U.S. Securities and Exchange Commission
Washington D. C., 20549
FORM 10-QSB
(MARK ONE)
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE
EXCHANGE ACT
For the transition period from __________ to __________.
Commission file number 0-20924
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RECONDITIONED SYSTEMS, INC.
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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 July 31, 1998, 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
JUNE 30, 1998
2
RECONDITIONED SYSTEMS, INC.
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BALANCE SHEETS
JUNE 30, 1998 AND 1997
(UNAUDITED)
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1998 1997
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ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 695,781 $ 129,632
Accounts receivable - trade, net of allowance
for doubtful accounts of $27,250 and
$33,000, respectively 1,254,644 1,051,646
Inventory 942,360 943,922
Prepaid expenses and other current assets 44,170 21,529
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TOTAL CURRENT ASSETS 2,936,955 2,146,729
PROPERTY AND EQUIPMENT; net of accumulated
depreciation of $349,675 and
$350,274, respectively 136,522 171,465
OTHER ASSETS
Notes receivable - Officers 150,000 --
Other assets 29,150 15,835
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$3,252,627 $2,334,029
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving line of credit (Note 2) $ -- $ 129,188
Current maturities of long-term debt 23,160 50,840
Accounts payable 436,973 365,145
Customer deposits 136,195 74,491
Accrued expenses and other current liabilities 198,198 169,497
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TOTAL CURRENT LIABILITIES 794,526 789,161
LONG-TERM DEBT, LESS CURRENT MATURITIES -- 20,036
STOCKHOLDERS' EQUITY 2,458,101 1,524,832
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$3,252,627 $2,334,029
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3
RECONDITIONED SYSTEMS, INC.
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STATEMENTS OF OPERATIONS
FOR THE THREE MONTH PERIODS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
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THREE MONTHS ENDED
JUNE 30,
1998 1997
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Sales $ 2,653,092 $ 2,267,362
Cost of sales 2,028,782 1,688,163
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Gross profit 624,310 579,199
Selling & administrative expenses 392,884 420,469
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Income from operations 231,426 158,730
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Other income (expense):
Interest income 10,441 171
Interest expense (639) (13,595)
Other 1,319 3,502
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11,121 (9,922)
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Net income $ 242,547 $ 148,808
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Basic earnings per share (Notes 1 and 3) .16 .10
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Basic weighted average number
of shares outstanding 1,473,950 1,473,950
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Diluted earnings per common
and common equivalent share (Notes 1 and 3) .14 .09
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Diluted weighted average number
of shares outstanding 1,691,411 1,578,510
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RECONDITIONED SYSTEMS, INC.
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STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED MARCH 31, 1998 AND THE THREE MONTH PERIOD ENDED JUNE 30, 1998
(UNAUDITED)
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COMMON COMMON RETAINED TREASURY
STOCK STOCK EARNINGS STOCK TOTAL
SHARES AMOUNT (DEFICIT) (134 SHARES)
------ ------ --------- ------------ ----------
Balance at
March 31, 1997 1,473,950 $4,586,982 $(3,207,204) $ (3,754) $1,376,024
Net income -- 0 839,530 0 839,530
--------- ---------- ----------- ----------- ----------
Balance at
March 31, 1998 1,473,950 $4,586,982 $(2,367,674) $ (3,754) $2,215,554
Net income -- 0 242,547 0 242,547
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BALANCE AT
JUNE 30, 1998 1,473,950 $4,586,982 $(2,125,127) $ (3,754) $2,458,101
========= ========== =========== =========== ==========
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RECONDITIONED SYSTEMS, INC.
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STATEMENTS OF CASH FLOWS
FOR THE THREE MONTH PERIODS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
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THREE MONTHS ENDED
JUNE 30,
1998 1997
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Cash and cash equivalents
provided (used) by operating
activities $ (14,501) $ 321,313
Cash and cash equivalents
used by investing
activities (13,017) (6,219)
Cash and cash equivalents
used by financing activities (9,732) (327,586)
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Decrease in cash
and cash equivalents (37,250) (12,492)
Cash and cash equivalents,
beginning of period 733,031 142,124
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Cash and cash equivalents,
end of period $ 695,781 $ 129,632
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RECONDITIONED SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
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NOTE 1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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BASIS OF PRESENTATION:
The unaudited financial statements include only the accounts and
transactions of the Company.
INTERIM FINANCIAL STATEMENTS:
The unaudited interim financial statements include all adjustments
(consisting of normal recurring accruals) which, in the opinion of
management, are necessary in order to make the financial statements
not misleading. Operating results for the three months ended June 30,
1998, are not necessarily indicative of the results that may be
expected for the entire year ending March 31, 1999. These financial
statements have been prepared in accordance with the instructions to
Form 10-QSB and do not contain certain information required by
generally accepted accounting principles. These statements should be
read in conjunction with financial statements and notes thereto
included in the Company's Form 10-KSB for the year ended March 31,
1998.
EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE:
Basic earnings per share include no dilution and are computed by
dividing income available to common stockholders by the weighted
average number of shares outstanding for the period.
Diluted earnings per share amounts are computed based on the weighted
average number of shares actually outstanding plus the shares that
would be outstanding assuming the exercise of dilutive stock options,
all of which are considered to be common stock equivalents. The number
of shares that would be issued from the exercise of stock options has
been reduced by the number of shares that could have been purchased
from the proceeds at the average market price of the Company's stock.
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NOTE 2.
REVOLVING LINE OF CREDIT
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Effective July 31, 1998 the Company renegotiated and renewed its $1,000,000 line
of credit agreement with M&I Thunderbird Bank. Under this new agreement,
interest is payable at the bank's base rate. Borrowings on the line of credit
may not exceed 75% of eligible accounts receivable and 30% of eligible inventory
up to $300,000. The line of credit is collateralized by accounts receivable,
inventory, property and equipment, and intangibles. The agreement contains
various covenants by the Company, including covenants that the Company will
maintain certain net worth thresholds and ratios, will meet certain debt service
coverage ratios, and will not enter into or engage in various types of
agreements or business activities without approval from M&I Thunderbird Bank.
7
RECONDITIONED SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
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NOTE 3.
EARNINGS PER SHARE
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THREE MONTHS ENDED
JUNE 30,
1998 1997
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BASIC EPS
Net Income $ 242,547 $ 148,808
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Weighted average number
of shares outstanding 1,473,950 1,473,950
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Basic earnings per share $ 0.16 $ 0.10
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DILUTED EPS
Net Income $ 242,547 $ 148,808
========== ==========
Weighted average number
of shares outstanding 1,473,950 1,473,950
Effect of dilutive securities:
Stock options 217,461 104,560
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Total common shares + assumed
conversions 1,691,411 1,578,510
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Per-Share Amount $ 0.14 $ 0.09
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8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
The statements contained in this report that are not historical facts may
constitute "forward-looking statements" within the meaning of Section 27A of the
Securities Exchange Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, and are subject to the safe harbors created
thereby. These forward-looking statements involve risks and uncertainties,
including, but not limited to, the risk that the Company may not be able to
geographically diversify its operations on a profitable basis, the risk that the
Company may not be able to continue to increase sales, maximize its production
capacity, maintain adequate inventory levels at an acceptable cost and employ
qualified personnel in response to rising sales. In addition, the Company's
business, operations and financial condition are subject to substantial risks
that are described in the Company's reports and statements filed from time to
time with the Securities and Exchange Commission. These reports and statements
include the Company's Annual Report on Form 10-KSB for the fiscal year ended
March 31, 1998.
RESULTS OF OPERATIONS
Reconditioned Systems, Inc. (the "Company") reported net income for the three
month period ended June 30, 1998 (hereinafter the "reporting period") of
$242,547 as compared to $148,808 for the three month period ended June 30, 1997
(hereinafter the "comparable period"). This $93,739 or 62.9% increase is a
result of increased sales and lower selling, administrative and interest
expenses over the comparable period.
The Company reported sales for the reporting period of $2,653,092 as compared to
$2,267,362 for comparable period, resulting in an increase of $385,730 or 17%.
This increase was primarily attributable to increased wholesale sales.
Approximately 60% of the total sales for the reporting period were wholesale
sales and 40% were retail sales. Sales during the comparable period were
approximately 50% wholesale and 50% retail.
Wholesale sales totaled $1,638,584 for the reporting period, an increase of
$481,946 or 42% over the comparable period. This was a result of expansion of
the wholesale division and implementation of a new marketing plan aimed at
increasing the Company's wholesale customer-base. The Company began targeting
the larger metropolitan areas throughout the western United States and has had
success in developing new dealership/broker relationships in these areas. The
Company's wholesale division has been very successful in the California market
and hopes to achieve similar results in other western states.
Retail sales in the Phoenix and Tucson markets totaled $1,014,508 during the
reporting period, a decrease of 9% over the comparable period. This decrease was
primarily a result of turnover within the retail sales department. During the
reporting period, the Company hired and trained four new sales representatives
to replace those lost through attrition and to add to the existing sales staff.
The complexity and demand for accuracy within the Company's industry require
that the sales staff have proper training and product knowledge. The Company has
developed a formal training program designed to equip new salespeople with the
skills necessary to succeed; however, these skills take time to develop. While
the Company believes these newly hired sales representatives will be successful
in developing the necessary skills to achieve their sales goals, there can be no
certainty that they will meet those expectations.
9
The Company's gross profit margin for the reporting period was 23.5%, as
compared to a gross profit margin of 25.5% for the comparable period. This 2%
decrease in the gross margin was primarily attributed to the increased
percentage of wholesale sales to retail sales.
The Company's selling and administrative expenses were reduced from 18.5% of
sales in the comparable period to 14.8% for the reporting period. The 3.7%
decrease was primarily a result of a lower overall percentage of fixed expenses
and the wholesale/retail sales mix. The Company's wholesale sales generally have
lower selling expenses than those of retail sales.
The Company's other income and expenses, which consists primarily of interest
income and expense, improved by $21,043 from the comparable period to the
reporting period. This improvement was primarily due to the elimination of the
Company's interest expense and minimum interest requirements associated with its
previous line of credit agreement and increased interest income. Effective July
30, 1997, the Company entered into a new borrowing agreement with M&I
Thunderbird Bank, lowering the Company's borrowing rate and eliminating the
minimum interest payments assessed under the previous line of credit. The
Company now carries a zero dollar balance on the new line of credit and believes
it has built a strong working relationship with M&I Thunderbird. In addition,
the Company earned interest income of $10,441 on interest-bearing accounts and
notes receivable from officers.
INCOME TAXES
As of March 31, 1998, the Company had federal loss carryforwards of
approximately $2,120,000 and state loss carryforwards of approximately
$1,920,000. During the quarters ended June 30, 1998 and 1997, the Company
benefited from these loss carryforwards in the approximate amounts of $97,000
and $60,000, respectively.
FINANCIAL CONDITION AND LIQUIDITY
As of June 30, 1998, the Company's cash and cash equivalents totaled $694,781.
In addition, the Company's net worth and working capital totaled $2,458,101 and
$2,142,429, respectively. The Company has no material long-term debt and
$1,000,000 available on its line of credit through M&I Thunderbird Bank.
While cash generated from operations has been sufficient to finance the
company's growth over the past few years, the Company reported negative cash
flows from operations of $14,501 during the reporting period. This was primarily
a result of the necessity to finance increased sales during the reporting
period.
The Company's sales growth resulted in increasing the Company's accounts
receivable balances by $292,522 at June 30, 1998 as compared to March 31, 1998.
The Company's collection rate remained fairly constant. The average days sales
in accounts receivable at June 30, 1998 was 38, as compared to 37 at March 31,
1998. The Company hopes to maintain a collection rate at or near 30 days.
The increased accounts receivables were partially offset by the company's strong
operating results and increased inventory turns during the reporting period.
Annualized inventory turns for the reporting period were 8.7, as compared to
6.75 for the year ended March 31, 1998. This improvement was primarily a result
10
of the Company's ability to increase sales without increasing inventory levels.
Management believes any additional sales increases may require the Company to
increase current inventory levels.
FUTURE OUTLOOK
Management is pleased with the operating results achieved during this reporting
period. The Company reported a 17% increase in revenues and a 62.9% increase in
net income. Management plans to pursue gradual and focused growth; in order to
facilitate this growth, the Company intends to expand its warehouse, office and
showroom space at the Tempe, Arizona location. This modest expansion and
improvements are expected to be completed by December, 1998.
The Company continues to pursue growth in both the wholesale and retail markets.
The wholesale division is expanding with new and existing dealer/broker
relationships. In addition to nurturing the accounts established in the
California markets, the Company will continue to concentrate on targeted growth
in other markets throughout the western United States. The retail division's
primary goal is to hire, train and maintain a qualified and competent sales
staff. In addition, the Company plans continued development of its advertising
and promotional programs designed to increase local and regional exposure.
Furthermore, now that the Company has strengthened its financial condition and
liquidity, management believes a conservative acquisition program is a viable
alternative for additional sales growth and increased share value.
The Company is currently investigating and taking corrective action to protect
itself from any potential computer hardware and software difficulties related to
Year 2000 computer problems. The Company intends to complete all corrective
action by June, 1999. The effect on the Company's future results of operations
is not expected to be material.
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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.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed herewith pursuant to Regulation S-B:
NO. DESCRIPTION REFERENCE
3.1 Articles of Incorporation of the Registrant, as amended and restated 3
3.2 Bylaws of Registrant, as amended and restated 3
4.1 Form of Common Stock Certificate 1
4.5 Registration Rights Agreements 2
*4.9 Options issued to Wayne R. Collignon 5
*4.10 Options issued to Dirk D. Anderson 5
*4.11 Amendment to Options issued to Wayne Collignon 6
*4.12 Amendment to Options issued to Dirk D. 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
10.17 Loan documents between National Bank of Arizona and the Registrant 2
*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 5
*10.26 Amendment to Employment Agreement between Registrant and Dirk Anderson 5
10.27 Amendments to Loan document between Norwest Business Credit and Registrant 5
10.28 Amendment to Loan document between Norwest Business Credit and Registrant 6
10.29 Loan document between Registrant and M&I Thunderbird Bank 7
*10.30 Loan document between Registrant and Wayne R. Collignon 8
*10.31 Loan document between Registrant and Dirk D. Anderson 8
10.32 Loan document between M&I Thunderbird Bank and the Registrant 9
(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 Proxy Statement on July 15, 1996
(5) Filed with Form 10-QSB on November 14, 1996
(6) Filed with 10-KSB on June 26, 1997
(7) Filed with 10-QSB on November 14, 1997
(8) Filed with 10-QSB on February 10, 1998
(9) Filed herein
(*) Indicates a compensatory plan or arrangement
(b) Reports on Form 8-K:
No reports were filed on Form 8-K during the quarter ended June 30, 1998.
13
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
RECONDITIONED SYSTEMS, INC.
Date: August 14, 1998 /s/ Wayne R. Collignon
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Wayne R. Collignon, President and CEO
Date: August 14, 1998 /s/ Dirk D. Anderson
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Dirk D. Anderson, CFO
14