-------------------------------- General ------- Reconditioned Systems, Inc. ("RSI" or the "Company"), an Arizona corporation formed in March 1987, remanufactures 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 remanufacturing and marketing workstations originally manufactured by Haworth, Inc. ("Haworth"). The Company operates three remanufacturing facilities, one in Arizona, one in Georgia and one in New Mexico. The Company also markets new office furniture product-lines, including office chairs, desks, filing, lighting and other office furniture accessories. The Company markets is products primarily in the continental United States.

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, electrical power and telecommunications raceways, resulting in virtually no interchangeability between their respective products. Due to this lack of interchangeability of dominant manufacturer parts, the Company has generally specialized in remanufacturing and marketing workstations originally manufactured by Haworth.

The Company's executive offices are located at 444 West Fairmont, Tempe, Arizona 85282 and its telephone number is 480-968-1772.

Principal Line of Business -------------------------- The Company's principal line of business is the sale of remanufactured Haworth workstations. Historically, these sales have accounted for approximately 70 - 80% of the Company's revenues. For the year ended March 31, 2003, these sales represented approximately 74% of the Company's revenues.

The Company purchases used Haworth workstations from manufacturers, dealers, brokers, and end-users and transports them to one of its three manufacturing facilities located in Arizona, Georgia and New Mexico, where it disassembles and inventories the workstations by component parts, stores, and, upon receipt of purchase orders, reconditions and reassembles the workstations. The remanufacturing 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 dealers, clone parts which the Company purchases from various vendors, and new parts which the Company manufactures from raw materials. The Company markets these remanufactured 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.

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, workstations are designed around personal computers, and the growth in that market has contributed to the growth and acceptance of workstations. The Company believes its remanufactured Haworth workstations offer an advantage over much of its competition because they are higher quality than new workstations available in the same price range.

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 (including new modular office furniture, desks, files, and chairs); installing workstations, and remanufacturing product already owned by customers. Historically, these other lines of business have accounted for approximately 20 - 30% of the Company's revenues. For the year ended March 31, 2003, these sales represented approximate 26% of the Company's revenues.

In August 2001, the Company opened a new manufacturing facility and retail showroom under the trade name of Total Office Interiors ("TOI") in Norcross, Georgia, a suburb of Atlanta. The primary focus of this expansion was to provide another manufacturing "hub" and sales office to market to customers in the Eastern United States. The Company modeled this new facility after its Arizona manufacturing and sales office.

In January 2002, the Company opened a satellite sales office and showroom ("spoke") in Sherman Oaks, California. The primary focus of this new sales office is to develop a TOI retail presence in the Southern California region. This office showcases the Company's remanufactured product-line, along with the other new product-lines offered by the Company's Arizona and Georgia sales offices.

On May 1, 2003, the Company purchased Beck Office Systems, Inc., a Haworth remanufacturer located in Albuquerque, New Mexico and Tucson, Arizona (see Item 7. Financial Statements - Footnote 14. Subsequent Event). The primary focus of this purchase is to increase the Company's geographic presence and gain operating synergies.

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 one of its three manufacturing facilities in Arizona, Georgia and New Mexico, 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 inventories new workstation components purchased from Haworth dealers, clone workstation components, and raw materials used in the remanufacturing process. These raw materials include items such as fabric, particleboard, laminate and paint.

The Company carries a limited amount of work in process and finished goods inventory because it generally does not initiate the remanufacturing process until a purchase order has been received and because the remanufacturing 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 remanufacturing 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 remanufactured 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.

The Company also carries a number of new product-lines, including new modular office furniture, filing, lighting, and other accessories. The Company currently maintains an excellent relationship with the manufacturers of these product-lines and does not foresee any disruption in supply. In addition, if the Company did face a disruption in supply of these product-lines, the Company believes it could easily find an alternative source.

Remanufacturing Process ----------------------- The Company's remanufacturing process for used Haworth workstations includes sanding, painting, laminating, and reupholstering. The remanufacturing process also includes replacing certain components with new components purchased from Haworth dealers, clone components purchased from various vendors, or new components manufactured by the Company from raw materials. The Company's facilities in Arizona, Georgia and New Mexico include all of the equipment required to recondition workstations, including closed and open paint booths, paint drying booths, sanding equipment, saws and laminating equipment.

The remanufactured 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 sells 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 remanufacturing them.

The Company's facilities have been designed to facilitate the natural flow of used Haworth workstation components and raw materials in order to streamline the remanufacturing process through disassembly, storage, remanufacturing, and shipping. Utilizing narrow aisle storage maximizes storage capacity. The Company believes that its current facilities will be able to handle the anticipated 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 remanufactured 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 remanufactured workstations. The Company has certain competitive advantages over new workstation manufacturers and their dealers. On orders of 100 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 remanufactured Haworth workstations exceeds that of new "Grade B" workstations. In addition, the Company can produce and install fully remanufactured 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 remanufacturing services are more comprehensive than most other reconditioners. The Company has the ability to produce more remanufactured workstations and higher quality remanufactured workstations than most other reconditioners, resulting in a competitive advantage. 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.

In an effort to increase the Company's ability to compete in this changing marketplace, beginning in October 1999, the Company became an authorized dealer of Teknion, a manufacturer of new modular office furniture and expanded its line of filing, seating, lighting and other office furniture accessories. In June 2000, the Company became an authorized dealer of Paoli Office Furniture, a manufacturer of executive freestanding office furniture and tables. The Company offers the Teknion and Paoli lines as an alternative to its remanufactured Haworth workstations. The Company's wholly-owned subsidiary, Beck Office Systems, is an authorized dealer of Kimball Office Furniture and National, manufacturers of new casegoods and seating.

Distribution ------------ The Company markets its products on a wholesale basis to furniture dealerships, design firms and installation companies throughout the United States. The Company employs three full-time employees who concentrate on telemarketing and servicing its wholesale sales and an independent marketing representative who concentrates on market expansion. In recent years, the Company's wholesale sales have comprised as much as approximately 65% of the Company's total sales. For the year ended March 31, 2003, wholesale sales accounted for 41% of the Company's total sales.

The Company operates three retail sales offices doing business under the trade name of "Total Office Interiors," located in the metropolitan areas of Phoenix, Atlanta and Los Angeles. The Company's Arizona sales office has historically generated approximately 40-50% of the Company's total sales. For the year ended March 31, 2003, Arizona retail sales accounted for approximately 38% of the Company's total sales. In August 2001, the Company opened a new manufacturing facility and retail showroom in Georgia. The primary focus of this expansion was to provide another manufacturing hub and sales office to market to customers in the Eastern United States. The Company modeled this new facility after its Arizona manufacturing and sales office. In January 2002, the Company opened a satellite sales office in Sherman Oaks, California. The primary focus of this new sales office is to develop a retail presence in Southern California. These two new divisions accounted for 21% of the Company's total sales for the fiscal year.

On May 1, 2003, the Company purchased, as a wholly-owned subsidiary, Beck Office Systems, a Haworth remanufacturer located in Albuquerque, New Mexico, with sales offices in Albuquerque and Tucson, Arizona. Beck markets its products on a retail basis throughout the United States and Puerto Rico, but primarily in New Mexico, Arizona, Colorado and Texas.

Customers --------- In addition to the Company's network of authorized dealers, the Company's retail customers range from ses to Fortune 500 companies. The Company's customer base also includes various federal, state and local agencies and other governmental entities. In January 2003, the Company finalized the registration of its products with the General Services Administration ("GSA"), which allows the Company to market directly to the U.S. government on open and closed bid projects. The Company is currently developing marketing material for GSA customers. The Company maintains a broad customer base and is not dependent on any one customer.

Personnel --------- The Company currently has 90 full-time employees of whom 45 are production personnel directly involved in the remanufacturing process, 12 are in the installation department, 24 are in the sales and design departments, and 9 are management and administrative personnel. Beck Office Systems, the Company's wholly-owned subsidiary currently has 56 full-time employees of whom 25 are production personnel directly involved in the remanufacturing process, 15 are in the installation department, 9 are in the sales and design departments, and 7 are management and administrative personnel.

The Company believes that its ability to grow and attain its desired profitability levels depend 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 includes severance benefits, with its Chief Executive Officer (see Item 10 - Executive Compensation) and with the President of Beck Office Systems, Inc. (see Item 7. Financial Statements; Footnote 14 - Subsequent Event). 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 principle 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 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 the 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.

The Company's operations are also governed by laws and regulations relating to work-place safety and worker health, principally the Occupational Safety and Health Act and accompanying regulations and various state laws and regulations. The Company does not believe that future compliance with current laws and regulations will have a material adverse effect on its financial condition or results of operations.

Insurance --------- The Company maintains liability insurance policies covering a number of risks, including business interruption, property, commercial crime, comprehensive general liability and workers compensation and employer's liability insurance. The Company believes that its insurance coverage is adequate.