U. S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1999.
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1943 (NO FEE REQUIRED)
For the transition period from _______________ to ______________.
COMMISSION FILE NUMBER 0-20924
RECONDITIONED SYSTEMS, INC.
(Name of small business issuer in its charter)
ARIZONA 86-0576290
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
444 WEST FAIRMONT, TEMPE, ARIZONA 85282
(Address of principal executive offices, including zip code)
602-968-1772
(Issuer's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Title of Each Class
-------------------
Common stock, no par value
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
The issuer's revenues for the fiscal year ended March 31, 1999 were $11,042,451.
As of June 25, 1999, the aggregate market value of the Common Stock (based on
the closing price as quoted on the Nasdaq Small Cap Market on that date) held by
non-affiliates of the Registrant was approximately $2,117,511.
As of June 25, 1999, the number of outstanding shares of the Registrant's Common
Stock was 1,401,816.
Portions of the Registrant's definitive Proxy Statement, dated July 7, 1999, for
the 1999 Annual Meeting of Stockholders to be held August 6, 1999, are
incorporated herein by reference into Part III of this Report.
Transitional Small Business Disclosure Format
Yes [ ] No [X]
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Reconditioned Systems, Inc. ("RSI" or the "Company"), an Arizona corporation
formed in March, 1987, reconditions and markets modular office workstations
consisting of panels, work surfaces, file drawers, book and binder storage and
integrated electrical components ("workstations"). The Company specializes in
reconditioning and marketing workstations originally manufactured by Haworth,
Inc. ("Haworth"). RSI purchases used workstations from manufacturers, dealers,
brokers, and end-users throughout the United States through competitive bids or
directly negotiated transactions. After purchasing used workstations, the
Company transports them to its manufacturing facility in Tempe, Arizona where it
disassembles and inventories the workstations by component parts, stores and,
upon receipt of purchase orders, reconditions and reassembles the workstations.
The Company sells the reconditioned workstations throughout the United States to
dealers and end-users.
There are more than 50 manufacturers of new workstations in the United States.
Steelcase, Inc. ("Steelcase"), Herman Miller, Inc. ("Herman Miller"), and
Haworth constitute the dominant manufacturers, controlling a majority of the
market for new workstations. Steelcase, Herman Miller, and Haworth have each
created a unique system for connecting panels and power and telecommunications
raceways, resulting in virtually no interchangability between their respective
products. Due to the lack of interchangability of parts for workstations of
these dominant manufacturers, the Company has generally specialized in
reconditioning and marketing workstations originally manufactured by just one of
the dominant manufacturers. The Company elected to specialize in reconditioning
and marketing workstations originally manufactured by Haworth as a result of the
extensive experience of the Company's founders with Haworth workstations.
The Company's executive offices are located at 444 West Fairmont, Tempe, Arizona
85282 and its telephone number is 602-968-1772.
PRINCIPAL LINE OF BUSINESS
The Company's principal line of business is the sale of reconditioned Haworth
workstations. Historically, these sales have accounted for approximately 70 -
80% of the Company's revenues.
The Company purchases used Haworth workstations from manufacturers, dealers,
brokers, and end-users and transports them to its manufacturing facility in
Tempe, Arizona where it disassembles and inventories the workstations by
component parts, stores, and, upon receipt of purchase orders, reconditions and
reassembles the workstations. The reconditioning process includes sanding,
painting, laminating, and reupholstering. Certain parts of the used Haworth
workstations the Company purchases are damaged beyond repair and must be
replaced with new parts purchased from Haworth, clone parts which the Company
purchases from various vendors, and new parts which the Company manufactures
from raw materials. The Company markets these reconditioned Haworth workstations
throughout the United States. Orders received by the Company range from as few
as one workstation to as many as several hundred workstations. However, orders
for more than fifty workstations are rare because the manufacturers of new
workstations offer deeper discounts on orders of this size, which makes it more
difficult for the Company to offer its reconditioned workstations at a lower
price than the new workstations.
The Company believes that workstations offer advantages over the traditional
desk, free standing file, and permanent dry wall dividers common to historical
office layouts since workstations enable businesses to house more people in a
given space than traditional structures and are easier to move and reconfigure.
In addition, the Company believes its reconditioned Haworth workstations offer
an advantage over much of its competition because they are higher quality than
new workstations available in the same price range.
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OTHER LINES OF BUSINESS
The Company derives certain revenues outside of its principal line of business.
Other lines of business in which the Company engages include: brokering "as is"
used workstations, selling new office furniture produced by other manufacturers
(primarily desks, files, and chairs), installing workstations, and
reconditioning product already owned by customers. Historically, these other
lines of business have accounted for approximately 20 - 30% of the Company's
revenues.
INVENTORY AND SOURCES OF SUPPLY
The Company purchases used Haworth workstations throughout the United States
through competitive bids or private negotiations with new workstation
manufacturers and dealers, used workstation brokers, and end-users. The Company
then transports the used Haworth workstations to its facility in Tempe, Arizona
where it disassembles, inventories by component part, and stores the used
Haworth workstation components until purchase orders are received which require
the various component parts. The Company also maintains inventories of new
workstation components purchased from Haworth, clone workstation components, and
raw materials used in the reconditioning process. These raw materials include
items such as fabric, particle board, laminate, and paint.
The Company carries a limited amount of work in process and finished goods
inventory because it generally does not initiate the reconditioning process
until a purchase order has been received and because the reconditioning process
rarely takes more than a couple of days due to the relatively small size of most
orders. However, a significant portion of the labor related to the
reconditioning process is completed at the time the used Haworth workstations
are originally received and disassembled, and as a result, the value of this
labor is capitalized and added to the value of the Company's inventory.
The Company currently has sufficient amounts of inventory to meet its
anticipated demand. However, because there is not a principal supplier of used
Haworth workstations and the supply is based upon end-user decisions regarding
disposal of or enhancement to existing furniture, there can be no assurance that
the Company will be able to purchase adequate levels of inventory in the future
at competitive prices. Because the Company's principal line of business is the
sale of reconditioned Haworth workstations, any unavailability of adequate
levels of inventory at competitive prices would have a material adverse effect
on the Company's business, operating results, and financial condition.
RECONDITIONING PROCESS
The Company's reconditioning process for used Haworth workstations includes
sanding, painting, laminating, and reupholstering. The reconditioning process
also includes replacing certain components with new components purchased from
Haworth, clone components purchased from various vendors, or new components
manufactured by the Company from raw materials. The Company's facility in Tempe,
Arizona includes all of the equipment required to recondition workstations,
including closed and open paint booths, a paint drying booth, sanding equipment,
saws, and laminating equipment.
The reconditioned Haworth workstations that the Company sells generally consist
of panels, worksurfaces, pedestals, overhead storage units, lateral file storage
units, task lights, and electrical raceways. The Company reconditions all of
these items. Components that are often damaged and need to be replaced with new
or clone components include panel top caps, shelf ends for overhead storage
units, worksurfaces, electrical base and top feeds, and electrical raceways. The
Company markets certain auxiliary items such as chairs, file cabinets, and
desks, but it usually purchases these items new from other manufacturers rather
than purchasing them used and reconditioning them.
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The Company's facility has been designed to facilitate the natural flow of used
Haworth workstation components and raw materials in order to streamline the
reconditioning process through disassembly, storage, reconditioning, and
shipping. Storage capacity is maximized by utilizing narrow aisle storage. The
Company believes that its current facility will be able to handle any increase
in volume as a result of its plan to increase its distribution channels.
COMPETITION
In purchasing used Haworth workstations, the Company competes with used
workstation brokers and other entities that recondition Haworth workstations.
Even though the Company may not be the highest bidder for an end-user's used
Haworth workstations, it may still have the opportunity to purchase them at a
slightly higher cost if the highest bidder was a used workstation broker who is
simply trying to make a small profit without actually taking possession of the
used Haworth workstations. The Company attempts to procure the used Haworth
workstations directly from end-users so as to avoid the middleman (used
workstation brokers) and to obtain these used Haworth workstations at the lowest
possible cost.
The market for workstations is highly competitive. The Company competes with new
workstation manufacturers, their dealers, and other reconditioners in the sale
of its reconditioned Haworth workstations. New workstation manufacturers and
their dealers have certain competitive advantages over the Company including
established distribution channels and marketing programs, substantial financial
strength, long-term customers, ready access to all component parts, and the fact
that if everything is equal (price, lead-time, etc.), most people would choose
new workstations over reconditioned workstations. The Company has certain
competitive advantages over new workstation manufacturers and their dealers. On
orders of 50 workstations or less, the Company's pricing is usually
significantly less than pricing on new "Grade A" workstations ("Grade A"
workstations are considered to be those workstations manufactured by Haworth,
Herman Miller, and Steelcase) and the quality of the Company's reconditioned
Haworth workstations exceeds that of new "Grade B" workstations. In addition,
the Company can produce and install fully reconditioned Haworth workstations
within two to three weeks as compared to standard lead-times of approximately
six to eight weeks for the new workstation manufacturers. The Company believes
that its reconditioning services are more comprehensive than most other
reconditioners. This results in a competitive advantage for the Company because
it has the ability to produce more reconditioned workstations and higher quality
reconditioned workstations than most other reconditioners. The Company is facing
increased competition from "bargain" newly manufactured product lines. There are
no significant barriers to entry into the markets served by the Company. An
increase in competition from existing competitors or the entry of new
competitors could have a material adverse effect on the Company's business,
operating results and financial condition. There can be no assurance that the
Company will be able to compete successfully in the future with existing or new
competitors.
DISTRIBUTION
The Company markets its products on a wholesale basis to new workstation
dealerships, design firms, and installation companies throughout the United
States. The Company also markets on a retail basis to end-users primarily in
Arizona. The Company's sales ratio historically had been approximately 50-60%
wholesale and 40-50% retail sales. As a result of increased marketing efforts in
the wholesale division, the Company's sales ratio for the fiscal year ended
March 31, 1999 approximated 65% wholesale and 35% retail. The Company maintains
a broad customer base and is not dependent on any one customer. The Company
employs three full-time salespeople who concentrate on telemarketing and
servicing its wholesale sales, and five full-time salespeople who concentrate on
retail sales in the greater Phoenix, Arizona area.
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PERSONNEL
The Company currently has approximately 64 full-time employees of whom 37 are
production personnel directly involved in the reconditioning process, six are in
the installation department, 12 are in the sales and design department, and nine
are management and administrative personnel. The Company believes that its
ability to grow and attain its desired profitability levels depends on its
ability to attract and retain highly qualified personnel. There can be no
assurance that the Company will be successful in attracting and retaining such
personnel. The Company has employment agreements, which include severance
benefits, with certain of its executive officers. See Item 10 - Executive
Compensation. None of the Company's personnel are covered by a collective
bargaining agreement, and the Company has never suffered a work stoppage. The
Company considers its relations with its employees to be excellent.
ENVIRONMENTAL REGULATIONS
The Company's operations are subject to a variety of federal, state, and local
environmental laws and regulations, including those governing air quality, water
quality, and hazardous materials. The Company's principal environmental concerns
relate to the handling and disposal of paints, solvents, and related materials
in connection with product finishes and composite fabrication. The Company
contracts with various independent waste disposal companies for services. The
Company may be exposed to certain environmental liabilities which may or may not
be covered by the insurance of the independent contractors naming the Company as
additional insured or by the Company's own insurance.
The Company believes that it has been operating in substantial compliance in all
material respects with existing environmental laws and regulations and that
costs and effects of such compliance are not material. The Company cannot
predict the nature, scope or effect of legislation or regulatory requirements
that could be imposed or how existing or future laws or regulations will be
administered or interpreted with respect to products or activities to which they
have not previously been applied. Compliance with more stringent laws or
regulations, or more vigorous enforcement policies or regulatory agencies, could
require substantial expenditures by the Company and could adversely affect its
business, financial condition and results of operations.
ITEM 2. DESCRIPTION OF PROPERTY
The Company presently leases a 58,500 square foot facility in Tempe, Arizona
that houses its corporate offices, its reconditioning operations, and its
warehouse space. The current lease on the Tempe facility expires March, 2001.
The Company believes its existing facilities are adequate for its current and
projected sales volumes. In addition, the Company believes suitable additional
space will be available as needed.
The Company owns substantially all of its equipment, including its office
equipment and its reconditioning equipment. The Company's equipment has been
assigned as collateral for amounts borrowed under loan agreements with M&I
Thunderbird Bank.
The Company has no investments or interests in real estate, real estate
mortgages or securities of persons primarily engaged in real estate activities.
ITEM 3. LEGAL PROCEEDINGS
The Company is not party to any pending legal proceedings other than routine
litigation incidental to the business.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held a special meeting on February 5, 1999 at which time the
shareholders voted on the proposed Merger Agreement between the Company and Cort
Investment Group, Inc. The following table provides the voting results:
SHARES VOTED BROKER
PROPOSAL ELIGIBLE VOTED FOR AGAINST ABSTENTIONS NON-VOTES UNVOTED
- -------- ---------- --------- ------- ----------- --------- -------
Proposed
Merger 1,473,816 941,539 7,783 1,500 0 522,994
Although the proposed Merger was approved by the Company's shareholders, on
February 16, 1999, RSI received formal notice of termination of the Merger
Agreement from Cort Investment Group, Inc. based upon the Company's allegedly
being in breach of certain representations and warranties set forth in the
Merger Agreement. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Proposed Merger."
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The following table sets forth the high and low closing sales price, as reported
by the Nasdaq Small Cap Market, in dollars per share for the quarters then
ended:
COMMON STOCK
DATE LOW HIGH
- -------------------- ---------- ----------
June, 1997 1 1/8 2 1/4
September, 1997 1 5/8 4 1/2
December, 1997 2 1/2 3 7/8
March, 1998 2 1/2 4 1/16
June, 1998 3 5/16 3 11/16
September, 1998 3 1/2 4 7/8
December, 1998 3 1/4 4 9/16
March, 1999 2 3/8 4 3/4
The total number of shares of Common Stock of the Company outstanding as of June
25, 1999 was 1,401,816. As a result of the Company's March 1, 1999 press release
announcing the Board's approval of a common stock repurchase plan, the Company
was approached by a brokerage firm who held a large block of the Company's
common stock. The Company purchased 72,000 of those shares in a market
transaction on April 13, 1999. As of the close of business on June 11, 1999, the
number of record holders of the Company's Common Stock was 47 and the number of
holders of the Company's Common Stock including beneficial holders of shares
held in street name was estimated to be 522.
There were no unregistered sales of the Company's Common Stock during the period
covered by this Report.
The Company has not paid any cash dividends on its Common Stock during the past
two fiscal years and does not intend to pay any cash dividends on its Common
Stock in the foreseeable future. Future earnings, if any, will be retained to
fund the development and growth of the Company's business. In addition, the
Company's line of credit security agreement prohibits the payment of any
dividends on the Company's Common Stock. Further, state corporate law may, under
certain circumstances, restrict the Company's ability to pay dividends.
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ITEM 6. 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 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.
Important factors that could cause actual results to differ materially from the
forward-looking statements include, but are not limited to, the risk that the
Company may not be able to geographically diversify its operations on a
profitable basis, continue to increase sales, attract and employ qualified
personnel, and bring its computer hardware and software into Year 2000
compliance. In addition, the Company's business, operations and financial
condition are subject to substantial other risks that are described in the
Company's reports and statements filed from time to time with the Securities and
Exchange Commission, including this Report.
RESULTS OF OPERATIONS
The Company had sales for the fiscal year ended March 31, 1999 (the "reporting
period") of $11,042,451. This compares to $9,583,441 for the fiscal year ended
March 31, 1998 (hereinafter the "comparable period"), resulting in an increase
of $1,459,010 or 15%. This increase was primarily attributable to increased
wholesale sales. Approximately 64% of the total sales for the reporting period
were generated from wholesale sales and 36% from retail sales. Sales during the
comparable period were approximately 60% wholesale and 40% retail.
Wholesale sales totaled $7,030,523 for the reporting period, an increase of
1,368,900 or 24% over the comparable period. This is primarily a result of the
continued success of the Company's wholesale marketing plan implemented during
fiscal 1998, designed to generate increased wholesale revenues by pursuing new
dealer/broker relationships throughout the western portion of the United States.
In addition to the expanded customer-base, the wholesale department was awarded
an exclusive sales contract near the end of the comparable period to provide
workstations in excess of $1 million over a period of 18-24 months. Sales under
this contract totaled approximately $857,000 during the reporting period.
Retail sales in the Phoenix market totaled $4,011,928 during the reporting
period, an increase of $90,110 or 2% over the comparable period. This increase
was achieved despite attrition within the retail sales department. Due in part
to a restrictive covenant in the Company's now terminated Merger Agreement with
Cort Investment Group, Inc., the Company's retail sales manager position has
been vacant since October, 1998. In addition, the number of retail salespeople
decreased from seven in the comparable period to five as of March 31, 1999.
The Company's gross profit margin for the reporting period was 24.0% as compared
to 25.2% for the comparable period. While retail gross profit margins remained
relatively consistent, wholesale gross profit margins declined from 25.3% in the
comparable period to 23.6% in the reporting period. The Company's wholesale
department has faced increased competition with "bargain" newly manufactured
product-lines. This competition has driven wholesale profit margins down. In
addition, the profit margins on the large sales contract mentioned above have
averaged 19.6%.
The Company's selling and administrative expenses, including terminated merger
costs, decreased as a percentage of sales from 16.3% in the comparable period to
15.0% in the reporting period. This decrease was achieved as a result of a lower
overall percentage of fixed expenses to sales and an increased percentage of
wholesale to retail sales. The Company's selling costs on wholesale sales
generally are lower than those on retail sales.
With the elimination of the Company's note payable and capital lease obligations
and the investment of surplus cash, the Company was able to eliminate its
interest expense and generate interest income. During the comparable period the
Company reported $10,727 in other expense, primarily composed of interest
expense. This compares to $55,488 in other income, primarily composed of
interest income, earned during the reporting period.
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INCOME TAXES
As of March 31, 1999, the Company had federal loss carryforwards of
approximately $994,000 and state loss carryforwards of approximately $794,000.
The federal loss carryforwards expire through March 31, 2011 and the state loss
carryforwards expire through March 31, 2001. The Company will benefit from the
loss carryforwards at statutory rates to the extent it is profitable before they
expire. Due to significant losses incurred during the years ended March 31,
1994, 1995 and 1996 and the uncertainty of the utilization of the loss
carryforwards in future periods, the Company established, and continues to
maintain, a valuation allowance equal to the full amount of the Company's
deferred tax assets.
PROPOSED MERGER
On November 16, 1998, the Company announced that it had entered into an
Agreement and Plan of Merger (the "Merger Agreement") with Cort Investment
Group, Inc., a Texas corporation d/b/a Contract Network ("CNI"), and RSI
Acquisition Corp., an Arizona corporation and wholly-owned subsidiary of CNI
("Merger Corp.").
On February 4, 1999, CNI informed the Company that CNI believed the Company was
in breach of certain of the representations and warranties set forth in the
Merger Agreement, specifically Sections 3.11 ("Tax Returns, Taxes"), 3.7 ("RSI
SEC Reports"), 3.8 ("Financial Statements and Records of RSI"), 3.9 ("Absence of
Certain Changes") and 3.10 ("No Material Undisclosed Liabilities"). CNI asserted
that the Company had not included certain elections in its 1995 income tax
returns and therefore had not properly preserved its net operating loss
carryforwards.
On February 15, 1999, the Company received formal notice of termination of the
Merger Agreement from CNI pursuant to the provisions of Section 8.1(b) of the
Merger Agreement based upon the Company allegedly being in breach of the
representations and warranties noted above.
The Company engaged experts who filed with the Internal Revenue Service (IRS)
for a private letter ruling to allow the Company to amend its 1995 income tax
returns to include the omitted elections. On June 25, 1999 the IRS approved the
Company's private letter ruling.
As of March 31, 1999, the Company had incurred $50,588 in expenses related to
the terminated merger.
FINANCIAL CONDITION AND LIQUIDITY
CASH FLOWS FROM OPERATING ACTIVITIES. Net cash provided by operations was
$507,844 for the year ended March 31, 1999 as compared to $1,252,483 for the
year ended March 31, 1998. This decrease was primarily due to increased accounts
receivables due to increased sales volume and the timing of certain significant
customer payments. Accounts receivables as of March 31, 1999 were $730,760
higher than those reported as of March 31, 1998. There were several large
customer accounts outstanding at March 31, 1999 which were subsequently received
during April 1999. As of April 30, 1999, accounts receivables were $1,163,808, a
reduction of $528,074.
CASH FLOWS FROM INVESTING AND FINANCING ACTIVITIES. Net cash used by investing
and financing activities was $137,550 for the reporting period. These funds were
primarily used for purchases related to the Company's Year 2000 compliance
program (see Year 2000 Issues below), the purchase of a delivery van and debt
reduction.
EXPECTED FUTURE CASH FLOWS. 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 potential acquisitions
or regional sales office development. 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
in available borrowings on its line of credit with M&I Thunderbird Bank (see
Note 6 of the Audited Financial Statements).
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FORWARD LOOKING STATEMENTS
The Company believes the key to increasing retail sales in the Phoenix-market is
to employ an adequate number of qualified sales personnel. The Company has added
an additional retail salesperson since March 31, 1999, and intends to continue
adding to the retail sales staff as qualified applicants become available. In
addition, management intends to hire a sales manager to further develop and
assist its existing sales staff and train newly hired salespeople. The wholesale
sales department plans to continue its emphasis on developing new dealer
relationships and strengthening existing accounts.
The Company reported sales growth of 15% for the reporting period and 35% for
the comparable period. Management does not believe increased sales personnel
within the Phoenix retail market and continuance of the wholesale marketing plan
will sustain a level of growth at or above the 15% growth achieved during the
reporting period. As a result, the Board is currently investigating possible
acquisition candidates and potential regional sales office locations. While the
Company intends to actively pursue growth, the Board remains conservative in its
approach. There can be no assurance that the Company will be able to identify or
acquire acquisition candidates on favorable terms or that the Company can
sustain the level of sales growth achieved during the reporting period.
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.
The Company implemented a program to access 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 complete; 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 the Company and the severity of the unresolved issues. Based on
the evaluations completed to date, there are no material third parties with
significant unresolved 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 begun implementing a plan to bring these systems into
compliance prior to the Year 2000. The details of the plan are as follows:
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 June 30, 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 approximately $70,000. Implementation
is scheduled to begin May 13, 1999 with an estimated completion date of August
31, 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 March 31, 1999, the total capital expenditures related to the Year 2000
project were approximately $53,000.
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If there are difficulties implementing the plan described above, the Company
intends to upgrade its current hardware and software to bring them into Year
2000 compliance. The estimated cost of the software upgrade is approximately
$500. The Company would also contract with a third party vendor to analyze the
existing computer hardware for Year 2000 compliance and will upgrade all
necessary hardware. The cost of the analysis and hardware upgrades is estimated
to be between $3,000 and $5,000. The cost of both the software and hardware
upgrades 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 to 60 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 is 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.
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ITEM 7. FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT
To The Stockholders and Board of Directors of
Reconditioned Systems, Inc.
We have audited the accompanying balance sheets of Reconditioned Systems, Inc.
as of March 31, 1999 and 1998, and the related statements of operations,
stockholders' equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Reconditioned Systems, Inc. as
of March 31, 1999 and 1998, and the results of its operations, stockholders'
equity, and its cash flows for the years then ended, in conformity with
generally accepted accounting principles.
Semple & Cooper, LLP
Phoenix, Arizona
May 4, 1999
11
<PAGE>
RECONDITIONED SYSTEMS, INC.
BALANCE SHEETS
MARCH 31, 1999 AND 1998
1999 1998
---------- ----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (Notes 1, 2 and 3) $1,103,325 $ 733,031
Accounts receivable (Notes 1, 6 and 7) 1,691,882 962,122
Inventory (Notes 1, 6 and 7) 909,622 925,258
Prepaid expenses and other current assets 51,002 58,885
---------- ----------
TOTAL CURRENT ASSETS 3,755,831 2,679,296
---------- ----------
PROPERTY AND EQUIPMENT: (NOTES 1, 5, 6 AND 7) 189,173 134,728
---------- ----------
OTHER ASSETS:
Notes receivable - officers (Notes 3 and 4) 150,000 150,000
Refundable deposits 13,036 13,930
Other 24,703 4,204
---------- ----------
187,739 168,134
---------- ----------
$4,132,743 $2,982,158
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt (Note 7) $ 0 $ 33,786
Accounts payable 557,662 444,900
Customer deposits 22,635 44,530
Accrued expenses and other current liabilities 286,076 243,388
---------- ----------
TOTAL CURRENT LIABILITIES 866,373 766,604
---------- ----------
COMMITMENTS (NOTE 8) 0 0
---------- ----------
STOCKHOLDERS' EQUITY: (NOTES 10 AND 12)
Common stock, no par value; 20,000,000 shares
shares authorized $4,586,982 $4,586,982
Accumulated deficit (1,320,612) (2,367,674)
---------- ----------
3,266,370 2,219,308
Less: treasury stock, 134 shares, at cost 0 (3,754)
---------- ----------
3,266,370 2,215,554
---------- ----------
$4,132,743 $2,982,158
========== ==========
The Accompanying Notes are an Integral Part
of the Financial Statements
12
<PAGE>
RECONDITIONED SYSTEMS, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 1999 AND 1998
1999 1998
----------- ----------
Sales $11,042,451 $9,583,441
Cost of sales 8,396,278 7,168,365
----------- ----------
Gross profit 2,646,173 2,415,076
Selling & administrative expenses 1,600,257 1,564,819
Terminated merger costs (Note 12) 50,588 0
----------- ----------
Income from operations 995,328 850,257
Other income (expense):
Interest income 49,083 9,771
Interest expense (1,276) (20,173)
Other 7,681 (325)
----------- ----------
55,488 (10,727)
----------- ----------
Income before income taxes 1,050,816 839,530
Provision for income taxes (Note 9) 0 0
----------- ----------
Net income $ 1,050,816 $ 839,530
=========== ==========
Basic earnings per share (Notes 1 and 11) $ 0.71 $ 0.57
=========== ==========
Basic weighted average number
of shares outstanding 1,473,880 1,473,950
=========== ==========
Diluted earnings per common
and common equivalent share (Notes 1 and 11) $ 0.62 $ 0.51
=========== ==========
Diluted weighted average number
of shares outstanding 1,697,352 1,655,762
=========== ==========
The Accompanying Notes are an Integral Part
of the Financial Statements
13
<PAGE>
<TABLE>
<CAPTION>
RECONDITIONED SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1999 AND 1998
| Common Common Retained
| Stock Stock Earnings Treasury
| Shares Amount (Deficit) Stock 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 | - - 839,530 - 839,530
|----------------------------------------------------------------------
|
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
|======================================================================
</TABLE>
The Accompanying Notes are an Integral Part
of the Financial Statements
14
<PAGE>
RECONDITIONED SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1999 AND 1998
1999 1998
----------- ----------
Cash Flows from Operating Activities:
Cash received from customers $10,319,727 $9,620,081
Cash paid to suppliers and employees (9,859,690) (8,353,071)
Interest received 49,083 5,646
Interest paid (1,276) (20,173)
----------- ----------
Net cash provided by operating
activities 507,844 1,252,483
----------- ----------
Cash Flows from Investing Activities:
Loans to officers 0 (150,000)
Purchase of property and equipment (103,590) (17,712)
Other (174) 0
----------- ----------
Net cash used by investing
activities (103,764) (167,712)
----------- ----------
Cash Flows from Financing Activities:
Proceeds from credit line and long-term
borrowings 0 2,643,000
Principal payments on credit line, long-
term borrowings and obligations
under capital leases (33,786) (3,136,864)
----------- ----------
Net cash used by financing
activities (33,786) (493,864)
----------- ----------
Increase in cash and cash equivalents 370,294 590,907
Cash and cash equivalents at beginning of year 733,031 142,124
----------- ----------
Cash and cash equivalents at end of year $ 1,103,325 $ 733,031
=========== ==========
The Accompanying Notes are an Integral Part
of the Financial Statements
15
<PAGE>
RECONDITIONED SYSTEMS, INC.
STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1999 AND 1998
1999 1998
---------- ----------
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net income $1,050,816 $ 839,530
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 48,790 68,256
Provision for doubtful accounts 1,000 (1,198)
Loss on disposal of fixed assets 355 2,704
Changes in assets and liabilities:
Accounts receivable (730,760) 38,163
Inventory 15,636 272,582
Prepaid expenses and other assets (11,548) (32,837)
Accounts payable and accrued expenses 133,555 65,283
---------- ----------
Net cash provided by operating
activities $507,844 $1,252,483
========== ==========
Non-Cash Investing and Financing Activities:
During the years ended March 31, 1999 and 1998, the Company did not have any
non-cash investing or financing activities.
The Accompanying Notes are an Integral Part
of the Financial Statements
16
<PAGE>
RECONDITIONED SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, NATURE OF OPERATIONS,
AND USE OF ESTIMATES
- --------------------------------------------------------------------------------
NATURE OF BUSINESS:
Reconditioned Systems, Inc. ("RSI" or the "Company"), is a corporation
which was incorporated in the State of Arizona in March, 1987. The
principal business purpose of the Company is the reconditioning and sale of
office workstations comprised of panel systems to customers located
throughout the country.
PERVASIVENESS OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
REVENUE RECOGNITION:
The Company recognizes a sale when its earnings process is complete. In
connection with projects that are to be installed by the customer or an
agent of the customer, the sale is recognized when the product is shipped
to or possession is taken by the customer. In connection with projects
installed by the Company, the sale is recognized upon completion of the
installation.
CASH AND CASH EQUIVALENTS:
The Company considers all highly liquid debt instruments and money market
funds purchased with an initial maturity of three (3) months or less to be
cash equivalents.
ACCOUNTS RECEIVABLE - TRADE:
The Company provides for potentially uncollectible accounts receivable by
use of the allowance method. The allowance is provided based upon a review
of the individual accounts outstanding, and the Company's prior history of
uncollectible accounts receivable. At March 31, 1999 and 1998, the Company
has established an allowance for doubtful accounts in the amount of $31,000
and $30,000, respectively.
INVENTORY:
Inventory, composed of used office workstations and reconditioning
supplies, is stated at the lower of cost (weighted-average method) or
market. The Company reviews its inventory monthly and makes provisions for
damaged and obsolete items. The Company contemplates its ability to alter
the size of panels and other workstation components and designs projects so
that the workstations are comprised of products currently in inventory in
establishing its obsolescence reserve. At March 31, 1999 and 1998, the
Company had established a reserve for damaged and obsolete inventory in the
amount of $100,000 and $25,000, respectively.
17
<PAGE>
RECONDITIONED SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
NOTE 1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, NATURE OF OPERATIONS,
AND USE OF ESTIMATES (CONTINUED)
- --------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT:
Property and equipment are recorded at cost. Depreciation is generally
provided for on the straight-line basis over the following estimated useful
lives of the assets:
Years
-----
Machinery and equipment 5 - 7
Office furniture and equipment 5 - 7
Leasehold improvements Lease term
Vehicles 4 - 5
DEFERRED INCOME TAXES:
Deferred income taxes are provided on an asset and liability method,
whereby deferred tax assets are recognized for deductible temporary
differences and operating loss and tax credit carryforwards and deferred
tax liabilities are recognized for taxable temporary differences. Temporary
differences are the differences between the reported amounts of assets and
liabilities and their tax basis. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, there is
uncertainty of the utilization of the operating losses in future periods.
Deferred tax assets and liabilities are adjusted for the effects of changes
in tax laws and rates on the date of enactment.
STOCK-BASED COMPENSATION:
The Company has elected to follow Accounting Principles Board Opinion No.
25 Accounting for Stock Issued to Employees (APB 25) and the related
interpretations in accounting for its employee stock options. Under APB 25,
because the exercise price of employee stock options equals the market
price of the underlying stock on the date of grant, no compensation expense
is recorded. The Company has adopted the disclosure-only provisions of
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (Statement No. 123).
EARNINGS PER 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. In addition, certain
outstanding warrants which expired June 30, 1997 are not included in the
computation of diluted earnings per share because their effect would be
antidilutive.
18
<PAGE>
RECONDITIONED SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
NOTE 2.
CONCENTRATIONS
- --------------------------------------------------------------------------------
The Company maintains cash balances at various financial institutions. Deposits
not to exceed $100,000 at the financial institutions are insured by the Federal
Deposit Insurance Corporation. As of March 31, 1999, the Company had
approximately $903,325 of uninsured cash.
In addition, the Company specializes in reconditioning one particular original
equipment manufacturer's (OEM) line of office workstations. The business is
dependent upon a readily available supply of new parts from the OEM, as well as
used product.
- --------------------------------------------------------------------------------
NOTE 3.
FAIR VALUE OF FINANCIAL INSTRUMENTS
- --------------------------------------------------------------------------------
Estimated fair values of the Company's financial instruments (all of which are
held for non-trading purposes), are as follows:
March 31, 1999 March 31, 1998
------------------------ -----------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
---------- ---------- -------- ----------
Cash and cash equivalents $1,103,325 $1,103,325 $733,031 $733,031
The carrying amount approximates fair value of cash and short-term instruments.
The fair value of Notes receivable - officers cannot be determined due to its
related party nature.
- --------------------------------------------------------------------------------
NOTE 4.
NOTES RECEIVABLE - OFFICERS
- --------------------------------------------------------------------------------
On December 19, 1997, the Company loaned $150,000 to officers of the Company.
These funds enabled the officers to purchase 100,000 shares of the Company's
Common Stock from a former shareholder in a privately negotiated transaction.
The notes are payable in one payment on or before December 19, 2002, and are
collateralized by the purchased shares of Common Stock. Interest on the notes
accrue at a rate equal to that of the Company's lender's base rate plus 2.5%,
payable annually beginning December 19, 1998.
19
<PAGE>
RECONDITIONED SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
NOTE 5.
PROPERTY AND EQUIPMENT
- --------------------------------------------------------------------------------
Property and equipment by major classifications are as follows:
MARCH 31,
1999 1998
-------- --------
Office furniture and equipment $258,840 $194,914
Machinery and equipment 233,996 227,953
Leasehold improvements 42,304 36,682
Vehicles 36,054 13,632
-------- --------
571,194 473,181
Accumulated depreciation (382,021) (338,453)
-------- --------
$189,173 $134,728
======== ========
- --------------------------------------------------------------------------------
NOTE 6.
PLEDGED ASSETS AND LINE OF CREDIT
- --------------------------------------------------------------------------------
As of March 31, 1999, the Company had a $1,000,000 line of credit agreement with
M&I Thunderbird Bank. Under this agreement, interest is payable at the bank's
base rate. Borrowings on the line of credit may not exceed seventy-five percent
(75%) of eligible accounts receivable and thirty percent (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 March 31, 1999 the Company had no outstanding borrowings on the line of
credit and was in compliance with all of the covenants of the agreement.
20
<PAGE>
RECONDITIONED SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
NOTE 7.
LONG-TERM DEBT
- --------------------------------------------------------------------------------
Long-term debt consists of the following: 1998
----
8.25% note payable to M&I Thunderbird Bank, due in
monthly installments of $3,440, including principal and
interest, until paid in full; collateralized by
accounts receivable, inventory, property and equipment,
and intangibles. In connection with this loan
agreement, the Company has agreed to maintain certain
financial ratios and various other covenants. As of
March 31, 1998, the Company was in compliance with
these financial ratios and other covenants $32,854
Capital lease obligations 932
-------
33,786
Less: current portion (33,786)
-------
Long-term portion $ 0
=======
- --------------------------------------------------------------------------------
NOTE 8.
OPERATING LEASE COMMITMENTS
- --------------------------------------------------------------------------------
The Company leases warehouse and office space in Tempe, Arizona, as well as
certain equipment under non-cancelable operating lease agreements expiring at
various times through March, 2001. Certain of the lease agreements require the
Company to pay property taxes, insurance and maintenance costs. The lease on the
Tempe, Arizona facility expires March, 2001.
The total minimum rental commitment due is as follows:
March 31, Amount
--------- ------
2000 $332,709
2001 333,058
2002 27,801
--------
$693,568
========
Rent expense under operating lease agreements for the years ended March 31, 1999
and 1998 was approximately $285,500 and $268,750, respectively.
21
<PAGE>
RECONDITIONED SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
NOTE 9.
INCOME TAXES
- --------------------------------------------------------------------------------
Deferred tax assets consist of the following components:
March 31, 1999 March 31, 1998
-------------- --------------
Deferred tax assets:
State loss carryforwards $ 72,000 $ 175,000
Federal loss carryforwards 338,000 725,000
----------- -----------
410,000 900,000
Less: valuation allowance (410,000) (900,000)
----------- -----------
$ - $ -
=========== ===========
The Company's approximate net operating loss carryforwards and their respective
expiration dates, are as follows:
Amount Expiration
-------- ----------
Federal $994,000 2011
Arizona $794,000 2001
- --------------------------------------------------------------------------------
NOTE 10.
COMMON STOCK OPTIONS
- --------------------------------------------------------------------------------
As of March 31, 1999 and 1998, 100,000 common stock options with an exercise
price of $1.00 per share were held by the Company's President and Chief
Executive Officer, Chief Financial Officer, and Chairman of the Board,
respectively. All of these stock options are presently exercisable. The option
exercise price equals the fair market value of the underlying common stock on
the issue date of August 19, 1996.
The Company granted a total of 8,400 Incentive Stock Options with an exercise
price of $3.00 to certain of the Company's non-officer employees on March 31,
1999. The options will be fully vested on March 31, 2002, subject to continued
employment, and they will expire on March 31, 2005. The option exercise price
exceeds the fair market value of the underlying common stock on the effective
date of grant.
The Company has agreed to register the shares issuable upon exercise of the
above options by filing a registration statement on Form S-8 with the Securities
and Exchange Commission.
22
<PAGE>
RECONDITIONED SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
NOTE 11.
EARNINGS PER SHARE
- --------------------------------------------------------------------------------
For the years ended March 31, 1999 and 1998, the following data shows amounts
used in computing earnings per share and the effect on income and the weighted
average number of shares of dilutive potential common stock.
MARCH 31,
1999 1998
---------- ----------
BASIC EPS
Net income $1,050,816 $ 839,530
========== ==========
Weighted average number of shares
outstanding 1,473,880 1,473,950
========== ==========
Basic earnings per share $ 0.71 $ 0.57
========== ==========
DILUTED EPS
Net income $1,050,816 $ 839,530
========== ==========
Weighted average number of shares
outstanding 1,473,880 1,473,950
Effect of dilutive securities:
Stock options 223,472 181,812
---------- ----------
Common stock including assumed
conversions 1,697,352 1,655,762
========== ==========
Diluted earnings per share $ 0.62 $ 0.51
========== ==========
23
<PAGE>
RECONDITIONED SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
NOTE 12.
TERMINATED MERGER COSTS
- --------------------------------------------------------------------------------
On November 16, 1998, the Company announced that it had entered into an
Agreement and Plan of Merger (the "Merger Agreement") with Cort Investment
Group, Inc., a Texas corporation d/b/a Contract Network ("CNI"), and RSI
Acquisition Corp., an Arizona corporation and wholly-owned subsidiary of CNI
("Merger Corp.").
On February 4, 1999, CNI informed the Company that CNI believed the Company was
in breach of certain of the representations and warranties set forth in the
Merger Agreement, specifically Sections 3.11 ("Tax Returns, Taxes"), 3.7 ("RSI
SEC Reports"), 3.8 ("Financial Statements and Records of RSI"), 3.9 ("Absence of
Certain Changes") and 3.10 ("No Material Undisclosed Liabilities"). CNI asserted
that the Company had not included certain elections in its 1995 income tax
returns and therefore had not properly preserved its net operating loss
carryforwards.
On February 15, 1999, the Company received formal notice of termination of the
Merger Agreement from CNI pursuant to the provisions of Section 8.1(b) of the
Merger Agreement based upon the Company allegedly being in breach of the
representations and warranties noted above.
The Company engaged experts who filed with the Internal Revenue Service (IRS)
for a private letter ruling to allow the Company to amend its 1995 income tax
returns to include the omitted elections. On June 25, 1999, the IRS approved the
Company's private letter ruling.
As of March 31, 1999, the Company had incurred $50,588 in expenses related to
the terminated merger.
- --------------------------------------------------------------------------------
NOTE 13.
SUBSEQUENT EVENTS
- --------------------------------------------------------------------------------
On April 13, 1999, the Company purchased 72,000 shares of the Company's Common
Stock on the open market for $2.375 per share. The Company intends to hold the
shares in treasury.
24
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
The information required by Items 9-11 of Part III is omitted from this Report
by virtue of the fact that the Company will file with the Securities and
Exchange Commission (the "SEC"), pursuant to Regulation 14A, within 120 days
after the end of the fiscal year covered by this Report, a definitive proxy
statement (the "Proxy Statement") relating to the Company's Annual Stockholders'
Meeting to be held August 6, 1999. Such information to be included in the Proxy
Statement is incorporated herein by reference. The Company expects to
disseminate the Proxy Statement to stockholders on or about July 7, 1998.
MATERIAL INCORPORATED HEREIN BY REFERENCE AND LOCATION IN PROXY
STATEMENT FOR 1999 ANNUAL MEETING:
Item No. Item Description Proxy Statement
- -------- ---------------- ---------------
9 Directors, Executive Officers, Proposal One - Election of Directors
Promoters, and Control Persons;
Compliance with Section 16(a)
of the Exchange Act
10 Executive Compensation Proposal One - Election of Directors
11 Security Ownership of Certain General Information - Security
Beneficial Owners and Management Ownership of Certain Principal
Stockholders and Management
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company holds a $75,000 note receivable from Wayne R. Collignon, the
Company's President and Chief Executive Officer and a $75,000 note receivable
from Dirk D. Anderson, the Company's Chief Financial Officer. The funds provided
by these notes were used by the officers to purchase 100,000 shares of the
Company's Common Stock from a former shareholder in a privately negotiated
transaction. The notes are payable in one payment on or before December 19,
2002, and are collateralized by the purchased shares of Common Stock. Interest
on the notes accrued at a rate equal to that of the Company's lender's base rate
plus 2.5%, payable annually beginning December 19, 1998.
25
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(A)(1) EXHIBITS
The following exhibits are filed herewith pursuant to Regulation S-B:
No. Description Reference
- --- ----------- ---------
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
27 Financial Data Schedule 10
(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 with 10-QSB on November 13, 1998
(10) Filed herewith
(*) Indicates a compensatory plan or arrangement
26
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K (CONTINUED)
(B) REPORT ON FORM 8-K
On February 18, 1999, the Company filed a report on Form 8-K dated February 16,
1999 announcing the termination of the Company's proposed merger with Cort
Investment Group, Inc. d/b/a Contract Network.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
RECONDITIONED SYSTEMS, INC.
BY: /S/ Wayne R. Collignon
-----------------------
Wayne R. Collignon, President and Chief Executive Officer
DATE: June 29, 1999
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and the
dates indicated.
RECONDITIONED SYSTEMS, INC.
BY: /S/ Wayne R. Collignon
-----------------------
Wayne R. Collignon, President and Chief Executive Officer
(Principal Executive Officer) and Director
DATE: June 29, 1999
BY: /S/ Dirk D. Anderson
-----------------------
Dirk D. Anderson, Chief Financial Officer (Principal Financial
Officer and Principal Accounting Officer) and Director
DATE: June 29, 1999
BY: /S/ Scott W. Ryan
-----------------------
Scott W. Ryan, Chairman of the Board of Directors
DATE: June 29, 1999
BY: /S/ Warren Palitz
-----------------------
Warren Palitz, Member of the Board of Directors
DATE: June 29, 1999
27
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 0000891915
<NAME> RECONDITIONED SYSTEMS, INC.
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 1,103,325
<SECURITIES> 0
<RECEIVABLES> 1,722,882
<ALLOWANCES> (31,000)
<INVENTORY> 909,622
<CURRENT-ASSETS> 3,755,831
<PP&E> 571,194
<DEPRECIATION> (382,021)
<TOTAL-ASSETS> 4,132,743
<CURRENT-LIABILITIES> 866,373
<BONDS> 0
0
0
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<TOTAL-REVENUES> 11,042,451
<CGS> 8,396,278
<TOTAL-COSTS> 10,047,123
<OTHER-EXPENSES> (56,764)
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<INTEREST-EXPENSE> 1,276
<INCOME-PRETAX> 1,050,816
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<NET-INCOME> 1,050,816
<EPS-BASIC> 0.71
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</TABLE>
