collignon 1,473,950 1,058,761 0 0 0
- --------------------------------------------------------------------------------
Dirk Anderson 1,473,950 1,058,761 0 0 0
- --------------------------------------------------------------------------------
Scott Ryan 1,473,950 1,058,761 0 0 0
- --------------------------------------------------------------------------------
Susan Zinga 1,473,950 691,022 0 0 0
- --------------------------------------------------------------------------------
Warren Palitz 1,473,950 782,928 0 0 0
- --------------------------------------------------------------------------------
2- Appointment
of auditors 1,473,950 1,057,660 0 1,101 0
- --------------------------------------------------------------------------------
ITEM 5. OTHER INFORMATION
None.
14
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed herewith pursuant to Regulation S-B:
<TABLE>
<CAPTION>
NO. DESCRIPTION REFERENCE
<S> <C>
2.1 Definitive merger agreement between Cort Investment
Group, Inc. and Reconditioned Systems, Inc. 9
3.1 Articles of Incorporation of the Registrant, as amended and restated 3
3.2 Bylaws of Registrant, as amended and restated 3
4.1 Form of Common Stock Certificate 1
4.5 Registration Rights Agreements 2
* 4.9 Options issued to Wayne R. Collignon 4
* 4.10 Options issued to Dirk D. Anderson 4
* 4.11 Amendment to Options issued to Wayne Collignon 5
* 4.12 Amendment to Options issued to Dirk D. Anderson 5
* 4.13 Options issued to Wayne R. Collignon 5
* 4.14 Options issued to Dirk D. Anderson 5
* 4.15 Options issued to Scott W. Ryan 5
* 4.16 Options issued to Scott W. Ryan 5
10.1 Lease Agreement, dated April 12, 1990 between Boston Safe Deposit
and Trust Company, as Lessor, and Registrant as Lessee 1
*10.21 Employment Agreement between the Registrant and Wayne R. Collignon 3
*10.22 Employment Agreement between the Registrant and Dirk D. Anderson 3
10.23 Third amendment to the Lease between the Registrant, as Lessee,
and Newhew Associates, as Lessor 3
10.24 Loan documents between the Registrant and Norwest Business Credit, Inc. 3
*10.25 Amendment to Employment Agreement between Registrant and
Wayne Collignon 4
*10.26 Amendment to Employment Agreement between Registrant and
Dirk Anderson 4
10.27 Amendments to Loan document between Norwest Business Credit
and Registrant 4
10.28 Amendment to Loan document between Norwest Business Credit
and Registrant 5
10.29 Loan document between Registrant and M&I Thunderbird Bank 6
*10.30 Loan document between Registrant and Wayne R. Collignon 7
*10.31 Loan document between Registrant and Dirk D. Anderson 7
10.32 Loan document between M&I Thunderbird Bank and the Registrant 8
(1) Filed with Registration Statement on Form S-18, No. 33-51980-LA, under
the Securities Act of 1933, as declared effective on December 17, 1992
(2) Filed with Form 10-KSB on July 13, 1995
(3) Filed with Form 10-KSB on July 2, 1996
(4) Filed with Form 10-QSB on November 14, 1996
(5) Filed with 10-KSB on June 26, 1997
(6) Filed with 10-QSB on November 14, 1997
(7) Filed with 10-QSB on February 10, 1998
(8) Filed with 10-QSB on August 14, 1998
(9) Filed herein
(*) Indicates a compensatory plan or arrangement
</TABLE>
(b) Reports on Form 8-K:
No reports were filed on Form 8-K during the quarter ended September 30, 1998.
15
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
RECONDITIONED SYSTEMS, INC.
Date: November 13, 1998 /s/ Wayne R. Collignon
-------------------------------------
Wayne R. Collignon, President and CEO
Date: November 13, 1998 /s/ Dirk D. Anderson
-------------------------------------
Dirk D. Anderson, CFO
16
AGREEMENT AND PLAN OF MERGER
AMONG
CORT INVESTMENT GROUP, INC.
(a Texas corporation)
RSI ACQUISITION CORP.
(an Arizona corporation)
and
RECONDITIONED SYSTEMS, INC.
(an Arizona corporation)
<PAGE>
This Agreement and Plan of Merger (the "Agreement") is made as of the 30th
day of October, 1998, among Cort Investment Group, Inc., a Texas corporation
d/b/a Contract Network ("CNI"); RSI Acquisition Corp., an Arizona corporation
("Merger Corp."), which is wholly-owned by CNI; and Reconditioned Systems, Inc.,
an Arizona corporation ("RSI").
W I T N E S S E T H:
WHEREAS, the respective Boards of Directors of CNI, Merger Corp. and RSI
each have determined that it is in the best interests of their respective
stockholders for CNI and Merger Corp. to acquire RSI upon the terms and
conditions set forth herein;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein, and certain other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, the parties hereto covenant
and agree as follows:
ARTICLE 1.
THE MERGER
1.1. MERGER. In accordance with the provisions of the Arizona Business
Corporation Act, at the Effective Date (as hereinafter defined), Merger Corp.
shall be merged (the "Merger") into RSI, as soon as practicable following the
satisfaction or waiver, if permissible, of the conditions set forth in Articles
6 and 7. Following the Merger, RSI shall continue as the surviving corporation
(the "Surviving Corporation") and shall continue to be governed by the laws of
the State of Arizona.
1.2. CONTINUING OF CORPORATE EXISTENCE. Except as may otherwise be set
forth herein, the corporate existence and identity of RSI, with all its
purposes, powers, franchises, privileges, rights and immunities, shall continue
unaffected and unimpaired by the Merger, and the corporate existence and
identity of Merger Corp., with all its purposes, powers, franchises, privileges,
rights and immunities, at the Effective Date shall be merged with and into that
of RSI, and the Surviving Corporation shall be vested fully therewith and the
separate corporate existence and identity of Merger Corp. shall thereafter
cease.
1.3. EFFECTIVE DATE. The Merger shall become effective upon the filing of
the Articles of Merger with the Corporation Commission of the State of Arizona
pursuant to the provisions of the Arizona Business Corporation Act (the "BCA").
The date and time when the Merger shall become effective is hereinafter referred
to as the "Effective Date."
<PAGE>
1.4. CORPORATE GOVERNANCE.
(a) The Articles of Incorporation of RSI, as in effect on the
Effective Date, shall continue in full force and effect and shall be the
Articles of Incorporation of the Surviving Corporation.
(b) The Bylaws of RSI, as in effect as of the Effective Date, shall
continue in full force and effect and shall be the Bylaws of the Surviving
Corporation.
(c) The members of the Board of Directors of the Surviving Corporation
shall be (i) the three persons holding such office in Merger Corp. as of
the Effective Date and (ii) Wayne R. Collignon and Dirk D. Anderson.
(d) The officers of the Surviving Corporation shall be the persons
holding such offices in Merger Corp. as of the Effective Date, except that
Wayne R. Collignon shall be elected as President and Dirk D. Anderson shall
be elected as Chief Financial Officer of the Surviving Corporation.
1.5. RIGHTS AND LIABILITIES OF THE SURVIVING CORPORATION. The Surviving
Corporation shall have the following rights and obligations:
(a) The Surviving Corporation shall have all the rights, privileges
immunities and powers and shall be subject to all the duties and
liabilities of a corporation organized under the laws of the State of
Arizona.
(b) The title to all real estate and other property owned by RSI and
Merger Corp. shall be vested in the Surviving Corporation without revision
or impairment;
(c) The Surviving Corporation automatically has all of the liabilities
of RSI and Merger Corp.; and
(d) At the Effective Date, a proceeding pending against RSI or Merger
Corp. may be continued as if the Merger did not occur or the Surviving
Corporation may be substituted in the proceeding.
1.6. CLOSING.
(a) A closing into escrow of the transactions contemplated by this
Agreement (the "Escrow Closing") shall take place at the offices of RSI in
Tempe, Arizona commencing at 10:00 a.m., local time, on the date (i) on
which the Special Meeting (as defined herein) of RSI's shareholders occurs
or (ii) as soon as possible thereafter when each of the other conditions
set forth in Articles 6 and 7 have been satisfied or waived, or at such
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other place, time and date as shall be fixed by mutual agreement between
CNI and RSI. The day on which the Escrow Closing shall occur is referred to
herein as the "Escrow Closing Date." Each party will cause to be prepared,
executed and delivered into escrow with counsel to RSI and CNI (the
"Co-Escrow Agents") the Articles of Merger and all other appropriate and
customary documents as any party or its counsel may reasonably request for
the purpose of consummating the transactions contemplated by this
Agreement. CNI shall deposit with the Exchange Agent (as described in
Section 2.3 below) the cash amounts specified therein on the Escrow Closing
Date. In order to facilitate the Escrow Closing, RSI will allow CNI's
lenders to perfect security interests in RSI's assets as of the Escrow
Closing Date; it being understood that such lenders shall irrevocably
undertake in writing to immediately release such security interests if the
Closing does not occur as contemplated herein. Such lenders shall also have
a security interest in the Exchange Fund (as defined in Section 2.3), which
shall be released on the Effective Date. All actions taken at the Escrow
Closing shall be deemed to have been taken simultaneously at the time the
last of any such actions is taken or completed.
(b) The consummation of the Merger shall occur promptly upon the
occurrence of the delivery of joint written instructions given by RSI and
CNI to the Co-Escrow Agents to effect the filing of the Articles of Merger
as described in Section 2.3(b). The day on which such joint written
instructions are delivered to the Co-Escrow Agents is referred to herein as
the "Closing Date."
ARTICLE 2.
CONVERSION OF SHARES; TREATMENT OF OPTIONS
2.1. CONVERSION OF SHARES. At the Effective Date, by virtue of the Merger
and without any action on the part of the holder thereof:
(a) The outstanding shares of RSI common stock, no par value ("RSI
Common Stock"), and the options and warrants to acquire shares of RSI
Common Stock outstanding on the Effective Date (the "Options") shall, in
the aggregate at the Effective Date, by virtue of the Merger and without
any action on the part of the holders thereof, be converted into the sum
(the "Merger Consideration") of (i) $8,575,000 plus (ii) the "Adjustment
Amount."
(b) The Merger Consideration shall be allocated among the shares of
RSI Common Stock and Options on the basis set forth below:
(i) Each outstanding share of RSI Common Stock shall be
converted into an amount in cash (the "Net Price Per Share") equal to
the result after the following calculation: (X) the Merger
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Consideration plus the total Option Consideration, divided by (Y) the
total number of RSI Common Stock Equivalents outstanding on the
Effective Date.
(ii) Each Outstanding Option, other than Out of the Money
Options, shall be canceled and converted into an amount in cash equal
to the product of (X) the number of shares of RSI Common Stock subject
to the canceled Option and (Y) the excess of the Net Price Per Share
over the exercise price subject to such Option;
(iii) Each Out of the Money Option shall be canceled without cost
or liability to RSI or the Surviving Corporation.
(c) Each share of Common Stock, $.01 par value, of Merger Corp. which
shall be outstanding immediately prior to the Effective Date shall at the
Effective Date, by virtue of the Merger and without any action on the part
of the holder thereof, be converted into one share of newly issued RSI
Common Stock.
(d) For purposes of this provision,
(i) "Adjustment Amount" means the amount, if any, by which the
Merger Consideration has been increased as described in Section 2.3(c)
hereof.
(ii) "Option Consideration" means the total dollar amount that
would be paid to RSI upon the exercise of all outstanding Options on
the Effective Date, other than Out of the Money Options;
(iii) "Out of the Money Options" means all Options which have an
exercise price per share equal to or greater than the Net Price Per
Share; and
(iv) "RSI Common Stock Equivalents" means the number of shares
of RSI Common Stock outstanding on the Effective Date plus the number
of shares of RSI Common Stock that could be issued upon the exercise
of all Options, other than Out of the Money Options, outstanding on
the Effective Date.
It is understood that for all purposes the warrants issued to CNI to purchase
230,000 shares of RSI Common Stock (the "CNI Warrants"), which are not
exercisable until the termination of this Agreement under certain conditions,
shall not be deemed to be outstanding and shall not be included in the
computation of Option Consideration or RSI Common Stock Equivalents.
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2.2. DISSENTING SHARES. Shares of RSI Common Stock held by any shareholder
entitled to relief as a dissenter under Sections 10-1301 through 10-1331 of the
BCA ("Dissenting Shares") shall not be converted into the right to receive the
consideration in accordance with Section 2.1, but shall be canceled and
converted into such consideration as may be due with respect to such Shares
pursuant to the applicable provisions of the BCA unless and until the right of
such shareholder to receive fair value for such Dissenting Shares terminates in
accordance with Sections 10-1301 through 10-1331 of the BCA.
2.3. EXCHANGE AGENT.
(a) CNI shall authorize Harris Trust & Savings Bank, or such other
firm as is reasonably acceptable to RSI, to serve as exchange agent
hereunder (the "Exchange Agent"). On the Escrow Closing Date, CNI shall
deposit or shall cause to be deposited in trust with the Exchange Agent,
the sum of $8,575,000, less any amounts required to be reserved for
Dissenting Shares (such deposited cash amount being hereinafter referred to
as the "Exchange Fund").
(b) The Exchange Agent shall hold the Exchange Fund in escrow until
the earliest of (i) receipt by the Exchange Agent of a copy of the joint
written instructions of RSI and CNI to the Co-Escrow Agents pursuant to
Section 2.4(d) to cause the Articles of Merger to be filed, whereupon the
Exchange Agent shall use the Exchange Fund solely for the purposes set
forth in subsections 2.3(d) through (g) below; (ii) receipt by the Exchange
Agent of a notice from CNI pursuant to Section 2.4(d) that it is entitled,
and so elects, to terminate this Agreement, whereupon the Exchange Agent
shall promptly deliver the Exchange Fund to CNI; or (iii) the failure of
the Exchange Agent to receive the notices under clause (i) or (ii) above
prior to May 15, 1999, whereupon the Exchange Agent shall promptly deliver
the Exchange Fund to CNI.
(c) The Exchange Fund may be invested by the Exchange Agent as
directed by CNI only in direct obligations of the United States,
obligations for which the full faith and credit of the United States is
pledged to provide for the payment of principal and interest, commercial
paper rated of the highest quality by Moody's Investors Services, Inc. or
Standard & Poor's Corporation or certificates of deposit, bank repurchase
agreements or bankers' acceptances of a commercial bank having at least
$100,000,000 in assets (collectively, "Permitted Investments") or in money
market funds which are invested in Permitted Investments. Of the net
earnings which are generated on the Exchange Fund, 50% of all net earnings
generated from the Escrow Closing Date through the Closing Date shall be
segregated from the Exchange Fund, reserved for CNI and paid to CNI as and
when requested by CNI; and the remaining 50% of such net earnings generated
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for such period (such remaining 50% portion, net of the Cure Amount
referenced in Section 2.4(d), is referred to herein as the "Adjustment
Amount") shall be retained in the Exchange Fund and shall become a part of
the Merger Consideration. If applicable, the Exchange Agent shall also
deduct from the Adjustment Amount, and pay to CNI, the Cure Amount in
accordance with the provisions of Section 2.4.
(d) The Exchange Agent shall pay the Merger Consideration as provided
for in this Section 2.3 out of the Exchange Fund. As soon as practicable
after the Effective Date, the Exchange Agent shall mail and otherwise make
available to each record holder (other than holders of Dissenting Shares)
who, as of the Effective Date, was a holder of either (i) an outstanding
certificate or certificates which immediately prior to the Effective Date
represented shares of RSI Common Stock (the "Certificates") or (ii)
Options, a form of letter of transmittal and instructions for use in
effecting the surrender of the Certificates or Options for payment therefor
and conversion thereof.
(e) Delivery of Certificates or Options shall be effected, and risk of
loss and title to the Certificates or Options shall pass, only upon proper
delivery of the Certificates or Options to the Exchange Agent and the form
of letter of transmittal shall so reflect. Upon surrender to the Exchange
Agent of a Certificate or Option, together with such letter of transmittal
duly executed, the holder of such Certificate or Option shall be entitled
to receive in exchange therefor, as promptly as practicable after the
Effective Date, a check representing the Merger Consideration to which such
holder shall have become entitled pursuant to this Article 2, and the
Certificate or Option so surrendered shall forthwith be canceled.
(f) If any portion of the consideration to be received pursuant to
this Article 2 upon exchange of a Certificate or Option is to be issued or
paid to a person other than the person in whose name the Certificate or
Option surrendered in exchange therefor is registered, it shall be a
condition of such issuance and payment that the Certificate or Option so
surrendered shall be properly endorsed or otherwise in proper form for
transfer and that the person requesting such exchange shall pay in advance
any transfer or other taxes required by reason of the issuance of a check
representing cash to such other person, or establish to the satisfaction of
the Exchange Agent that such tax has been paid or that no such tax is
applicable.
(g) In the case of any lost, mislaid, stolen or destroyed
Certificates, the holder thereof may be required, as a condition precedent
to the delivery to such holder of the consideration described in this
Article 2, to deliver to CNI a bond in such reasonable sum as CNI may
direct as indemnity against any claim that may be made against the Exchange
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Agent, CNI or the Surviving Corporation with respect to the Certificate
alleged to have been lost, mislaid, stolen or destroyed.
(h) After the Effective Date, there shall be no transfers on the stock
transfer books of the Surviving Corporation of the shares of RSI Common
Stock that were outstanding immediately prior to the Effective Date. If,
after the Effective Date, Certificates are presented to the Surviving
Corporation for transfer, they shall be canceled and exchanged for the
consideration described in this Article 2.
(i) Any portion of the Exchange Fund that remains unclaimed by the
stockholders of RSI for six months after the Effective Date shall be
returned to CNI, upon demand, and any holder of RSI Common Stock who has
not theretofore complied with Section 2.3(d) shall thereafter look only to
CNI for issuance of the consideration to which such holder has become
entitled pursuant to this Article 2; provided, however, that neither the
Exchange Agent nor any party hereto shall be liable to a holder of shares
of RSI Common Stock for any amount required to be paid to a public official
pursuant to any applicable abandoned property, escheat or similar law.
2.4. COMPUTATION OF ADJUSTMENT AMOUNT.
(a) No later than 30 days after the Escrow Closing Date, CNI shall
prepare and deliver to the Board of Directors of RSI an unaudited statement
of the current assets and current liabilities of the Company as of the
Escrow Closing Date (the "Closing Balance Sheet"), prepared in accordance
with generally accepted accounting principles. CNI shall promptly make
available to RSI and its accountants all work papers and other pertinent
information used in connection therewith.
(b) Within five days after the Closing Balance Sheet is delivered to
RSI pursuant to subsection (a) above, RSI shall complete its examination
thereof and shall deliver to CNI either (i) a written acknowledgment
accepting the Closing Balance Sheet or (ii) a written report (the
"Objection Report") setting forth in reasonable detail any proposed
objections to the Closing Balance Sheet. A failure by RSI to deliver the
Objection Report within the required five-day period shall constitute its
acceptance of the calculations set forth in the Closing Balance Sheet.
(c) During a period of 10 days following the receipt by CNI of the
Objection Report, RSI and CNI shall attempt to resolve any differences they
may have with respect to the matters raised in the Objection Report. In the
event RSI and CNI fail to agree on any of CNI's proposed adjustments
contained in the Objection Report within such 10-day period, then the
parties will submit such dispute to the Phoenix office of Arthur Andersen,
L.L.P., certified public accountants ("Independent Auditors"), to make the
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final determination, prior to the 60th day after the Escrow Closing Date,
with respect to the Closing Balance Sheet. The decision of the Independent
Auditors shall be final and binding on the parties. The costs and expenses
of the Independent Auditors and their services rendered pursuant to this
subsection shall be borne equally by CNI and RSI.
(d) If, after finalization of the Closing Balance Sheet (which shall
be deemed to mean either the acceptance by RSI of the Closing Balance Sheet
in accordance with Section 2.4(b) above or, if RSI delivers an Objection
Report, upon the resolution of the matters raised in the Objection Report
pursuant to Section 2.4(c) above, but which shall in no event occur prior
to February 28, 1999), the Closing Balance sheet shall reveal that RSI
shall not have been in compliance with the financial covenants set forth in
Section 2.4(e) below (all computed in accordance with GAAP as of the Escrow
Closing Date), then
(i) if the Cure Amount (defined below) is equal to or less than
the Adjustment Amount, the Cure Amount will be segregated from the
Exchange Fund and will be paid over to CNI, whereupon CNI and RSI
shall furnish joint written instructions to the Co-Escrow Agents (and
a copy to the Exchange Agent) to file the Articles of Merger with the
Corporation Commission of the State of Arizona;
(ii) if the Cure Amount is greater than the Adjustment Amount,
then CNI shall elect either to (X) waive its right to receive any Cure
Amount in excess of the Adjustment Earnings (whereupon CNI and RSI
shall furnish the joint written instructions described in the
preceding clause (i)) or (Y) terminate this Agreement (whereupon CNI
shall provide notice of such termination to the Co-Escrow Agents and
the Exchange Agent); or
(iii) For purposes of this Section 2.4(d)(i) and (ii), the "Cure
Amount" shall mean the smallest dollar amount that would cure any and
all deficiencies in the financial covenants listed in Section 2.4(e)
below, it being understood that such amount may be applied to cure
multiple covenants.
(e) For purposes of this Section 2.4, RSI shall be required to be in
compliance with the following financial covenants as of the Escrow Closing
Date:
(i) Cash and cash equivalents, plus net accounts receivable,
minus customer deposits, shall exceed $1,925,000;
(ii) Cash, plus net accounts receivable, plus inventory, minus
total liabilities, shall exceed $2,475,000;
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(iii) Total liabilities shall be less than $800,000;
(iv) Accounts payable shall be less than $475,000;
(v) Inventory shall be at least $900,000;
(vi) Total assets, minus intangible assets, plus the value of
intangible assets listed on Schedule 2.4 ($45,078.37), plus $800,000,
minus total liabilities, shall be greater than $3,725,000; and
(vii) Shareholders' equity shall be at least $2,925,000.
ARTICLE 3.
REPRESENTATIONS AND WARRANTIES OF RSI
RSI hereby represents and warrants to CNI and Merger Corp. as follows:
3.1. ORGANIZATION AND GOOD STANDING OF RSI. RSI is a corporation duly
organized, validly existing and in good standing under the laws of Arizona. RSI
does not own any equity interest in any other corporation, partnership or
similar entity.
3.2. FOREIGN QUALIFICATION. RSI is duly qualified or licensed to do
business and is in good standing as a foreign corporation in every jurisdiction
where the failure so to qualify would have a material adverse effect on (i) its
business, operations, assets or financial condition (an "RSI Material Adverse
Effect") or (ii) the validity or enforceability of, or the ability of RSI to
perform its obligations under, this Agreement.
3.3. CORPORATE POWER AND AUTHORITY. RSI has the corporate power and
authority to own, lease and operate its properties and assets and to carry on
its business as currently being conducted. RSI has the corporate power and
authority to execute and deliver this Agreement and, subject to the approval of
this Agreement and the Merger by its shareholders, to perform its obligations
under this Agreement and to consummate the Merger. The execution, delivery and
performance by RSI of this Agreement has been duly authorized by all necessary
corporate action (other than the approval of this Agreement and the Merger by
its shareholders).
3.4. BINDING EFFECT. This Agreement has been duly executed and delivered
by RSI and is the legal, valid and binding obligation of RSI enforceable in
accordance with its terms except that:
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(a) enforceability may be limited by bankruptcy, insolvency or other
similar laws affecting creditors' rights;
(b) the availability of equitable remedies may be limited by equitable
principles of general applicability; and
(c) rights to indemnification may be limited by considerations of
public policy.
3.5. ABSENCE OF RESTRICTIONS AND CONFLICTS. Subject only to the approval of
the adoption of this Agreement and the Merger by RSI's shareholders and except
as set forth on SCHEDULE 3.5, the execution, delivery and performance of this
Agreement and the consummation of the Merger and the fulfillment of and
compliance with the terms and conditions of this Agreement do not and will not,
with the passing of time or the giving of notice or both, violate or conflict
with, constitute a breach of or default under, result in the loss of any
material benefit under, or permit the acceleration of any obligation under, (i)
any term or provision of the Articles of Incorporation or Bylaws of RSI, (ii)
any "Material Contract" (as defined herein), (iii) any judgment, decree or order
of any court or governmental authority or agency to which RSI is a party or by
which RSI or its properties is bound, or (iv) any statute, law, regulation or
rule applicable to RSI other than such violations, conflicts, breaches or
defaults which would not have an RSI Material Adverse Effect. Except for the
filing of the Articles of Merger with the Arizona Corporation Commission and
publication thereof as required by the BCA, and compliance with the applicable
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), the Securities Act of 1933, as amended (the "Securities Act"), applicable
state securities laws and the rules and regulations of the Nasdaq Stock Market,
no consent, approval, order or authorization of, or registration, declaration or
filing with, any governmental agency or public or regulatory unit, agency, body
or authority with respect to RSI is required in connection with the execution,
delivery or performance of this Agreement by RSI or the consummation of the
transactions contemplated hereby.
3.6. CAPITALIZATION OF RSI.
(a) The authorized capital stock of RSI consists of 20,000,000 shares
of common stock, no par value. As of the date hereof, there were (i)
1,473,834 shares of RSI Common Stock issued and outstanding, (ii) 300,000
shares of RSI Common Stock reserved for issuance upon the exercise of
outstanding Options, and (iii) no shares of RSI Common Stock held as
treasury shares.
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(b) All of the issued and outstanding shares of RSI Common Stock have
been duly authorized and validly issued and are fully paid, nonassessable
and free of preemptive rights.
(c) To RSI's knowledge, other than as set forth on SCHEDULE 3.6, there
are no voting trusts, stockholder agreements or other voting arrangements
by the shareholders of RSI.
(d) Except as set forth in subsection (a) above and in SCHEDULE 3.6,
and except for the CNI Warrants, there is no outstanding subscription,
contract, convertible or exchangeable security, option, warrant, call or
other right obligating RSI to issue, sell, exchange, or otherwise dispose
of, or to purchase, redeem or otherwise acquire, shares of, or securities
convertible into or exchangeable for, capital stock of RSI.
3.7. RSI SEC REPORTS. RSI has made available to CNI and Merger Corp. (i)
RSI's Annual Report on Form 10-KSB for the year ended March 31, 1998, including
all exhibits filed thereto and items incorporated therein by reference, (ii)
RSI's Quarterly Report on Form 10-QSB for the fiscal quarter ended June 30,
1998, including all exhibits thereto and items incorporated therein by
reference, (iii) the proxy statement relating to RSI's meeting of shareholders
held on August 14, 1998 and (iv) all other reports or registration statements
(as amended or supplemented prior to the date hereof), filed by RSI with the
Securities and Exchange Commission (the "SEC") since April 1, 1996, including
all exhibits thereto and items incorporated therein by reference (items (i)
through (iv) being referred to as the "RSI SEC Reports"). As of their respective
dates, the RSI SEC Reports did not contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading. Since April 1, 1996, RSI has filed all material
forms, reports and documents with the SEC required to be filed by it pursuant to
the federal securities laws and the SEC rules and regulations thereunder, each
of which complied as to form, at the time such form, report or document was
filed, in all material respects with the applicable requirements of the
Securities Act, the Exchange Act and the applicable rules and regulations
thereunder.
3.8. FINANCIAL STATEMENTS AND RECORDS OF RSI. RSI has made available to CNI
and Merger Corp. true, correct and complete copies of the following financial
statements (the "RSI Financial Statements"):
(a) the financial statements of RSI of March 31, 1997 and 1998, and
for the years then ended, including the notes thereto, in each case
examined by and accompanied by the report of Semple & Cooper, LLP
(collectively, the "RSI Year-End Statements"); and
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(b) the unaudited balance sheet of RSI as of June 30, 1998 (the "RSI
Balance Sheet"), with any notes thereto, and the related unaudited
statement of income for the three months then ended (collectively, the "RSI
Quarterly Statements").
The RSI Year-End Statements and the RSI Quarterly Statements present fairly, in
all material respects, the financial position of RSI as of the dates thereof and
the results of operations and cash flows thereof for the periods then ended, in
each case in conformity with generally accepted accounting principles ("GAAP"),
consistently applied, except as noted therein. Since March 31, 1998, there has
been no change in accounting principles or standards applicable to, or methods
of accounting (including valuation methods) utilized by, RSI, except as
specifically noted in the RSI Financial Statements. The books and records of RSI
have been and are being maintained in accordance with good business practice,
reflect only valid transactions and are complete and correct in all material
respects.
3.9. ABSENCE OF CERTAIN CHANGES. Since March 31, 1998, RSI has not, except
as otherwise set forth on SCHEDULE 3.9:
(a) suffered any adverse change in the business, operations, assets,
or financial condition, except as reflected on the RSI Quarterly
Statements;
(b) suffered any damage or destruction to or loss of the assets of
RSI, whether or not covered by insurance, which property or assets are
material to the operations or business of RSI taken as a whole, or lost the
business relationship of any significant customer of RSI;
(c) settled, forgiven, compromised, canceled, released, waived or
permitted to lapse any material rights or claims other than in the ordinary
course of business;
(d) entered into or terminated any material agreement, commitment or
transaction, or agreed to make or made any changes in material leases or
agreements, other than renewals or extensions thereof and leases,
agreements, transactions and commitments entered into or terminated in the
ordinary course of business;
(e) written up, written down or written off the book value of any
material amount of assets or changed any valuation methods or other
accounting standards;
(f) declared, paid or set aside for payment any dividend or
distribution with respect to RSI's capital stock or repurchased any such
capital stock;
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(g) redeemed, purchased or otherwise acquired, or sold, granted or
otherwise disposed of, directly or indirectly, any of RSI's capital stock
or securities (other than shares issued upon exercise of the Options) or
any rights to acquire such capital stock or securities, or agreed to
changes in the terms and conditions of any such rights outstanding as of
the date of this Agreement;
(h) increased the compensation of, paid any bonuses to or made or
guaranteed any loan in excess of $1,000 in favor of any employees or
contributed to any employee benefit plan, other than in accordance with
accruals set forth on the RSI Quarterly Statements;
(i) entered into any employment, consulting or compensation agreement
with any person or group, providing for payment in excess of $5,000 by RSI;
(j) entered into any collective bargaining agreement with any person
or group;
(k) entered into, adopted or amended any employee benefit plan;
(l) created, incurred or assumed any debt for borrowed money
(including obligations in respect of capital leases);
(m) acquired or disposed of any material asset other than inventory
in the ordinary course of business;
(n) entered into any transaction outside the ordinary course of
business; or
(o) entered into any agreement to do any of the foregoing.
3.10. NO MATERIAL UNDISCLOSED LIABILITIES. There are no liabilities or
obligations of RSI of any nature, whether absolute, accrued, contingent, or
otherwise, other than the liabilities and obligations that are reflected,
accrued or reserved against on the RSI Balance Sheet, or incurred in the
ordinary course of business and consistent with past practices since March 31,
1998.
3.11. TAX RETURNS; TAXES. RSI has duly filed all U.S. federal and material
state, county, local and foreign tax returns and reports required to be filed by
it, including those with respect to income, payroll, property, withholding,
social security, unemployment, franchise, excise and sales taxes and all such
returns and reports are correct in all material respects; has either paid in
full all taxes that have become due as reflected on any return or report and any
interest and penalties with respect thereto or has fully accrued on its books or
has established adequate reserves for all taxes payable but not yet due; and has
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made cash deposits with appropriate governmental authorities representing
estimated payments of taxes, including income taxes and employee withholding tax
obligations. No extension or waiver of any statute of limitations or time within
which to file any return has been granted to or requested by RSI with respect to
any tax. No unsatisfied deficiency, delinquency or default for any tax,
assessment or governmental charge has been claimed, proposed or assessed against
RSI, nor has RSI received notice of any such deficiency, delinquency or default.
RSI has no material tax liabilities other than those reflected on RSI Balance
Sheet and those arising in the ordinary course of business since the date
thereof. RSI will make available to CNI true, complete and correct copies of
RSI's U.S. federal tax returns for the last five years and make available such
other tax returns requested by CNI. The U.S. federal income tax liabilities of
RSI have been calculated in accordance the guidelines of the Internal Revenue
Service. The Internal Revenue Service has audited RSI for all fiscal years up to
and including the year ended March 31, 1995. At March 31, 1998, the net
operating loss carryforward of RSI was at least $2,100,000.
3.12. MATERIAL CONTRACTS. RSI has furnished or made available to CNI
accurate and complete copies of the Material Contracts (as defined herein)
applicable to RSI. Except as set forth on SCHEDULE 3.12, there is not under any
of the Material Contracts any existing breach, default or event of default by
RSI nor event that with notice or lapse of time or both would constitute a
breach, default or event of default by RSI other than breaches, defaults or
events of default which would not have an RSI Material Adverse Effect, nor does
RSI know of, and RSI has not received notice of, or made a claim with respect
to, any breach or default by any other party thereto which would, severally or
in the aggregate, have an RSI Material Adverse Effect. As used herein, the term
"Material Contracts" shall mean the following:
(i) contracts with any labor union; employee benefit plans or
contracts; and employment, consulting or similar contracts, including
confidentiality agreements;
(ii) leases, whether as lessor or lessee; loan agreements, mortgages,
indentures, instruments of indebtedness or commitments in each case
involving indebtedness for borrowed money or money loaned to others; and
guaranty or suretyship, performance bond, indemnification or contribution
agreements involving obligations;
(iii) contracts with third parties that involve aggregate payments by
RSI after the date hereof of more than $25,000 per annum;
(iv) insurance policies material to the business of RSI; and
(v) other contracts that are material to the operations, business or
financial condition of RSI.
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3.13. LITIGATION AND GOVERNMENT CLAIMS. Except as disclosed on SCHEDULE
3.13, there is no pending suit, claim, action or litigation, or administrative,
arbitration or other proceeding or governmental investigation or inquiry against
RSI. To the knowledge of RSI, there are no such proceedings threatened or
contemplated. RSI is not subject to any judgment, decree, injunction, rule or
order of any court, or, to the knowledge of RSI, any governmental restriction
applicable to RSI which is reasonably likely (i) to have an RSI Material Adverse
Effect or (ii) to cause a material limitation on CNI's ability to operate the
business of RSI (as it is currently operated) after the Effective Date.
3.14. COMPLIANCE WITH LAWS. RSI has all material authorizations, approvals,
licenses and orders to carry on its business as it is now being conducted, to
own or hold under lease the properties and assets it owns or holds under lease
and to perform all of its obligations under the agreements to which it is a
party. RSI has been and is, to the knowledge of RSI, in compliance with all
applicable laws, regulations and administrative orders of any country, state or
municipality or of any subdivision of any thereof to which its business and its
employment of labor or its use or occupancy of properties or any part hereof are
subject in any material respect.
3.15. EMPLOYEE BENEFIT PLANS. Each employee benefit plan, as such term is
defined in Section 3(3) of the Employee Retirement Income Security Act of 1974,
as amended ("ERISA"), of RSI (collectively the "Employee Plans") complies in all
material respects with all applicable requirements of ERISA and the Internal
Revenue Code of 1986, as amended (the "Code"), and other applicable laws. None
of the Employee Plans is an employee pension benefit plan or a multiemployer
plan, as such terms are defined in ERISA. Neither RSI nor any of its directors,
officers, employees or agents has, with respect to any Employee Plan, engaged in
any "prohibited transaction," as such term is defined in the Code or ERISA, nor
has any Employee Plan engaged in such prohibited transaction which could result
in any taxes or penalties or other prohibited transactions.
3.16. EMPLOYMENT AGREEMENTS; LABOR RELATIONS.
(a) SCHEDULE 3.16 sets forth a complete and accurate list of all
material employee benefit or compensation plans, agreements and
arrangements to which RSI is a party and which is not disclosed in the RSI
SEC Reports, including without limitation (i) all severance, employment,
consulting or similar contracts, (ii) all material agreements and contracts
with "change of control" provisions or similar provisions and (iii) all
indemnification agreements or arrangements with directors or officers.
(b) RSI is in compliance in all material respects with all laws
(including Federal and state laws) respecting employment and employment
practices, terms and conditions of employment, wages and hours, and is not
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engaged in any unfair labor or unlawful employment practice. There is no
unlawful employment practice discrimination charge pending before the EEOC
or EEOC recognized state "referral agency." There is no unfair labor
practice charge or complaint against RSI pending before the National Labor
Review Board. There is no labor strike, dispute, slowdown or stoppage
actually pending or, to the knowledge of RSI, threatened against or
involving or affecting RSI and no National Labor Review Board
representation question exists respecting its employees. Except as set
forth on SCHEDULE 3.16, no grievance or arbitration proceeding is pending
and no written claim therefor has been delivered to RSI. There is no
collective bargaining agreement that is binding on RSI.
3.17. INTELLECTUAL PROPERTY. RSI owns or has valid, binding and enforceable
rights to use all material patents, trademarks, trade names, service marks,
service names, copyrights, applications therefor and licenses or other rights in
respect thereof ("Intellectual Property") used or held for use in connection
with the business of RSI, without any known conflict with the rights of others.
RSI has not received any notice from any other person pertaining to or
challenging the right of RSI to use any Intellectual Property or any trade
secrets, proprietary information, inventions, know-how, processes and procedures
owned or used or licensed to RSI.
3.18. REAL ESTATE; ENVIRONMENTAL LAWS.
(a) (i) Applicable zoning ordinances permit the operation of RSI's
business at its 444 West Fairmont, Tempe, Arizona leased site (the "Real
Estate"); (ii) RSI has all easements and rights, including easements for
all utilities, services, roadways and other means of ingress and egress,
necessary to operate the business; and (iii) neither the whole nor any
portion of the Real Estate has been condemned, requisitioned or otherwise
taken by any public authority, and no notice of any such condemnation,
requisition or taking has been received. No such condemnation, requisition
or taking is threatened or contemplated, and there are no pending public
improvements which may result in special assessments against or which may
otherwise materially and adversely affect the Real Estate. To the knowledge
of RSI, (i) the Real Estate has not been used for deposit or disposal of
hazardous wastes or substances in violation of any past or current law in
any material respect and (ii) there is no material liability under past or
current law with respect to any hazardous wastes or substances which have
been disposed of on or in the Real Estate.
(b) RSI has not received any notice of, and has no actual knowledge
of, any material violation of any zoning, building, health, fire, water use
or similar statute, ordinance, law, regulation or code in connection with
the Real Estate.
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(c) RSI has complied with all environmental, health and safety laws,
and no action, suit, proceeding, hearing, investigation, charge, complaint,
claim or demand has been filed or commenced against RSI alleging any
failure so to comply. RSI has obtained and is in compliance with all
permits, licenses and other authorizations which are required under
environmental, health and safety laws. No hazardous or toxic material
exists in any structure located on, or exists on or under the surface of,
the Real Estate which is, in any case, in material violation of applicable
environmental, health or safety laws. For purposes of this Section,
"hazardous or toxic material" shall mean waste, substance, materials or
particulate matter regulated as hazardous or toxic under any environmental,
health or safety law. For purposes of this Section, "environmental, health
and safety laws" means the Comprehensive Environmental Response
Compensation and Liability Act of 1980, the Resource Conservation and
Recovery Act of 1976 and the Occupational Safety and Health Act of 1970,
each as amended, together with all other laws of federal, state and local
governments (and all agencies thereof) concerning pollution or protection
of the environment, public health and safety, or employee health and
safety, including laws relating to emissions, discharges, releases or
threatened releases of pollutants, contaminants or chemical, industrial,
hazardous or toxic materials or wastes into ambient air, surface water,
ground water or lands or otherwise relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling of
pollutants, contaminants or chemical, industrial, hazardous or toxic
materials or wastes.
3.19. CONDITION OF ASSETS. All of the assets (other than inventory) of RSI
viewed as a whole and not on an asset by asset basis are in good condition and
working order, ordinary wear and tear excepted, and are reasonably suitable for
the uses for which intended, free from any defects known to RSI, except such
minor defects, as do not substantially interfere with the continued use thereof.
RSI has in force such insurance of its properties and operations as is set forth
on SCHEDULE 3.19.
3.20. ACCOUNTS RECEIVABLE. The accounts receivable set forth on the RSI
Quarterly Statements are reflected thereon in accordance with GAAP. The
allowance for collection losses on the RSI Quarterly Statements has been
determined in accordance with GAAP consistent with past practice. The accounts
receivable arising since the date of the RSI Quarterly Statements are valid and
genuine subject to no setoffs or counterclaims and are collectible in the
ordinary course of business, subject to RSI's recorded reserve for doubtful
accounts.
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3.21. INVENTORY. All inventory used in the conduct of the operations of the
business reflected on the RSI Quarterly Statements or acquired since the date
thereof, was acquired and has been maintained in the ordinary course of
business, consists substantially of good and merchantable quality and, other
than after acquired inventory, has been recorded on the RSI Quarterly Statements
in accordance with GAAP.
3.22. YEAR 2000. All operating system, application and other computer
software owned by or licensed to RSI, and all computer hardware and related
equipment leased or owned by RSI, is currently Year 2000 compliant, or to the
extent that such software or hardware is not currently Year 2000 compliant, RSI
has in place and is implementing detailed plans to ensure that such software and
hardware will be Year 2000 compliant no later than June 30, 1999.
3.23. BROKERS AND FINDERS. None of RSI or its officers or directors has
employed any broker, finder or investment bank or incurred any liability for any
investment banking fees, financial advisory fees, brokerage fees or finders'
fees in connection with the transactions contemplated hereby. RSI is not aware
of any claim for payment of any finder's fees, brokerage or agent's commissions
or other like payments in connection with the negotiations leading to this
Agreement or the consummation of the transactions contemplated hereby.
ARTICLE 4.
REPRESENTATIONS AND WARRANTIES OF CNI AND MERGER CORP.
CNI and Merger Corp. hereby represent and warrant to RSI as follows:
4.1. ORGANIZATION AND GOOD STANDING. Each of CNI and Merger Corp. is a
corporation duly organized, validly existing and in good standing under the laws
of the jurisdiction of its incorporation.
4.2. CORPORATE POWER AND AUTHORITY. Each of CNI and Merger Corp. has the
corporate power and authority to own, lease and operate their respective
properties and assets and to carry on their respective businesses as currently
being conducted. Each of CNI and Merger Corp. has the corporate power and
authority to execute and deliver this Agreement and to perform its obligations
under this Agreement and to consummate the Merger. The execution, delivery and
performance by CNI and Merger Corp. of this Agreement have been duly authorized
by all necessary corporate action.
4.3. BINDING EFFECT. This Agreement has been duly executed and delivered
by CNI and Merger Corp. and is the legal, valid and binding obligation of CNI
and Merger Corp., enforceable in accordance with its terms except that:
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(a) enforceability may be limited by bankruptcy, insolvency or other
similar laws affecting creditors' rights;
(b) the availability of equitable remedies may be limited by equitable
principles of general applicability; and
(c) rights to indemnification may be limited by considerations of
public policy.
4.4 ABSENCE OF RESTRICTIONS AND CONFLICTS. Subject only to the approval of
the adoption of this Agreement, the Merger and the Warrant by each of CNI's and
Merger Corp.'s shareholders, the execution, delivery and performance of this
Agreement and the Warrant and the consummation of the Merger and the fulfillment
of and compliance with the terms and conditions of this Agreement and the
Warrant do not and will not, with the passing of time or the giving of notice or
both, violate or conflict with, constitute a breach of or default under, result
in the loss of any material benefit under, or permit the acceleration of any
obligation under, (i) any term or provision of the Articles of Incorporation or
Bylaws of each of CNI and Merger Corp., (ii) any judgment, decree or order of
any court or governmental authority or agency to which either CNI or Merger
Corp. is a party or by which either CNI or Merger Corp. or its properties are
bound, or (iii) any statute, law, regulation or rule applicable to each of CNI
and Merger Corp. other than such violations, conflicts, breaches or defaults
which would not have a material adverse effect on the business, operations,
assets or financial condition of either CNI or Merger Corp. Except for the
filing of the Articles of Merger with the Arizona Corporation Commission and
publication thereof as required by the BCA, compliance with the applicable
requirements of the Securities Act, the Exchange Act and applicable state
securities laws, no consent, approval, order or authorization of, or
registration, declaration or filing with, any governmental agency or public or
regulatory unit, agency, body or authority with respect to each of CNI and
Merger Corp. is required in connection with the execution, delivery or
performance of this Agreement and the Warrant by each of CNI and Merger Corp. or
the consummation of the transactions contemplated hereby.
4.5 BROKERS AND FINDERS. Except for ECDI Capital Corp. (the fees of which
shall be paid by CNI), none of CNI or its officers or directors has employed any
broker, finder or investment bank or incurred any liability for any investment
banking fees, financial advisory fees, brokerage fees or finders' fees in
connection with the transactions contemplated hereby. CNI is not aware of any
claim for payment of any finder's fees, brokerage or agent's commissions or
other like payments in connection with the negotiations leading to this
Agreement or the consummation of the transactions contemplated hereby.
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ARTICLE 5.
CERTAIN COVENANTS AND AGREEMENTS
5.1. CONDUCT OF BUSINESS BY RSI. From the date hereof to the Escrow Closing
Date, RSI will, except as required in connection with the Merger and the other
transactions contemplated by this Agreement and except as otherwise disclosed on
the schedules hereto or consented to in writing by CNI:
(a) carry on its business in the ordinary and regular course in
substantially the same manner as heretofore conducted and not engage in any
new line of business or enter into any material agreement, transaction or
activity or make any material commitment except those in the ordinary and
regular course of business and not otherwise prohibited under this Section
5.1;
(b) neither change nor amend its Articles of Incorporation or Bylaws;
(c) other than pursuant to the exercise of the Options outstanding on
the date hereof, not issue, sell or grant options, warrants or rights to
purchase or subscribe to, or enter into any arrangement or contract with
respect to the issuance or sale of any of the capital stock of RSI or
rights or obligations convertible into or exchangeable for any shares of
the capital stock of RSI and not alter the terms of any presently
outstanding options or option plans or make any changes (by split-up,
combination, reorganization or otherwise) in the capital structure of RSI;
(d) not declare, pay or set aside for payment any dividend or other
distribution in respect of the capital stock or other equity securities of
RSI and not redeem, purchase or otherwise acquire any shares of the capital
stock or other securities of RSI or rights or obligations convertible into
or exchangeable for any shares of the capital stock or other securities of
RSI or obligations convertible into such, or any options, warrants or other
rights to purchase or subscribe to any of the foregoing;
(e) not acquire or enter into any agreement to acquire, by merger,
consolidation or purchase of stock or assets, any business or entity, or
dispose of any material asset other than the sale of inventory in the
ordinary course of business;
(f) use its reasonable efforts to preserve intact the corporate
existence, goodwill and business organization of RSI, to keep the officers
and employees of RSI available to RSI and to preserve the relationships of
RSI with suppliers, customers and others having business relations with any
of them;
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(g) not (i) create, incur or assume any debt (including obligations in
respect of capital leases) or, except in the ordinary course of business
under existing lines of credit, create, incur or assume any short-term debt
for borrowed money, (ii) assume, guarantee, endorse or otherwise become
liable or responsible (whether directly, contingently or otherwise) for the
obligations of any other person, (iii) make any loans or advances in excess
of $1,000 to any other person, or (iv) make any capital contributions to,
or investments in, any person;
(h) not (i) enter into, modify or extend in any manner the terms of
any employment, severance or similar agreements with officers and
directors, (ii) grant any increase in the compensation of officers or
directors, whether now or hereafter payable, or (iii) grant any increase in
the compensation of any other employees except for compensation increases
in the ordinary course of business and consistent with past practice (it
being understood by the parties hereto that for the purposes of (ii) and
(iii) above increases in compensation shall include any increase pursuant
to any option, bonus, stock purchase, pension, profit-sharing, deferred
compensation, retirement or other plan, arrangement, contract or
commitment);
(i) not make or incur any individual capital expenditure in excess of
$5,000 or capital expenditures in the aggregate in excess of $10,000 except
as disclosed on Schedule 5.1(i) for purposes of becoming Year 2000
compliant (as used herein, "capital expenditure" shall mean all payments in
respect of the cost of any fixed asset or improvement or replacement,
substitution or addition thereto which is deemed a long-term asset under
GAAP, including those costs arising in connection with the acquisition of
such assets by way of increased product or service charges or offset items
or in connection with capital leases);
(j) perform all of its obligations under all Material Contracts
(except those being contested in good faith) and not enter into, assume or
amend any contract or commitment that would be a Material Contract other
than contracts to provide services entered into in the ordinary course of
business; and
(k) prepare and file all federal, state, local and foreign returns for
taxes and other tax reports, filings and amendments thereto required to be
filed by it, and allow CNI, at its request, to review all such returns,
reports, filings and amendments at RSI's offices prior to the filing
thereof, which review shall not interfere with the timely filing of such
returns.
In connection with the continued operation of the business of RSI between
the date of this Agreement and the Escrow Closing Date, RSI shall confer in good
faith and on a regular and frequent basis with one or more representatives of
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CNI designated in writing to report operational matters of materiality and the
general status of ongoing operations. In addition, upon reasonable notice not
less than 24 hours in advance, RSI will allow CNI employees and agents to be
present at RSI's business locations during normal business hours to observe the
business and operations of RSI. Between the Escrow Closing Date and the
Effective Date, RSI will allow CNI employees and agents to be present at RSI's
business locations without the requirement of advance notice, and RSI shall not
take any action which CNI reasonably asserts would constitute a violation of
Section 5.1 hereof. RSI acknowledges that CNI does not and will not waive any
rights it may have prior to the Escrow Closing Date under this Agreement as a
result of such consultations, nor shall CNI be responsible for any decisions
made by RSI's officers and directors with respect to matters which are the
subject of such consultation.
5.2. NOTICE OF ANY MATERIAL CHANGE. RSI shall, promptly after the first
notice or occurrence thereof, advise CNI in writing of any event or the
existence of any state of facts that would make any of its representations and
warranties in this Agreement untrue in any material respect.
5.3. INSPECTION AND ACCESS TO INFORMATION.
(a) Between the date of this Agreement and the Escrow Closing Date,
RSI will provide to CNI and its accountants, counsel and other authorized
representatives reasonable access, during normal business hours to its
premises, properties, contracts, commitments, books, records and other
information (including tax returns filed and those in preparation) and will
cause its officers to furnish to CNI and its authorized representatives
such financial, technical and operating data and other information
pertaining to its business, as CNI shall from time to time reasonably
request.
(b) CNI and its representatives shall maintain the confidentiality of
all information (other than information which is generally available to the
public) concerning RSI acquired pursuant to the transactions contemplated
hereby in the event that the Merger is not consummated. All files, records,
documents, information, data and similar items relating to the confidential
information of RSI, whether prepared by CNI or otherwise coming into its
possession (other than information which (i) is or becomes generally
available to the public other than as a result of a disclosure by CNI or
its representatives, (ii) is or becomes available to CNI from a source
other than RSI, its subsidiaries or RSI's representatives, provided that
such source is not, and was not, bound by a confidentiality agreement with
RSI or any of its affiliates or representatives or (iii) RSI agrees in
writing was available to CNI on a nonconfidential basis prior to
disclosure), shall remain the exclusive property of RSI and shall be
promptly delivered to RSI upon termination of this Agreement.
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5.4. SHAREHOLDERS' MEETING; PROXY STATEMENT.
(a) RSI shall call a meeting of its shareholders to be held as soon as
practicable after the date hereof for the purpose of voting upon the Merger
and this Agreement (the "Special Meeting").
(b) RSI will use its reasonable efforts to hold the Special Meeting as
promptly as practicable and will, through its Board of Directors, recommend
to its shareholders approval of the Merger and this Agreement at the
Special Meeting; provided, however, that such recommendation is subject to
any action taken by, or upon the authority of, the Board of Directors of
RSI in a response to an Acquisition Proposal (as defined hereinafter) and
in the exercise of its good faith judgment as to its fiduciary duties to
the shareholders of RSI, which such judgment is based upon the advice of
independent, outside legal counsel that a failure of the Board to withdraw,
modify or change its recommendation due to an Acquisition Proposal would be
likely to constitute a breach of its fiduciary duties to such shareholders.
(c) As promptly as practicable but in no event later than 30 days
after the execution of this Agreement, RSI shall promptly prepare and file
with the SEC a proxy statement with respect to the Special Meeting (the
"Proxy Statement"). Each of CNI and RSI agrees to provide as promptly as
practicable to the other such information concerning its business and
financial statements and affairs as, in the reasonable judgment of the
other party, may be required or appropriate or is customary for inclusion
in the Proxy Statement, and to cause its counsel and auditors to cooperate
with the other's counsel and auditors in the preparation of the Proxy
Statement. The information provided by CNI and RSI for use in the Proxy
Statement shall be true and correct in all material respects without
omission of any material fact which is required to make such information
not false or misleading.
(d) At the time the Proxy Statement is mailed to RSI's shareholders,
the Proxy Statement will (i) not contain any untrue statement of a material
fact, or omit to state any material fact required to be stated therein as
necessary, in order to make the statements therein, in light of the
circumstances under which they were made, not misleading or necessary and
(ii) comply in all material respects with the provisions of the Exchange
Act, as applicable, and the rules and regulations thereunder; provided,
however, no representation is made by RSI with respect to statements made
in the Proxy Statement based on information supplied by CNI expressly for
inclusion or incorporation by reference in the Proxy Statement or
information omitted with respect to CNI.
5.5. REASONABLE EFFORTS; FURTHER ASSURANCES; COOPERATION. Subject to the
other provisions of this Agreement, the parties hereby shall each use their
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reasonable efforts to perform their obligations herein and to take, or cause to
be taken or do, or cause to be done, all things reasonably necessary, proper or
advisable under applicable law to obtain all regulatory approvals and satisfy
all conditions to the obligations of the parties under this Agreement and to
cause the Merger and the other transactions contemplated herein to be carried
out promptly in accordance with the terms hereof and shall cooperate fully with
each other and their respective officers, directors, employees, agents, counsel,
accountants and other designees in connection with any steps required to be
taken as a part of their respective obligations under this Agreement, including
without limitation:
(a) RSI and CNI shall promptly make their respective filings and
submissions and shall take, or cause to be taken, all actions and do, or
cause to be done, all things reasonably necessary, proper or advisable
under applicable laws and regulations to obtain any required approval of
any federal, state or local governmental agency or regulatory body with
jurisdiction over the transactions contemplated by this Agreement.
(b) In the event any claim, action, suit, investigation or other
proceeding by any governmental body or other person is commenced which
questions the validity or legality of the Merger or any of the other
transactions contemplated hereby or seeks damages in connection therewith,
the parties agree to cooperate and use all reasonable efforts to defend
against such claim, action, suit, investigation or other proceeding and, if
an injunction or other order is issued in any such action, suit or other
proceeding, to use all reasonable efforts to have such injunction or other
order lifted, and to cooperate reasonably regarding any other impediment to
the consummation of the transactions contemplated by this Agreement.
(c) Each party shall give prompt written notice to the other of (i)
the occurrence, or failure to occur, of any event which occurrence or
failure would be likely to cause any representation or warranty of RSI or
CNI, as the case may be, contained in this Agreement to be untrue or
inaccurate in any material respect at any time from the date hereof to the
Escrow Closing Date or that will or may result in the failure to satisfy
any of the conditions specified in Article 6 or 7 and (ii) any failure of
RSI or CNI, as the case may be, to comply with or satisfy any covenant,
condition or agreement to be complied with or satisfied by it hereunder.
5.6. PUBLIC ANNOUNCEMENTS. The timing and content of all announcements
regarding any aspect of this Agreement or the Merger to the financial community,
government agencies, employees or the general public shall be mutually agreed
upon in advance (unless CNI or RSI is advised by counsel that any such
announcement or other disclosure not mutually agreed upon in advance is required
to be made by law or applicable Nasdaq Stock Market rule and then only after
making a reasonable attempt to comply with the provisions of this Section).
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5.7. NO SOLICITATIONS. From the date hereof until the Escrow Closing Date
or until this Agreement is terminated or abandoned as provided in this
Agreement, RSI shall not directly or indirectly (i) solicit or initiate
discussion with or (ii) enter into negotiations or agreements with, or furnish
any information to, any corporation, partnership, person or other entity or
group (other than CNI, an affiliate of CNI or their authorized representatives
pursuant to this Agreement) concerning any proposal for a merger, sale of
substantial assets, sale of shares of stock or securities or other takeover or
business combination transaction (the "Acquisition Proposal") involving RSI, and
RSI will instruct its officers, directors, advisors and its financial and legal
representatives and consultants not to take any action contrary to the foregoing
provisions of this sentence; provided, however, that RSI, its officers,
directors, advisors and its financial and legal representatives and consultants
shall not be prohibited prior to the Escrow Closing Date from taking any action
described in (ii) above to the extent such action is taken by, or upon the
authority of, the Board of Directors of RSI in the exercise of good faith
judgment as to its fiduciary duties to the shareholders of RSI, which judgment
is based upon the advice of independent, outside legal counsel that a failure of
the Board of Directors of RSI to take such action would be likely to constitute
a breach of its fiduciary duties to such shareholders; PROVIDED FURTHER, that
nothing in this Section 5.7 shall prevent RSI or the Board of Directors from
taking, and disclosing to RSI's shareholders, a position contemplated by Rules
14d-9 and 14e-2 promulgated under the Exchange Act with regard to any tender
offer or from making such disclosure to RSI's shareholders which, as advised in
an opinion of counsel, is required under applicable law. RSI will notify CNI
promptly if RSI becomes aware that any inquiries or proposals are received by,
any information is requested from or any negotiations or discussions are sought
to be initiated with, RSI with respect to an Acquisition Proposal, and RSI shall
promptly deliver to CNI any written inquiries or proposals received by RSI
relating to an Acquisition Proposal, except, in each case, when RSI has been
advised by independent outside counsel for RSI that providing such information
to CNI would be likely to result in a breach of the fiduciary duties of RSI's
Board of Directors to RSI's shareholders. Each time, if any, that the Board of
Directors of RSI determines, upon advice of such legal counsel and in the
exercise of its good faith judgment as to its fiduciary duties to shareholders,
that it must enter into negotiations with, or furnish any information to, any
corporation, partnership, person or other entity or group (other than CNI, an
affiliate of CNI or their authorized representatives) concerning any Acquisition
Proposal, RSI will give CNI prompt notice of such determination, except in
instances where RSI receives the advice of independent, outside legal counsel
for RSI that providing such information to CNI would be a breach of the
fiduciary duties of RSI's Board of Directors.
5.8 SURVIVAL OF COVENANTS AND AGREEMENTS. All of the covenants and
agreements contained in this Article 5, except those contained in Section 5.4,
shall survive from the Escrow Closing Date to the Effective Date.
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ARTICLE 6.
CONDITIONS PRECEDENT TO OBLIGATIONS OF RSI
Except as may be waived by RSI, the obligations of RSI to consummate the
transactions contemplated by this Agreement shall be subject to the satisfaction
on or before the Escrow Closing Date of each of the following conditions:
6.1. COMPLIANCE. CNI shall have, or shall have caused to be, satisfied or
complied with and performed in all material respects all terms, covenants and
conditions of this Agreement to be complied with or performed by CNI on or
before the Escrow Closing Date.
6.2. REPRESENTATIONS AND WARRANTIES. All of the representations and
warranties made by CNI in this Agreement shall be true and correct in all
material respects at and as of the Escrow Closing Date with the same force and
effect as if such representations and warranties had been made at and as of the
Escrow Closing Date, except for changes permitted or contemplated by this
Agreement.
6.3. CERTIFICATES. RSI shall have received a certificate or certificates,
executed on behalf of CNI by an executive officer of CNI, to the effect that the
conditions contained in Sections 6.1 and 6.2 hereof have been satisfied.
6.4. SHAREHOLDER APPROVAL. This Agreement shall have been approved and
adopted by the affirmative vote of the holders of a majority of all of the
outstanding shares (as of the "record date" set forth in the Proxy Statement) of
RSI Common Stock.
ARTICLE 7.
CONDITIONS PRECEDENT TO OBLIGATIONS OF CNI AND MERGER CORP.
Except as may be waived by CNI and Merger Corp., the obligations of CNI and
Merger Corp. to consummate the transactions contemplated by this Agreement shall
be subject to the satisfaction, on or before the Escrow Closing Date, of each of
the following conditions:
7.1. COMPLIANCE. RSI shall have, or shall have caused to be, satisfied or
complied with and performed in all material respects all terms, covenants, and
conditions of this Agreement to be complied with or performed by it on or before
the Escrow Closing Date.
7.2. REPRESENTATIONS AND WARRANTIES. All of the representations and
warranties made by RSI in this Agreement shall be true and correct in all
material respects at and as of the Escrow Closing Date with the same force and
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effect as if such representations and warranties had been made at and as of the
Escrow Closing Date, except for changes permitted or contemplated by this
Agreement.
7.3. CERTIFICATES. CNI shall have received a certificate or certificates,
executed on behalf of RSI by an executive officer of RSI, to the effect that the
conditions in Sections 7.1 and 7.2 hereof have been satisfied.
7.4. DUE DILIGENCE. The due diligence review of RSI's business conducted by
CNI shall not have revealed any item which in CNI's reasonable judgment would
constitute a material adverse change or a prospect of a material adverse change
in a particular balance sheet or statement of income item of RSI.
7.5 EMPLOYMENT AGREEMENTS. CNI shall have entered into employment
agreements with the executive management of RSI in the form attached hereto as
EXHIBIT 7.5.
ARTICLE 8.
MISCELLANEOUS
8.1. TERMINATION. In addition to the provisions regarding termination set
forth elsewhere herein, this Agreement and the transactions contemplated hereby
may be terminated at any time:
(a) on or before the Effective Date, by mutual consent of RSI and CNI;
(b) on or before the Escrow Closing Date, by CNI if there has been a
material misrepresentation or breach of warranty in the representations and
warranties of RSI set forth herein or a failure to perform in any material
respect a covenant on the part of RSI with respect to its representations,
warranties and covenants set forth in this Agreement;
(c) on or before the Escrow Closing Date, by RSI if there has been a
material misrepresentation or breach of warranty in the representations and
warranties of CNI set forth herein or a failure to perform in any material
respect a covenant on the part of CNI with respect to its representations,
warranties and covenants set forth in this Agreement;
(d) by either of CNI or RSI if the Escrow Closing Date has not
occurred by March 31, 1999, unless such failure of consummation is due to
the failure of the terminating party to perform or observe the covenants,
agreements, and conditions hereof to be performed or observed by it;
(e) on or before the Escrow Closing Date, by either of RSI or CNI if
the transactions contemplated hereby violate any nonappealable final order,
27
<PAGE>
decree, or judgment of any court or governmental body or agency having
competent jurisdiction;
(f) on or before the Escrow Closing Date, by RSI if in the exercise of
the good faith judgment of its Board of Directors (which judgment is based
upon the advice of independent, outside legal counsel) as to its fiduciary
duties to its shareholders such termination is required by reason of an
Acquisition Proposal or, if the Board of Directors of RSI withdraws or
materially modifies or changes its recommendation to its shareholders to
approve this Agreement and the Merger if there exists at such time an
Acquisition Proposal for RSI and such change in recommendation is based
upon the advice of independent, outside legal counsel;
(g) on or before the Escrow Closing Date, by CNI if the RSI Board of
Directors withdraws or materially modifies or changes its recommendation to
the shareholders of RSI to approve this Agreement and the Merger if there
exists at such time an Acquisition Proposal; and
(h) by CNI in accordance with clause (ii)(Y) of Section 2.4(d).
8.2. EXPENSES. If the transactions contemplated by this Agreement are not
consummated, each party hereto shall pay its own expenses incurred in connection
with this Agreement and the transactions contemplated hereby.
8.3. ENTIRE AGREEMENT. This Agreement and the exhibits hereto contain the
complete agreement among the parties with respect to the transactions
contemplated hereby and supersede all prior agreements and understandings among
the parties with respect to such transactions. The parties hereto have not made
any representation or warranty except as expressly set forth in this Agreement
or in any certificate or schedule delivered pursuant hereto. The obligations of
any party under any agreement executed pursuant to this Agreement shall not be
affected by this section.
8.4. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations and
warranties of each party contained herein or in any exhibit, certificate,
document or instrument delivered pursuant to this Agreement shall not survive
the occurrence of the Merger.
8.5. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which when so executed and delivered shall be deemed an
original, and such counterparts together shall constitute only one original.
8.6. NOTICES. All notices, demands, requests, or other communications that
may be or are required to be given, served, or sent by any party to any other
party pursuant to this Agreement shall be in writing and shall be sent by
28
<PAGE>
facsimile transmission, next-day courier or mailed by first-class, registered or
certified mail, return receipt requested, postage prepaid, or transmitted by
hand delivery, addressed as follows:
(i) If to RSI:
444 West Fairmont
Tempe, Arizona 85282
Attn: Scott W. Ryan, Chairman
Telephone: 602-968-1772
Fax: 602-894-1907
with a copy (which shall not constitute notice) to:
Fennemore Craig
3003 N. Central, Suite 2600
Phoenix, Arizona 85012-2913
Attn: Karen McConnell
Telephone: 602-916-5307
Fax: 602-916-5507
(ii) If to CNI or Merger Corp.:
10390 Brockwood Road
Dallas, Texas 75238
Attn: Michael O'Neal, CEO
Telephone: 214-340-6400
Fax: 214-340-8269
with a copy (which shall not constitute notice) to:
Crouch & Hallett, L.L.P.
717 North Harwood Street, Suite 1400
Dallas, Texas 75201
Attention: Bruce H. Hallett
Telephone: 214-922-4120
Fax: 214-953-0576
Each party may designate by notice in writing a new address to which any notice,
demand, request, or communication may thereafter be so given, served, or sent.
Each notice, demand, request, or communication that is mailed, delivered, or
transmitted in the manner described above shall be deemed sufficiently given,
served, sent, and received for all purposes at such time as it is delivered to
the addressee (with the return receipt, the delivery receipt or the affidavit of
messenger being deemed conclusive evidence of such delivery) or at such time as
delivery is refused by the addressee upon presentation.
29
<PAGE>
8.7. SUCCESSORS; ASSIGNMENTS. This Agreement and the rights, interests,
and obligations hereunder shall be binding upon and shall inure to the benefit
of the parties hereto and their respective successors and assigns. Neither this
Agreement nor any of the rights, interests or obligations hereunder shall be
assigned, by operation of law or otherwise, by any of the parties hereto without
the prior written consent of the other.
8.8. GOVERNING LAW. This Agreement shall be construed and enforced in
accordance with the laws of the State of Arizona (except the choice of law rules
thereof).
8.9. WAIVER AND OTHER ACTION. This Agreement may be amended, modified, or
supplemented only by a written instrument executed by the parties against which
enforcement of the amendment, modification or supplement is sought.
8.10. SEVERABILITY. If any provision of this Agreement is held to be
illegal, invalid, or unenforceable, such provision shall be fully severable, and
this Agreement shall be construed and enforced as if such illegal, invalid, or
unenforceable provision were never a part hereof; the remaining provisions
hereof shall remain in full force and effect and shall not be affected by the
illegal, invalid, or unenforceable provision or by its severance; and in lieu of
such illegal, invalid, or unenforceable provision, there shall be added
automatically as part of this Agreement, a provision as similar in its terms to
such illegal, invalid, or unenforceable provision as may be possible and be
legal, valid, and enforceable.
8.11. NO THIRD PARTY BENEFICIARIES. Nothing expressed or implied in this
Agreement is intended, or shall be construed, to confer upon or give any person,
firm or corporation other than the parties hereto and their shareholders, any
rights, remedies, obligations or liabilities under or by reason of this
Agreement or result in such person, firm or corporation being deemed a third
party beneficiary of this Agreement.
8.12. MUTUAL CONTRIBUTION. The parties to this Agreement and their counsel
have mutually contributed to its drafting. Consequently, no provision of this
Agreement shall be construed against any party on the ground that such party
drafted the provision or caused it to be drafted or the provision contains a
covenant of such party.
8.13. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement, and
shall become effective when one or more counterparts have been signed by each of
the parties hereto and delivered to each of the other parties hereto.
8.14. MEDIATION. If within 10 days of the receipt of notice of a
controversy or dispute among the parties, the controversy or dispute is not
settled through negotiation, then any party may refer the controversy or dispute
to mediation under the Commercial Mediation Rules of the American Arbitration
Association. The mediator shall be appointed within 10 days of the initiation of
the mediation. The mediation shall be held in Dallas, Texas. If the controversy
or dispute is not settled within 30 days after the appointment of the mediator,
then any party may refer the controversy or dispute to arbitration in accordance
with Section 8.15 hereof. Notwithstanding the foregoing, CNI's failure to
deposit the required cash amount to the Exchange Fund in accordance with Section
30
<PAGE>
2.3(a) shall not constitute a controversy or dispute that is subject to
mediation. In the event CNI fails to comply with its obligations pursuant to
said Section 2.3(a), it (a) consents to submit itself to personal jurisdiction
of any federal or state court in the State of Arizona and (b) agrees that it
will not attempt to deny such personal jurisdiction by motion or other request
for leave from any such court.
8.15. ARBITRATION. Any controversy or dispute among the parties arising in
connection with this Agreement shall first be submitted for mediation in
accordance with Section 8.14 hereof. Failing settlement through such mediation,
the dispute shall be submitted to a panel of three arbitrators and finally
settled by arbitration in accordance with the commercial arbitration rules of
the American Arbitration Association. Each of the disputing parties shall
appoint one arbitrator, and these two arbitrators shall independently select a
third arbitrator. Arbitration shall take place in Dallas, Texas. Fees incurred
by each party in such arbitration shall be borne by the party incurring such
fees. Any award for monetary damages resulting from nonpayment of sums due
hereunder shall bear interest from the date on which such sums were originally
due and payable. Judgment upon the award rendered may be entered in any court
having jurisdiction or application may be made to such court for judicial
acceptance of the award and an order of enforcement, as the case may be.
Notwithstanding the foregoing, CNI's failure to deposit the required cash amount
to the Exchange Fund in accordance with Section 2.3(a) shall not constitute a
controversy or dispute that is subject to arbitration. In the event CNI fails to
comply with its obligations pursuant to said Section 2.3(a), it (a) consents to
submit itself to personal jurisdiction of any federal or state court in the
State of Arizona and (b) agrees that it will not attempt to deny such personal
jurisdiction by motion or other request for leave from any such court.
[signatures on following page]
31
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
CORT INVESTMENT GROUP, INC.
By: /s/ Michelle Swanger, President
-------------------------------------
RSI ACQUISITION CORP.
By: /s/ Michelle Swanger, President
-------------------------------------
RECONDITIONED SYSTEMS, INC.
By: /s/ Scott W. Ryan
-------------------------------------
32
<PAGE>
SCHEDULES TO AGREEMENT AND PLAN OF MERGER
DATED OCTOBER 30, 1998:
GENERAL
These Schedules are attached to and form a part of that creation Agreement and
Plan of Merger (the "Agreement") dated October 30,1998 among Cort Investment
Group, Inc., RSI Acquisition Corp., and Reconditioned Systems, Inc.
Unless otherwise defined or unless the context otherwise requires, capitalized
terms used in the Schedules shall have the meanings ascribed to them in the
Agreement. The Schedule numbers, heading and any reference in these Schedules to
a Section of the Agreement are for convenience only and are not intended to
limit, and shall not be construed as limiting, the disclosures contained herein
which may also be applicable to another Section or Sections.
The following Schedules comprise the disclosures authorized by the Agreement.
SCHEDULE 3.5
RSI must obtain written approval of the Merger and/or the grant of the lien on
RSI's assets to CNI's lenders from the following third parties:
M&I Thunderbird Bank (Commercial Lender)
One East Camelback Road
Phoenix, Arizona 85016
Glenborough Properties (Landlord)
2633 East Indian School Road, Suite 320
Phoenix, Arizona 85016
Frieden Neopost (Postage Machine)
315 S. 48th St., Suite 110
Tempe, Arizona 85281
Penske Truck Leasing (Truck)
2219 S. 2nd Place
Phoenix, Arizona 85004
Advanta Business Systems (Postal Machine)
P.O. Box 1228
Voorhees, New Jersey 08043-1228
SCHEDULE 3.6
RSI has entered into stock option agreements with each of Dirk Anderson, Wayne
Collignon, and Scott Ryan. These stock option agreements provide that if the
optionee's employment with RSI is terminated for any reason other than the
optionee's death, the option may be exercised at any time within three months
after the date of termination but not more than ten years after the grant of the
option.
Additionally, the 1997 RSI Stock Option Plan permits the Board of Directors, in
its sole discretion, to accelerate the benefits of any award under the Plan in
the event of a Corporate Transaction or Change of Control. A "Corporate
S-1
<PAGE>
Transaction" includes any reverse merger in which RSI is the surviving entity
but in which securities possessing more than 50% of the total combined voting
power of RSI's outstanding securities are transferred to a person or persons
different from the persons holding those securities immediately prior to such
merger. A "Change of Control" is a change in ownership or control of RSI either
by (i) the direct or indirect acquisition by any person or related group of
persons other than RSI or a person that directly or indirectly controls, is
controlled by, or is under common control with, RSI of beneficial ownership
(within the meaning of Rule 13d-13 of the Exchange Act) of securities possessing
more than 50% of the total combined voting power of RSI's outstanding securities
pursuant to a tender or exchange offer made directly to RSI's shareholders or
other transaction, in each case which RSI's Board of Directors does not
recommend such shareholders to accept; or (ii) a change in the composition of
the RSI Board of Directors over a period of 36 consecutive months or less such
that a majority of the Board members (rounded up to the next whole number)
ceases, by reason of one or more contested elections for Board membership, to be
comprised of individuals who either have been Board member continuously since
the beginning of such period or have been elected or nominated for election as
Board members during such period or have been elected or nominated for election
as Board members during such period by at least a majority of the Board members
continuously serving at the beginning of such period who were still in office at
the time such election or nomination was approved by the Board.
SCHEDULE 3.9
RSI has not experienced the changes set forth in subsections (a) through (g) and
(j) through (o).
(h) RSI has increased the compensation of the following employees since March
31, 1998 in excess of $1,000 in the following annual dollar amount
(assuming a 40 hour work week):
Stephanie Yrun $ 2,500.00 Wade Thompson $ 3,120.00
Harvey Foster IV $ 1,040.00 Richard Thompson $ 1,560.00
Paul Serpa $ 1,560.00 Sheldon Sweat $ 1,560.00
David Kendrick $ 2,080.00 Ricardo Lopez $ 1,040.00
Shannan Crawford $ 2,500.00 Calixtro Lopez $ 1,040.00
James Allen $ 1,040.00 Kris Mohlin $ 2,000.00
Harvey Foster III $ 1,040.00 Thu Le $ 1,560.00
David Gossett $ 1,040.00 Calistro Lopez $ 1,040.00
John Greeson $ 1,040.00 Elliot Frayre $ 2,080.00
Karla Herman $ 3,750.00 Roderick Jackson $ 2,080.00
Kelly Beacham $ 1,040.00 Gay Thach $ 1,560.00
(i) See Schedule 3.16 for a list of employment, consulting or compensation
agreements with any person or group providing for payment in excess of
$5,000 by RSI.
S-2
<PAGE>
SCHEDULE 3.11
As of March 31, 1998, the net operating loss carryforward of RSI was
approximately $2.1 million or federal income taxes and approximately $1.9
million for Arizona state income taxes.
SCHEDULE 3.12
RSI has furnished CNI with summaries and certificates of insurance, but has not
provided CNI copies of the insurance policies. These policies are available on
request.
SCHEDULE 3.13
RSI is a party to a lawsuit filed in Texas, entitled Furniture Man, Inc. v.
Reconditioned Systems, Inc. The lawsuit includes a counterclaim by RSI against
Furniture Man, Inc. ("FMI"). The claim and counterclaim result from a contract
dispute, with both parties alleging breach of contract. The court ruled in favor
of RSI, and ordered FMI to pay approximately $9,807.23 to RSI for damages and
RSI's court costs and legal fees. FMI filed a motion for a new trial, which the
court denied. Judgment will become final on October 28, 1998.
SCHEDULE 3.16
(a) RSI has entered into Retail Salesperson Compensation Agreements with the
following individuals (see Supplement A attached):
Anne St. Lawrence
John Fritz
Michelle Martin-Craig
Deborah Rhodes
Jeff Johnsen
Paul Campbell
RSI has entered into Wholesale Salesperson Compensation Agreements with the
following individuals (see Supplement B attached):
Melissa Doyle
George Scott Kimball
RSI's employee benefit plans include the following:
Blue Cross/Blue Shield Medical Insurance
Guardian Dental Insurance
Standard Insurance Long-term and Short-term Disability Insurance
Guardian Life Insurance
RSI 401(k) Retirement Savings Plan
S-3
<PAGE>
RSI's articles or incorporation and bylaws contain identification
provisions in favor of directors, officers and agents.
RSI has entered into Indemnification Agreements with its directors dated
August 5, 1996. These Indemnification Agreements were approved by the RSI
shareholders.
(b) There are no grievances or arbitration proceedings that are pending, and
RSI has not received any written claim therefor.
SCHEDULE 3.19
None
SCHEDULE 3.22
RSI has determined that its current accounting software and the majority of its
computer hardware are not Year 2000 compliant. RSI is currently investigating
hardware and software options. At this time, RSI is strongly favoring the
purchase of Dynamics Accounting and Manufacturing software and conversion to a
Windows NT operating systems environment for its networking needs. In addition,
the majority of RSI's hardware will be replaced with upgraded systems. The
estimated cost to complete this project is:
Dynamics Computer Software $30,000
Computer Training and Installation $65,000
Training and Support $ 5,000
At the request of CNI, RSI agrees that unless RSI receives the prior consent of
CNI to proceed, RSI will delay the implementation of a Year 2000 solution as
long as the Merger is proceeding to conclusion in good faith.
S-4
<PAGE>
EXHIBIT 7.5
(Employment Agreements for Dirk D. Anderson and Wayne R. Collignon - Previously
filed pursuant to Regulation S-B - See Exhibits 10.25 and 10.26).
SUPPLEMENT A
RECONDITIONED SYSTEMS, INC.
COMPENSATION AGREEMENT
NAME: John K. Fritz
DRAW: $27,000 annually, $1,038.46 bi-weekly
COMMISSIONS: 25% of gross profit for all sales on which the gross profit is at
least 20%. For sales on which the gross profit is less than 20%,
the commission % will be equal to the gross profit %.
Commissions earned in excess of draws received will be paid by the end of the
month following the month in which they were earned. Following an initial three
month grace period, draws received in excess of commissions earned will be
carried forward. If, subsequent to the initial grace period, draws received
exceed commissions earned for a period of three months, RSI may terminate your
employment without prejudice. If at the conclusion of your employment your draws
received exceed your commissions earned, you are required to repay the excess
draws (excluding any excess accumulated during your grace period).
Commissions will be earned on invoiced shipments only. Any additional costs
incurred by the Company as a result of errors made by you, your failure to
obtain proper credit information, or your failure to cooperate in collection
efforts will directly reduce your commissions.
All other terms of your employment are outlined in the RSI Employee Handbook.
These terms are be kept confidential between you and RSI Management. Disclosure
of this Compensation Agreement to any other RSI employee or anyone else will
result in termination of this Compensation Agreement.
- -------------------------------- -----------------------------------
John K. Fritz Wayne R. Collignon, President & CEO
Reconditioned Systems, Inc.
E-1
<PAGE>
SUPPLEMENT B
RECONDITIONED SYSTEMS, INC.
COMPENSATION AGREEMENT
NAME: Scott Kimball
DRAW: $40,000 annually, $1,538.46 bi-weekly
COMMISSIONS: 5% of wholesale gross profit between $50,000 and $74,999 monthly
and 10% of wholesale gross profit in excess of $75,000 monthly.
Commissions will be paid by the end of the month following the month in which
they were earned.
Commissions will be earned on invoiced shipments only. Any additional costs
incurred by the Company as a result of errors made by you, your failure to
obtain proper credit information, or your failure to cooperate in collection
efforts will directly reduce your commissions.
All other terms of your employment are outlined in the RSI Employee Handbook.
These terms are be kept confidential between you and RSI Management. Disclosure
of this Compensation Agreement to any other RSI employee or anyone else will
result in termination of this Compensation Agreement.
- -------------------------------- -----------------------------------
Scott Kimball Wayne R. Collignon, President & CEO
Reconditioned Systems, Inc.
E-2
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000891915
<NAME> RECONDITIONED SYSTEMS, INC.
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 836,411
<SECURITIES> 0
<RECEIVABLES> 1,461,217
<ALLOWANCES> 35,000
<INVENTORY> 793,735
<CURRENT-ASSETS> 3,113,428
<PP&E> 514,941
<DEPRECIATION> 361,996
<TOTAL-ASSETS> 3,454,964
<CURRENT-LIABILITIES> 750,633
<BONDS> 0
0
0
<COMMON> 4,586,982
<OTHER-SE> (1,882,651)
<TOTAL-LIABILITY-AND-EQUITY> 3,454,964
<SALES> 5,774,466
<TOTAL-REVENUES> 5,774,466
<CGS> 4,479,916
<TOTAL-COSTS> 5,308,679
<OTHER-EXPENSES> (24,037)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,047
<INCOME-PRETAX> 488,777
<INCOME-TAX> 0
<INCOME-CONTINUING> 488,777
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 488,777
<EPS-PRIMARY> .33
<EPS-DILUTED> .29
</TABLE>
