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 December 31, 1997
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT
For the transition period from to
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Commission file number 0-20924
RECONDITIONED SYSTEMS, INC.
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(Exact name of small business issuer as specified in its charter)
ARIZONA 86-0576290
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
444 WEST FAIRMONT, TEMPE, ARIZONA 85282
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(Address of principal executive offices)
602-968-1772
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(Issuer's telephone number)
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(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 February 5, 1997, the number of
shares outstanding of the Registrant's common stock was 1,473,950.
PART 1 - FINANCIAL STATEMENTS
ITEM 1
RECONDITIONED SYSTEMS, INC.
UNAUDITED FINANCIAL STATEMENTS
DECEMBER 31, 1997
2
RECONDITIONED SYSTEMS, INC.
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BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(UNAUDITED)
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1997 1996
---- ----
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 38,446 $ 150,071
Accounts receivable - trade, net of allowance
for doubtful accounts of $70,403 and
$31,495, respectively 1,328,858 828,430
Inventory 1,082,855 1,009,159
Prepaid expenses and other current assets 28,941 162,530
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TOTAL CURRENT ASSETS 2,479,100 2,150,190
PROPERTY AND EQUIPMENT; net of accumulated
depreciation of $381,146 and
$318,007, respectively 148,185 197,758
OTHER ASSETS
Notes receivable - Officers (Note 3) 150,000 --
Other assets 14,188 41,783
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$2,791,473 $2,389,731
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving line of credit (Note 2) $ -- $ 545,893
Current maturities of long-term debt 41,577 49,869
Accounts payable 444,629 308,779
Customer deposits 18,955 53,827
Accrued expenses and other current liabilities 277,075 107,076
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TOTAL CURRENT LIABILITIES 782,236 1,065,444
LONG-TERM DEBT, LESS CURRENT MATURITIES 3,415 45,621
STOCKHOLDERS' EQUITY 2,005,822 1,278,666
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$2,791,473 $2,389,731
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3
RECONDITIONED SYSTEMS, INC.
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STATEMENT OF OPERATIONS
FOR THE THREE MONTH AND NINE MONTH PERIODS ENDED DECEMBER 31, 1997 AND 1996
(UNAUDITED)
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THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1997 1996 1997 1996
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Sales $2,827,429 $1,672,569 $7,340,607 $4,968,983
Cost of sales 2,065,594 1,273,316 5,461,608 3,786,424
---------- ---------- ---------- ----------
Gross profit 761,835 399,253 1,878,999 1,182,559
Selling & administrative
expenses 439,341 352,782 1,231,498 953,095
---------- ---------- ---------- ----------
Income from operations 322,494 46,471 647,501 229,464
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Other income (expense):
Interest income 1,806 3,832 2,158 8,364
Interest expense (1,107) (19,787) (19,267) (79,446)
Other (3,281) 2,374 (594) 2,374
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(2,582) (13,581) (17,703) (68,708)
---------- ---------- ---------- ----------
Net income $ 319,912 $ 32,890 $ 629,798 $ 160,756
========== ========== ========== ==========
Earnings per common and
common equivalent share $ 0.22 $ 0.02 $ 0.43 $ 0.11
========== ========== ========== ==========
Weighted average number
of shares outstanding 1,473,950 1,473,950 1,473,950 1,473,950
========== ========== ========== ==========
Earnings per common and
common equivalent share -
assuming dilution $ 0.19 $ 0.02 $ 0.38 $ 0.10
========== ========== ========== ==========
Weighted average number of
shares outstanding -
assuming dilution 1,668,105 1,532,391 1,661,745 1,533,847
========== ========== ========== ==========
4
RECONDITIONED SYSTEMS, INC.
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STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED MARCH 31, 1997 AND THE
NINE MONTH PERIOD ENDED DECEMBER 31, 1997
(UNAUDITED)
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COMMON COMMON PREFERRED PREFERRED RETAINED TREASURY
STOCK STOCK STOCK STOCK EARNINGS STOCK TOTAL
SHARES AMOUNT SHARES AMOUNT (DEFICIT) (134 SHARES)
------ ------ ------ ------ --------- ------------ ----------
Balance at
March 31, 1,621,300 $2,489,143 555,555 $2,156,717 $(3,465,318) $(3,754) $1,176,788
1996
Conversion of
Preferred 7,222,215 2,097,839 (555,555) (2,156,717) 0 0 (58,878)
Stock to
Common Stock,
net of costs
of $58,878
Reverse
Split of (7,369,565) 0 0 0 0 0 0
Common Stock
Net income -- 0 -- 0 258,114 0 258,114
---------- --------- -------- ---------- ----------- ------- ----------
Balance at
March 31, 1,473,950 $4,586,982 -- 0 $(3,207,204) $(3,754) $1,376,024
1997
Net income -- 0 -- 0 629,798 0 629,798
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BALANCE AT
DECEMBER 31, 1,473,950 $4,586,982 0 0 $(2,577,406) $(3,754) $2,005,822
1997
5
RECONDITIONED SYSTEMS, INC.
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STATEMENT OF CASH FLOWS
FOR THE THREE MONTH AND NINE MONTH PERIODS ENDED DECEMBER 31, 1997 AND 1996
(UNAUDITED)
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THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1997 1996 1997 1996
---- ---- ---- ----
Cash and cash equivalents
provided (used) by operating
activities $(168,068) $(106,752) $ 542,811 $(110,302)
Cash and cash equivalents
used by investing
activities (150,324) (8,804) (163,831) (29,599)
Cash and cash equivalents
provided (used) by financing
activities (13,605) 7,798 (482,658) 189,274
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Increase (decrease) in cash
and cash equivalents (331,997) (107,758) (103,678) 49,373
Cash and cash equivalents,
beginning of period 370,443 257,829 142,124 100,698
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Cash and cash equivalents,
end of period $ 38,446 $ 150,071 $ 38,446 $ 150,071
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6
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 nine months ended December 31,
1997, are not necessarily indicative of the results that may be expected
for the entire year ending March 31, 1998. These financial statements
have been prepared in accordance with the instructions to Form 10-QSB
and do not contain certain information required by generally accepted
accounting principles. These statements should be read in conjunction
with financial statements and notes thereto included in the Company's
Form 10-KSB for the year ended March 31, 1997.
EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE:
The computation of earnings per share is based on the net income and the
weighted average number shares of common stock outstanding for each
period. Certain stock options outstanding are considered common stock
equivalents in computing diluted earnings per share during the quarters
and periods ended December 31, 1997 and 1996, and were accounted for
under the Treasury Stock method. In addition, certain warrants which
were outstanding during the periods ended December 31, 1997 and 1996 are
not included in the computation of diluted earnings per share for those
quarters because their effect would be antidilutive. The earnings per
share and the weighted average number of shares outstanding for the
quarter ended and period ended December 31, 1996 give retroactive effect
to the conversion of preferred stock to common stock and the reverse
split of common stock which were effective on August 12, 1996. Earnings
per share and diluted earnings per share for the quarter and period
ended December 31, 1996 have been restated to give retroactive effect to
FASB No. 128.
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NOTE 2.
REVOLVING LINE OF CREDIT
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On July 30, 1997, the Company terminated its line of credit agreement with
Norwest Business Credit, Inc. and entered into a line of credit agreement with
M&I Thunderbird Bank. Under this new $1,000,000 revolving line of credit
agreement, which is effective through July 31, 1998, interest is payable at the
bank's base rate plus 2%. Borrowings on the line of credit may not exceed 75% of
eligible accounts receivable and 30% of eligible inventory up to $300,000. The
line of credit is collateralized by accounts receivable, inventory, property and
equipment, and intangibles. The agreement contains various covenants by the
Company, including covenants that the Company will maintain certain net worth
thresholds and ratios, will meet certain debt service coverage ratios, and will
not enter into or engage in various types of agreements or business activities
without approval from M&I Thunderbird Bank.
7
RECONDITIONED SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
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NOTE 3.
NOTES RECEIVABLE - OFFICERS
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On December 19, 1997, the Company issued two separate $75,000 notes receivable
to officers of the Company. The notes are payable in one payment on or before
December 19, 2002. Interest on the notes accrues at a rate equal to that of the
Company's lender's base rate plus 2%, payable annually beginning December 19,
1998.
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NOTE 4.
EARNINGS PER SHARE
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THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1997 1996 1997 1996
---- ---- ---- ----
BASIC EPS
Net Income (Numerator) $ 319,912 $ 32,890 $ 629,798 $ 160,756
========== ========== ========== ==========
Shares (Denominator) 1,473,950 1,473,950 1,473,950 1,473,950
========== ========== ========== ==========
Per-Share Amount $ 0.22 $ 0.02 $ 0.43 $ 0.11
========== ========== ========== ==========
DILUTED EPS
Net Income $ 319,912 $ 32,890 $ 629,798 $ 160,756
========== ========== ========== ==========
Shares 1,473,950 1,473,950 1,473,950 1,473,950
Effect of Dilutive Securities:
Stock options 194,155 58,441 187,795 59,897
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Total common shares + assumed
conversions 1,668,105 1,532,391 1,661,745 1,533,847
========== ========== ========== ==========
Per-Share Amount $ 0.19 $ 0.02 $ 0.38 $ 0.10
========== ========== ========== ==========
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
The statements contained herein which are not historical facts may constitute
"forward-looking statements" within the meaning of Section 27A of the Securities
Exchange Act of 1933, as amended, and Section 21E of the Securities Exchange Act
of 1934, as amended, and are subject to the safe harbors created thereby. These
forward-looking statements involve risks and uncertainties, including, but not
limited to, the risk that the Company may not be able to continue to increase
sales, maximize its production capacity, maintain adequate inventory levels at
an acceptable cost, maintain the mix between wholesale and retail sales, expand
its production and showroom space at an acceptable cost, and hire qualified
personnel in response to rising sales. In addition, the Company's business,
operations and financial condition are subject to substantial risks which are
described in the Company's reports and statements filed from time to time with
the Securities and Exchange Commission. These reports and statements include the
Company's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1997.
RESULTS OF OPERATIONS
FOR THE THREE MONTH PERIODS ENDED DECEMBER 31, 1997 AND 1996
Reconditioned Systems, Inc. ("RSI" or the "Company") reported revenues of
$2,827,429 for the three month period ended December 31, 1997 (hereinafter the
"reporting quarter"). This represents a $1,154,860 or 69% improvement over the
sales reported for the three month period ended December 31, 1996 (hereinafter
the "comparable quarter").
Wholesale sales increased 97% over the comparable quarter. Retail sales in the
Phoenix and Tucson markets increased 40% over the comparable quarter. This
increase in revenues was primarily attributable to increased marketing efforts
and extended OEM lead times. As previously reported, the Company has implemented
a wholesale marketing plan which focuses on expanding its wholesale markets
within the Western portion of the United States. The Company has also expanded
its retail operations through increased advertising in the Phoenix market and by
hiring additional retail sales personnel. In addition to the effects of the
Company's marketing plan, sales benefited from Haworth, Inc.'s relatively
extended lead times during the reporting quarter, giving the Company a temporary
competitive advantage. Haworth's current lead times are more in line with those
during the first two quarters of the fiscal year.
The Company's gross profit margin improved as a result of operating efficiencies
achieved through economies of scale from 23.8% in the comparable quarter to
26.9% for the reporting quarter. All areas of production benefited from the
economies of scale created by the Company's increased sales.
Selling and administrative expenses for the reporting quarter were 15.5%,
compared to 21.1% for the comparable quarter. The 5.6% improvement primarily
resulted from a lower overall percentage of fixed expenses and the
wholesale/retail mix of those sales. Wholesale sales, generally have lower
selling expenses. Current wholesale sales compensation approximates 3.6% of
wholesale sales revenues. By comparison, retail sales compensation approximates
10.1% of retail sales revenues.
Other income and expenses, which primarily consisted of interest expense,
improved by 81% over the comparable quarter. The Company's increased sales and
improved financial stability enabled management to acquire new financing with
lower borrowing rates on its revolving line of credit. In addition, the Company
paid off its line of credit during the reporting period through improved cash
flows, thereby eliminating its interest expense associated with the revolving
credit line.
The Company's net income increased $287,022 or 873% over the comparable quarter
as a result of the increased sales revenues, gains in economies of scale, lower
overall fixed costs, improved wholesale/retail sales mix, and lower interest
expense, as discussed above.
9
FOR THE NINE MONTH PERIODS ENDED DECEMBER 31, 1997 AND 1996
The Company's operating results for the nine month period ended December 31,
1997 (hereinafter the "reporting period") were influenced by the same factors
affecting the results for the reporting quarter, as were discussed in the
narrative above. Wholesale sales represented 57.7% of the sales revenues earned
during the reporting period. Wholesale revenues increased 62.7% compared to the
wholesale sales during the nine month period ended December 31, 1996
(hereinafter the "comparable period"). Retail sales increased by 31% during the
reporting period in comparison to the comparable period.
INCOME TAXES
As of March 31, 1997, the Company had federal loss carryforwards of
approximately $2,990,000 and state loss carryforwards of approximately
$2,790,000. The federal loss carryforwards expire through March 31, 2011 and the
state loss carryforwards expire through March 31, 2001. If the Company is
profitable before these loss carryforwards expire, it will benefit from them at
statutory rates. During the quarters ended December 31, 1997 and 1996, the
Company benefited in the approximate amount of $135,000 and $11,000 from these
loss carryforwards. The Company benefited from these loss carryforwards in the
approximate amount of $315,000 and $91,000 during the periods ended December 31,
1997 and 1996, respectively.
FINANCIAL CONDITION AND LIQUIDITY
The primary factors affecting the Company's financial condition and liquidity
are the results of operations, collection period and rate of inventory turns.
Net income earned during the reporting period generated the cashflow necessary
to finance the 47.7% increase in sales and resulted in net cash from operations
of $542,811. This increase allowed the Company to reduce its revolving credit
and long-term debt balances by $482,658 and finance $163,831 in notes receivable
and additional equipment. As of the date of this report, the Company had no
outstanding balance and approximately $980,000 of availability on its operating
line of credit. In addition, the Company was in compliance with all loan
covenants associated with this revolving line of credit. The Company's average
days sales in accounts receivable increased from 38 days in the comparable
period to 43 in the reporting period. This compares to 51 days as of March 31,
1997 and 41 days as of June 30, 1997, and 40 days as of September 30, 1997. The
Company hopes to maintain an average collection period of 30 to 40 days. The
increase in the collection period was offset by improved inventory turns from
4.2 in the comparable period to 6.3 in the reporting period and the Company's
strong operating results. Management believes cash flow from current operations
and the availability on the Company's $1,000,000 credit line will provide
adequate funds to sustain the Company's growth in sales without the need for
additional outside capital.
FORWARD LOOKING-STATEMENTS
This reporting quarter marks the ninth consecutive profitable quarter following
the Company's restructuring and downsizing. The operating results achieved
during the reporting period are representative of management's long term goals;
however, management does not believe the Company is currently positioned to meet
these results on a consistent basis. In order to meet this level of output, the
Company's remanufacturing facility was operating near production capacity. In
addition, the Company's closing ratio on large projects exceeded the level
normally achieved, primarily as a result of Haworth, Inc.'s extended lead times,
as discussed above. Management's goals for the short term are to achieve results
more consistent with those of the previous two quarters. In order to position
the Company to achieve results like that of the reporting quarter in the long
term, management intends to further develop its wholesale customer base within
the Western region of the United States, expand its production and showroom
space, and hire additional retail sales personnel. In addition, now that the
Company has strengthened its financial condition and liquidity, management
believes a conservative acquisition program is a viable alternative for
additional growth and increased share value.
10
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
Effective June 30, 1997, the Company's Class B Warrants expired.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
11
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 Amended and Restated Articles of Incorporation (2)
3.2 Amended and Restated Bylaws (2)
4.1 Form of Stock Certificate (1)
4.5 Registration Rights Agreements (3)
*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 (6)
*4.12 Amendment to Options issued to Dirk Anderson (6)
*4.13 Options issued to Wayne R. Collignon (6)
*4.14 Options issued to Dirk D. Anderson (6)
*4.15 Options issued to Scott W. Ryan (6)
*4.16 Options issued to Scott W. Ryan (6)
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 Registrant and Wayne Collignon (4)
*10.22 Employment Agreement between Registrant and Dirk Anderson (4)
10.23 Third amendment to the Lease between Registrant, as Lessee,
and Newhew Associates, as Lessor (4)
*10.25 Amendment to Employment Agreement between Registrant and
Wayne Collignon (5)
*10.26 Amendment to Employment Agreement between Registrant and
Dirk Anderson (5)
10.29 Loan documents between Registrant and M&I Thunderbird Bank (7)
*10.30 Loan documents between Registrant and Wayne R. Collignon (8)
*10.31 Loan documents between Registrant and Dirk D. Anderson (8)
27 Financial Data Schedule (8)
- ----------
* Member of Compensation Committee.
(1) Filed with Registration Statement on Form S-18, No. 33-51980-LA, under
Securities Act of 1933, as declared effective on December 17, 1992.
(2) Filed with the Company's definitive proxy statement on July 10, 1996
(3) Filed with Form 10-KSB on July 13, 1995
(4) Filed with Form 10-KSB on July 2, 1996
(5) Filed with Form 10-QSB on November 14, 1996
(6) Filed with Form 10-KSB on June 26, 1997
(7) Filed with Form-10-QSB on November 14, 1997
(8) Filed herewith
(b) Reports on Form 8-K:
No reports were filed on Form 8-K during the quarter ended December 31, 1997.
12
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: February 10, 1998 /s/ Wayne R. Collignon
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Wayne R. Collignon, President and CEO
Date: February 10, 1998 /s/ Dirk D. Anderson
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Dirk D. Anderson, CFO
13