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 June 30, 1999
[ ] 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.
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(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)
480-968-1772
--------------------------
(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 August 4, 1999, the number of
shares outstanding of the Registrant's common stock was 1,401,816.
Transitional Small Business Disclosure Format. Yes [ ] No [X].
<PAGE>
ITEM 1
PART 1 - FINANCIAL STATEMENTS
RECONDITIONED SYSTEMS, INC.
UNAUDITED FINANCIAL STATEMENTS
JUNE 30, 1999
2
<PAGE>
RECONDITIONED SYSTEMS, INC.
BALANCE SHEETS
JUNE 30, 1999 AND 1998
(UNAUDITED)
1999 1998
---- ----
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $1,279,252 $ 695,781
Accounts receivable - trade, net of allowance for
doubtful accounts of $37,500 and 27,250,
respectively 1,308,726 1,254,644
Inventory 918,941 942,360
Prepaid expenses and other current assets 80,210 44,170
---------- ----------
TOTAL CURRENT ASSETS 3,587,129 2,936,955
---------- ----------
PROPERTY AND EQUIPMENT, NET: 199,102 136,522
---------- ----------
OTHER ASSETS:
Notes receivable - officers 150,000 150,000
Refundable deposits 13,036 13,930
Other 29,995 15,220
---------- ----------
193,031 179,150
---------- ----------
TOTAL ASSETS $3,979,262 $3,252,627
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 0 $ 23,160
Accounts payable 455,568 436,973
Customer deposits 30,016 136,195
Accrued expenses and other current liabilities 224,748 198,198
---------- ----------
TOTAL CURRENT LIABILITIES 710,332 794,526
---------- ----------
STOCKHOLDERS' EQUITY:
Common stock, no par value; 20,000,000 shares
shares authorized $4,586,982 $4,586,982
Accumulated deficit (1,146,802) (2,125,127)
---------- ----------
3,440,180 2,461,855
Less: treasury stock, 72,000 and 134 shares
respectively, at cost (171,250) (3,754)
---------- ----------
3,268,930 2,458,101
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $3,979,262 $3,252,627
========== ==========
3
<PAGE>
RECONDITIONED SYSTEMS, INC.
STATEMENTS OF OPERATIONS
FOR THE THREE MONTH PERIODS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
1999 1998
---- ----
Sales $2,297,796 $2,653,092
Cost of sales 1,717,015 2,028,782
---------- ----------
Gross profit 580,781 624,310
Selling & administrative expenses 423,139 392,884
---------- ----------
Income from operations 157,642 231,426
Other income (expense):
Interest income 16,168 10,441
Interest expense 0 (639)
Other 0 1,319
---------- ----------
16,168 11,121
---------- ----------
Net income $ 173,810 $ 242,547
========== ==========
Basic earnings per share (Notes 1 and 3) $ 0.12 $ 0.16
========== ==========
Basic weighted average number
of shares outstanding 1,458,232 1,473,950
========== ==========
Diluted earnings per common
and common equivalent share (Notes 1 and 3) $ 0.10 $ 0.14
========== ==========
Diluted weighted average number
of shares outstanding 1,668,463 1,691,411
========== ==========
4
<PAGE>
RECONDITIONED SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED MARCH 31, 1999 AND THE THREE MONTH PERIOD
ENDED JUNE 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
| COMMON COMMON RETAINED
| STOCK STOCK EARNINGS TREASURY
| SHARES AMOUNT (DEFICIT) STOCK TOTAL
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
|
BALANCE AT MARCH 31, 1998 | 1,473,950 $4,586,982 $(2,367,674) $ (3,754) $2,215,554
|
RETIREMENT OF TREASURY |
SHARES | (134) - (3,754) 3,754 -
|
NET INCOME | - - 1,050,816 - 1,050,816
|---------------------------------------------------------------------------
|
BALANCE AT MARCH 31, 1999 | 1,473,816 $4,586,982 $(1,320,612) $ - $3,266,370
|
PURCHASE OF TREASURY |
SHARES | (72,000) - - (171,250) (171,250)
|
NET INCOME | 173,810 173,810
|---------------------------------------------------------------------------
|
BALANCE AT JUNE 30, 1999 | 1,401,816 $4,586,982 $(1,146,802) $(171,250) $3,268,930
|===========================================================================
</TABLE>
5
<PAGE>
RECONDITIONED SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTH PERIODS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
1999 1998
---- ----
Cash and cash equivalents provided (used) by
operating activities $ 371,280 $ (14,501)
Cash and cash equivalents used by investing
activities
(24,103) (13,017)
Cash and cash equivalents used by financing
activities
(171,250) (9,732)
---------- ----------
Increase (decrease) in cash and cash equivalents 175,927 (37,250)
Cash and cash equivalents at beginning of period 1,103,325 733,031
---------- ----------
Cash and cash equivalents at end of period $1,279,252 $ 695,781
========== ==========
6
<PAGE>
RECONDITIONED SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
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NOTE 1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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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 three months ended June 30,1999 are
not necessarily indicative of the results that may be expected for the
entire year ending March 31, 2000. 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 the
financial statements and notes thereto included in the Company's Form
10-KSB for the year ended March 31, 1999.
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.
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NOTE 2.
REVOLVING LINE OF CREDIT
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Effective July 31, 1999, the Company renewed its $1,000,000 line of credit
agreement with M&I Thunderbird Bank. Under the terms of the agreement, interest
is payable at the bank's base rate. Borrowings on the line of credit may not
exceed 75% of eligible 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 June 30, 1999, the Company had no
outstanding borrowings against this line of credit.
7
<PAGE>
RECONDITIONED SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 3.
EARNINGS PER SHARE
- --------------------------------------------------------------------------------
THREE MONTHS ENDED
JUNE 30,
1999 1998
---- ----
BASIC EPS
Net Income $ 173,810 $ 242,547
========== ==========
Weighted average number of shares outstanding 1,458,232 1,473,950
Basic earnings per share $ 0.12 $ 0.16
========== ==========
DILUTED EPS
Net Income 173,810 $ 242,547
========== ==========
Weighted average number of shares outstanding 1,458,232 1,473,950
Effect of dilutive securities:
Stock options 210,231 217,461
---------- ----------
Total common shares + assumed conversions 1,668,463 1,691,411
========== ==========
Per Share Amount $ 0.10 $ 0.14
========== ==========
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
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 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 successfully
diversify its operations, the risk that the Company may not see increased sales
and profitability, the risk that the Company may not be able to bring its
computer systems into year 2000 compliance before January 1, 2000, and the risk
that the stock market may not recognize the Company's positive financial results
and potential for future prospects. 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, including the Company's Annual Report on
Form 10-KSB for the fiscal year ended March 31, 1999.
RESULTS OF OPERATIONS
Reconditioned Systems, Inc. (the "Company" or "RSI") reported net income for the
three month period ended June 30, 1999 (hereinafter the "reporting period") of
$173,810 as compared to $242,547 for the three month period ended June 30, 1998
(hereinafter the "comparable period"). This $68,737 or 28.3% decrease is
primarily a result of decreased sales volume.
The Company reported sales for the reporting period of $2,297,796 as compared to
$2,653,092 for the comparable period, resulting in a decrease of $355,296 or
13.4%. Wholesale sales totaled $1,315,844 for the reporting period, a decrease
of $322,740 or 19.7% over the comparable period. This decrease was primarily due
to increased pressure from "budget" newly manufactured product-lines. Retail
sales in the Phoenix market remained relatively constant at $981,952 during the
reporting period, a decrease of $32,556 or 3.2% over the comparable period.
The Company's gross profit margin for the reporting period was 25.2%, as
compared to a gross profit margin of 23.5% for the comparable period. This 1.7%
improvement was primarily attributable to the increased percentage of retail to
wholesale sales. Retail sales comprised approximately 43% of total sales in the
reporting period as compared to 38% of total sales in the comparable period.
The Company's selling and administrative expenses increased from 14.8% of sales
in the comparable period to 18.4% for the reporting period. The 3.6% increase
was primarily a result of fixed costs and lower sales volume. In addition, the
Company increased marketing expenditures during the reporting period in an
effort to bolster sales.
The Company's other income and expenses, which consists primarily of interest
income and expense, improved by $5,047 from the comparable period to the
reporting period. This improvement was primarily due to increased interest
income generated from the Company's current cash reserves.
9
<PAGE>
FORWARD LOOKING STATEMENTS
The Company is facing increasing competition with "budget" newly manufactured
product-lines. These product-lines have had a significant impact on the Company
wholesale sales. Management has responded to this competitive pressure by
implementing a new pricing structure for the wholesale market. Beginning July 1,
1999, the Company's wholesale department began offering deeper discounts and
implemented a new freight policy modeled after those offered by new furniture
manufacturers. In addition, wholesale marketing efforts have been intensified in
an attempt to expand our existing network of dealers. However, there can be no
assurance that the new pricing structure and increased wholesale marketing
efforts will enable the Company to compete successfully with the "budget" newly
manufactured product-lines.
In an effort to counter the effects of deeper wholesale discounts on the
Company's gross margin and pursue long-term growth, management has begun
implementing a new retail marketing program. The primary focus of this program
is to change the Company's image in the Phoenix marketplace from that of a used
furniture refurbisher to that of a full service office furniture dealership. The
Company registered the trade name of Total Office Interiors with the State of
Arizona and is scheduled to begin doing retail business under this new trade
name on or about October 1, 1999. Along with the new trade name, the Company has
contracted to build a new retail sales showroom and remodel the office space
within its existing Tempe facility. This space will be used to display and
market the Company's refurbished systems furniture, as well as an expanded new
product-line, including files, chairs, desks and newly manufactured systems
furniture. Management believes this name change and expanded product line will
help potential customers to identify the Company's line of business and position
the Company as a source for all office furniture needs. However, the full
service office furniture market is highly competitive, and there can be no
assurance that the new retail marketing program will lead to improved margins or
long-term growth.
Effective July 1, 1999, the Company promoted one of its sales representatives to
sales manager to lead the Company's sales force and assist in the creation and
development of the Company's new marketing program. The Company also plans to
increase its retail sales staff from six to nine over the next 12 - 18 months.
Management hopes to use the knowledge gained from this new marketing program in
the development of other satellite offices as opportunities become available.
INCOME TAXES
During the periods ended June 30, 1999 and 1998, the Company's taxable net
income was fully offset by net operating loss carryforwards. As a result the
Company incurred no income tax expense during these periods.
FINANCIAL CONDITION AND LIQUIDITY
As of June 30, 1999, the Company's cash and cash equivalents totaled $1,279,252.
In addition, the Company's net worth and working capital totaled $3,268,930 and
$2,876,797, respectively. The Company has no 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 $371,280 during the reporting
period. This was primarily a result of operating income and increased
collections of accounts receivable. The Company used approximately $24,000 of
these funds for investment activities primarily for the purchase of a delivery
truck, production machinery and fixed asset additions related to the Year 2000
compliance program, and it used $171,125 to finance the purchase of treasury
shares. The remaining funds were added to the Company's cash reserves.
Cash provided by operations in the near future should closely follow operating
income, net of expenditures related to the Company's Year 2000 compliance
program and funds used for retail sales office development and potential
acquisitions. Management believes current cash reserves and cash flows from
operations will be adequate to fund all of these programs without the need for
outside financing. In addition, the Company has $1,000,000 available on its line
of credit with M&I Thunderbird Bank.
10
<PAGE>
YEAR 2000 COMPLIANCE
The "Year 2000 problem" arose because many existing computer programs use only
the last two digits to refer to a year. Therefore, these computer programs do
not properly recognize a year that begins with "20" instead of the familiar
"19." If not corrected, many computer applications could fail or create
erroneous results when the year 2000 begins.
RSI has implemented a program to assess and monitor the progress of its material
customers, suppliers and other significant third parties in resolving Year 2000
compliance issues. Questionnaires have been sent to all significant third
parties to evaluate their Year 2000 readiness. In addition, all new suppliers
and customers will be required to complete the questionnaires. The initial
evaluation is completed; however, new third parties will be evaluated as needed.
All material third parties with potential unresolved Year 2000 compliance issues
which become evident through this assessment program will be monitored on an
individual basis depending on the significance of the relationship to RSI and
the severity of the unresolved issues. Based upon the evaluations completed to
date, there are no material third parties with significant unresolved Year 2000
compliance issues at this time.
The Company has evaluated its existing systems, including information technology
and non-information technology systems, for Year 2000 compliance. Following this
evaluation, the Company believes all of its non-information technology systems
are in compliance at this time.
The Company's computer hardware and accounting software are not Year 2000
compliant. The Company has developed the following plan to bring these systems
into compliance:
The Company has begun to replace its existing computer hardware with new Year
2000 compliant equipment. The total replacement cost is estimated at
approximately $40,000 and is scheduled for completion by August 31, 1999. In
addition, the existing accounting software program will be replaced with a new
accounting/manufacturing software program. The estimated cost of this program,
including implementation and training, is estimated to be approximately $70,000.
Implementation began May 13, 1999 and is scheduled for completion on September
30, 1999. The cost of the hardware and software replacement will be funded from
current cash reserves and is not expected to have a material effect on the
Company's operating results. These capital expenditures will bring the Company
into Year 2000 compliance and are expected to improve administrative efficiency.
As of June 30, 1999, the total capital expenditures related to the Year 2000
project were approximately $62,000.
If there are difficulties implementing the plan described above, the Company
intends to upgrade its current software programs to bring them into Year 2000
compliance. The estimated cost of the software upgrade is approximately $500.
The Company would replace all non-compliant hardware as described above. The
costs of both the software and hardware upgrades and replacements would be
funded from current cash reserves. This is not expected to have a material
effect on the Company's operations and the additions could easily be completed
within 30 days. These upgrades would bring the Company's computer systems into
Year 2000 compliance.
The most likely worse case scenario regarding the Company's Year 2000 compliance
would be the Company's inability to implement the new accounting/manufacturing
package before December 31, 1999 or that the cost of implementation will exceed
the estimated costs. If for any reason the conversion process cannot be
completed before January, 2000, the Company will resort to its backup plan. If
the cost of the conversion exceeds the estimated costs, the Company believes any
additional expense can be funded from cash reserves without a material effect on
operations.
The Company's reconditioning and sale of workstations in not dependent upon
computer operations. Accordingly, management does not believe there is a risk of
interruption in its supply of workstations to its customers or lost revenues
with any potential Year 2000 compliance issues. Further, management does not
believe that the Company faces any potential liability to third parties for
breach of contract or other harm if its systems are not Year 2000 compliant.
11
<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 AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
12
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed herewith pursuant to Regulation S-B:
No. Description Reference
- --- ----------- ---------
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
10.33 Loan document between M&I Thunderbird Bank and the Registrant 6
(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 herein
(b) Reports on Form 8-K:
No reports were filed on Form 8-K during the quarter ended June 30, 1999.
13
<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: August 11, 1999 /s/ Wayne R. Collignon
--------------------------------------
Wayne R. Collignon, President and CEO
Date: August 11, 1999 /s/ Dirk D. Anderson
--------------------------------------
Dirk D. Anderson, CFO
14
EXHIBIT 10.33
M & I THUNDERBIRD BANK
CHANGE IN TERMS AGREEMENT
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Principal Loan Date Maturity Loan # Call Collateral Account Officer Initials
$1,000,000.00 7/31/2000 1001-R2 09400069235 JLL
- ---------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the applicability of
this document to any particular loan or items.
- ---------------------------------------------------------------------------------------------------
Borrower: RECONDITIONED SYSTEMS, INC. Lender: M&I Thunderbird Bank, an Arizona corporation
444 West Fairmont 90th Street & Via Linda Office (18)
Tempe, AZ 85282 c/o Loan Support Department
P.O. Box 56969
Phoenix, AZ 85079-6969
- ---------------------------------------------------------------------------------------------------
Principal Amount: $1,000,000.00 Date of Agreement: July 31,1999
</TABLE>
DESCRIPTION OF EXISTING INDEBTEDNESS. Promissory Note originally dated July
30,1997, in the original principal amount of $1,000,000.00, and any renewals
thereof.
DESCRIPTION OF CHANGE IN TERMS. The maturity date is hereby extended to July 31,
2000. The payment terms are hereby changed as described in the Payment section
of this Agreement.
PROMISE TO PAY. RECONDITIONED SYSTEMS, INC. ("Borrower") promises to pay to M&I
Thunderbird Bank, an Arizona corporation ("Lender"), or order, in lawful money
of the United States of America, the principal amount of One Million and 00/100
Dollars ($1,000,000.00) or so much as may be outstanding, together with interest
on the unpaid outstanding principal balance of each advance. Interest shall be
calculated from the date of each advance until repayment of each advance.
PAYMENT. Borrower will pay this loan in one payment of all outstanding principal
plus all accrued unpaid interest on July 31, 2000. In addition, Borrower will
pay regular monthly payments of accrued unpaid interest beginning August 31,
1999, and all subsequent interest payments are due on the last day of each month
after that. The annual interest rate for this Agreement is computed on a 365/360
basis; that is, by applying the ratio of the annual interest rate over a year of
360 days, multiplied by the outstanding principal balance, multiplied by the
actual number of days the principal balance is outstanding. Borrower will pay
Lender at Lender's address shown above or at such other place as Lender may
designate in writing. Unless otherwise agreed or required by applicable law,
payments will be applied first to any unpaid collection costs and any late
charges, then to any unpaid interest, and any remaining amount to principal.
VARIABLE INTEREST RATE. The interest rate on this Agreement is subject to change
from time to time based on changes in an index which is Lender's Prime Rate (the
"Index"). This is the rate Lender charges, or would charge, on 90-day unsecured
loans to the most creditworthy corporate customers. This rate may or may not be
the lowest rate available from Lender at any given time. Lender will tell
Borrower the current index rate upon Borrower's request. Borrower understands
that Lender may make loans based on other rates as well. The interest rate
change will not occur more often than each day. The index currently is 8.000%
per annum. The interest rate to be applied to the unpaid principal balance of
this Agreement will be at a rate equal to the index, resulting in an initial
rate of 8.000% per annum. NOTICE: Under no circumstances will the interest rate
on this agreement be more than the maximum rate allowed by applicable law.
PREPAYMENT: Borrower may pay without penalty all or a portion of the amount owed
earlier than it is due. Early payments will not, unless agreed to by Lender in
writing, relieve Borrower of Borrower's obligation to continue to make payments
of accrued unpaid interest. Rather, they will reduce the principal balance due.
LATE CHARGE: If a payment is 10 days or more late, Borrower will be charged
5.000% of the regularly scheduled payment.
DEFAULT: Borrower will be in default if any of the following happens: (a)
Borrower fails to make any payment when due. (b) Borrower breaks any promise
Borrower has made to Lender, or Borrower fails to comply with or to perform when
due any other term, obligation, covenant, or condition contained in this
<PAGE>
Agreement or any agreement related to this Agreement, or in any other agreement
or loan Borrower has with Lender. (c) Borrower defaults under any loan,
extension of credit, security agreement, purchase or sales agreement, or any
other agreement, in favor of any other creditor or person that may materially
affect any of Borrower's property or Borrower's ability to repay this Note or
perform Borrower's obligations under this Note or any of the Related Documents.
(d) Any representation or statement made or furnished to Lender by Borrower or
on Borrower's behalf is false or misleading in any material respect either now
or at the time made or furnished. (e) Borrower becomes insolvent, a receiver is
appointed for any part of Borrower's property, Borrower makes an assignment for
the benefit of creditors, or any proceeding is commenced either by Borrower or
against Borrower under any bankruptcy or insolvency laws. (f) Any creditor tries
to take any of Borrower's property on or in which Lender has a lien or security
interest. This includes a garnishment of any of Borrower's accounts with Lender.
(g) Any guarantor dies or any of the other events described in this default
section occurs with respect to any guarantor of this Agreement. (h) A material
adverse change occurs in Borrower's financial condition, or Lender believes the
prospect of payment or performance of the indebtedness is impaired. (I) Lender
in good faith deems itself insecure.
If any default, other than a default in payment, is curable and if Borrower has
not been given a notice of a breach of the same provision of this Agreement
within the proceeding twelve (12) months, it may be cured (and no event of
default will have occurred) if Borrower, after receiving written notice from
Lender demanding cure of such default: (a) cures the default within thirty (30)
days; or (b) if the cure requires more than thirty (30) days, immediately
initiates steps which Lender deems in Lender's sole discretion to be sufficient
to cure the default and thereafter continues and completes all reasonable and
necessary steps sufficient to produce compliance as soon as reasonably
practical.
LENDER'S RIGHTS: Upon default, Lender may declare the entire unpaid principal
balance on this Agreement and all accrued unpaid interest immediately due,
without notice, and then Borrower will pay that amount. Upon default, including
failure to pay upon final maturity, Lender, at its option, may also, if
permitted under applicable law, increase the variable interest rate on this
Agreement to 5.00 percentage points over the index. The interest rate will not
exceed the maximum rate permitted by applicable law. Lender may hire or pay
someone else to help collect this Agreement if Borrower does not pay. Borrower
also will pay Lender that amount. This includes, subject to any limits under
applicable law, Lender's attorneys' fees and legal expenses whether of not there
is a lawsuit, including attorneys' fees and legal expenses for bankruptcy
proceedings (including efforts to modify or vacate any automatic stay or
injunction), appeals, and any anticipated post-judgment collection services. If
not prohibited by applicable law, Borrower also will pay any court costs, in
addition to all other sums provided by law. This Agreement has been delivered to
Lender and accepted by Lender in the State of Arizona. If there is a lawsuit,
Borrower agrees upon Lender's request to submit to the jurisdiction of the
courts of Maricopa County, the State of Arizona. This Agreement shall be
governed by and construed in accordance with the laws of the State of Arizona.
RIGHT OF SETOFF. Borrower grants to Lender a contractual security interest in,
and hereby assigns, conveys, delivers, pledges, and transfers to Lender all
Borrower's right, title and interest in and to, Borrower's accounts with Lender
(whether checking, savings, or some other account), including without limitation
all accounts held jointly with someone else and all accounts Borrower may open
in the future, excluding however all IRA and Keogh accounts, and all trust
accounts for which the grant of a security interest would be prohibited by law.
Borrower authorizes Lender, to the extent permitted by applicable law, to charge
or setoff all sums owing on this Agreement against any and all such accounts.
LINE OF CREDIT. This Agreement evidences a revolving line of credit. Advances
under this Agreement may be requested either orally or in writing by Borrower or
by any authorized person. Lender may, but need not, require that all oral
requests be confirmed in writing. All communications, instructions, or
directions by telephone or otherwise to Lender are to be directed to Lender's
office shown above. The following party or parties are authorized to request
advances under the line of credit until Lender receives from Borrower at
Lender's address shown above written notice of revocation of their authority.
WAYNE COLLIGNON, President; and DIRK ANDERSON, CFO. Borrower agrees to be liable
for all sums either: (a) advanced in accordance with the instructions of an
authorized person or (b) credited to any of Borrower's accounts with Lender. The
unpaid principal balance owing on this Agreement at any time may be evidenced by
endorsements on this Agreement or by Lender's internal records, including daily
computer printouts. Lender will have no obligation to advance funds under this
Agreement if: (a) Borrower or any guarantor is in default under the terms of
this Agreement or any Agreement that Borrower or any guarantor has with Lender,
including any agreement made in connection with the signing of this Agreement;
(b) Borrower or any guarantor ceases doing business or is insolvent, (c) any
guarantor seeks, claims or otherwise attempts to limit, modify or revoke such
guarantor's guarantee of this Agreement or any other loan with Lender; (d)
Borrower has applied funds provided pursuant to this Agreement for purposes
other than those authorized by Lender; or (e) Lender in good faith deems itself
insecure under this Agreement or any other agreement between Lender and
Borrower.
2
<PAGE>
CONTINUING VALIDITY. Except as expressly changed by this Agreement, the terms of
the original obligation or obligations, including all agreements evidenced or
securing the obligation(s) remain unchanged and in full force and effect.
Consent by Lender to this Agreement does not waive Lender's right to strict
performance of the obligation(s) as changed, nor obligate Lender to make any
future change in terms. Nothing in this Agreement will constitute a satisfaction
of the obligation(s). It is the intention of Lender to retain as liable parties
all makers and endorsers of the original obligation(s) including accommodation
parties, unless a party is expressly released by Lender in writing. Any maker or
endorser, including accommodation makers, will not be released by virtue of this
Agreement. If any person who signed the original obligation does not sign this
Agreement below, then all persons signing below acknowledge that this Agreement
is given conditionally, based on the representation to Lender that the
non-signing party consents to the changes and provisions of this Agreement or
otherwise will not be released by it. This waiver applies not only to any
initial extension, modification or release, but also to all such subsequent
actions.
ADDITIONAL PROVISIONS. NOTICE TO ALL COMMERCIAL LOAN CUSTOMERS WITH LOANS
GREATER THAN $250,000.00: Effective September 5,1989, only agreements IN WRITING
are enforceable in the event there are no disagreements over this loan. This
includes all agreements or understandings to loan money, to grant or extend
credit, or to extend, renew, or modify a loan. For further information, please
refer to A.R.S. 44-101-9, or contact your loan officer.
MISCELLANEOUS PROVISIONS. Lender may delay or forgo enforcing any of its rights
or remedies under this Agreement without losing them. Borrower and any other
person who signs, guarantees or endorses this Agreement, to the extent allowed
by law, waive presentment, demand for payment, protest and notice of dishonor.
Upon any change in terms of this Agreement, and unless otherwise expressly
stated in writing, no party who signs this Agreement, whether as maker,
guarantor, accommodation maker or endorser, shall be released from liability.
All such parties agree that Lender may renew or extend (repeatedly and for any
length of time) this loan, or release any party or guarantor or collateral; or
impair, fail to realize upon or perfect Lender's security interest in the
collateral; and take any other action deemed necessary by Lender without the
consent of or notice to anyone. All such parties also agree that Lender may
modify this loan without the consent of or notice to anyone other than the party
with whom the modification is made.
EFFECTIVE RATE. Borrower agrees to an effective rate of interest that is the
rate specified in this Note plus any additional rate resulting from any other
charges in the nature of interest paid or to be paid in connection with this
Note.
PRIOR TO SIGNING THIS AGREEMENT, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS
OF THIS AGREEMENT, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER
AGREES TO THE TERMS OF THE AGREEMENT AND ACKNOWLEDGES RECEIPT OF A COMPLETED
COPY OF THIS AGREEMENT.
BORROWER:
RECONDITIONED SYSTEMS, INC.
BY: /s/ Dirk D. Anderson
---------------------------------
DIRK D. ANDERSON, CFO
3
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