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 September 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
-------
RECONDITIONED SYSTEMS, INC.
-----------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
ARIZONA 86-0576290
------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
444 WEST FAIRMONT, TEMPE, ARIZONA 85282
----------------------------------------
(Address of principal executive offices)
602-968-1772
--------------------------
(Issuer's telephone number)
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ].
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of October 30, 1998, the number of
shares outstanding of the Registrant's common stock was 1,473,950.
Item 1
PART 1 - FINANCIAL STATEMENTS
RECONDITIONED SYSTEMS, INC.
UNAUDITED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
2
RECONDITIONED SYSTEMS, INC.
- --------------------------------------------------------------------------------
BALANCE SHEETS
September 30, 1998 and 1997
(Unaudited)
- --------------------------------------------------------------------------------
1998 1997
---------- ----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 836,411 $ 370,443
Accounts receivable - trade, net of allowance
for doubtful accounts of $35,000 and
$47,500, respectively 1,426,217 981,920
Inventory 793,735 1,039,441
Prepaid expenses and other current assets 57,065 39,444
---------- ----------
TOTAL CURRENT ASSETS 3,113,428 2,431,248
PROPERTY AND EQUIPMENT; net of accumulated
depreciation of $361,996 and
$366,278, respectively 152,945 162,748
OTHER ASSETS
Notes receivable - Officers 150,000 --
Other assets 38,591 15,763
---------- ----------
$3,454,964 $2,609,759
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt 13,248 45,075
Accounts payable 422,477 443,781
Customer deposits 38,356 198,783
Accrued expenses and other current liabilities 276,552 222,688
---------- ----------
TOTAL CURRENT LIABILITIES 750,633 910,327
LONG-TERM DEBT, LESS CURRENT MATURITIES -- 13,522
STOCKHOLDERS' EQUITY 2,704,331 1,685,910
---------- ----------
$3,454,964 $2,609,759
========== ==========
3
RECONDITIONED SYSTEMS, INC.
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
For the Three and Six Month Periods Ended September 30, 1998 and 1997
(Unaudited)
- --------------------------------------------------------------------------------
Three Months Ended Six Months Ended
September 30, September 30,
-------------------------- --------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
Sales $ 3,121,374 $ 2,245,816 $ 5,774,466 $ 4,513,178
Cost of sales 2,451,134 1,707,851 4,479,916 3,396,014
----------- ----------- ----------- -----------
Gross profit 670,240 537,965 1,294,550 1,117,164
Selling & administrative expenses 435,879 371,688 828,763 792,157
----------- ----------- ----------- -----------
Income from operations 234,361 166,277 465,787 325,007
----------- ----------- ----------- -----------
Other income (expense):
Interest income 11,153 181 21,594 352
Interest expense (408) (4,565) (1,047) 18,160)
Other 1,124 (815) 2,443 2,687
----------- ----------- ----------- -----------
11,869 (5,199) 22,990 (15,121)
----------- ----------- ----------- -----------
Net income $ 246,230 $ 161,078 $ 488,777 $ 309,886
=========== =========== =========== ===========
Basic earnings per share
(Notes 1 and 3) 0.17 0.11* 0.33 0.21*
=========== =========== =========== ===========
Basic weighted average number
of shares outstanding 1,473,950 1,473,950* 1,473,950 1,473,950*
=========== =========== =========== ===========
Diluted earnings per common
and common equivalent share
(Notes 1 and 3) 0.14 0.10* 0.29 0.19*
=========== =========== =========== ===========
Diluted weighted average number
of shares outstanding 1,700,481 1,654,571* 1,696,210 1,625,729*
=========== =========== =========== ===========
*Restated to give retroactive effect to SFAS No. 128.
4
RECONDITIONED SYSTEMS, INC.
- --------------------------------------------------------------------------------
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED MARCH 31, 1998 AND THE SIX MONTH PERIOD
ENDED SEPTEMBER 30, 1998
(UNAUDITED)
- --------------------------------------------------------------------------------
COMMON COMMON RETAINED TREASURY
STOCK STOCK EARNINGS STOCK
SHARE AMOUNT (DEFICIT) (134 SHARES) TOTAL
--------- ---------- ----------- ------------ -----------
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
Treasury Stock
Retired -- 0 (3,754) 3,754 0
Net income -- 0 488,777 0 488,777
--------- ----------- ----------- ----------- -----------
Balance at
September 30, 1998 1,473,950 $ 4,586,982 $(1,882,651) $ 0 $ 2,704,331
========= =========== ============ =========== ===========
5
RECONDITIONED SYSTEMS, INC.
- --------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
FOR THE THREE AND SIX MONTH PERIODS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
- --------------------------------------------------------------------------------
Three Months Ended Six Months Ended
September 30, September 30,
----------------------- -----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
Cash and cash equivalents
provided by operating
activities $ 183,102 $ 389,566 $ 168,601 $ 710,879
Cash and cash equivalents
used by investing activities (32,560) (7,288) (45,577) (13,507)
Cash and cash equivalents
used by financing activities (9,912) (141,467) (19,644) (469,053)
--------- --------- --------- ---------
Increase in cash and
cash equivalents 140,630 240,811 103,380 228,319
Cash and cash equivalents,
beginning of period 695,781 129,632 733,031 142,124
--------- --------- --------- ---------
Cash and cash equivalents,
end of period $ 836,411 $ 370,443 $ 836,411 $ 370,443
========= ========= ========= =========
6
RECONDITIONED SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
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 six months ended September 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.
- --------------------------------------------------------------------------------
NOTE 2.
REVOLVING LINE OF CREDIT
- --------------------------------------------------------------------------------
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. As
of September 30, 1998, there were no outstanding borrowings on the line of
credit.
7
RECONDITIONED SYSTEMS, INC.
Notes to Financial Statements
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 3.
EARNINGS PER SHARE
- --------------------------------------------------------------------------------
Three Months Ended Six Months Ended
September 30, September 30,
----------------------- ----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
BASIC EPS
Net Income $ 246,230 $ 161,078 $ 488,777 $ 309,886
========== ========== ========== ==========
Weighted average number
of shares outstanding 1,473,950 1,473,950 1,473,950 1,473,950
========== ========== ========== ==========
Basic earnings per share $ 0.17 $ 0.11 $ 0.33 $ 0.21
========== ========== ========== ==========
DILUTED EPS
Net Income $ 246,230 $ 161,078 $ 488,777 $ 309,886
========== ========== ========== ==========
Weighted average number
of shares outstanding 1,473,950 1,473,950 1,473,950 1,473,950
Effect of dilutive securities:
Stock options 226,531 180,621 222,260 151,779
---------- ---------- ---------- ----------
Total common shares + assumed
conversions 1,700,481 1,654,571 1,696,210 1,625,729
========== ========== ========== ==========
Per-Share Amount $ 0.14 $ 0.10 $ 0.29 $ 0.19
========== ========== ========== ==========
8
RECONDITIONED SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 4.
SUBSEQUENT EVENTS
- --------------------------------------------------------------------------------
On October 30, 1998, the Company's Board of Directors signed a definitive merger
agreement with Cort Investment Group, Inc., a privately-owned Texas corporation
d/b/a Contract Network ("CNI"). Under the terms of the agreement, CNI will
acquire RSI for $8,575,000 in cash. CNI has been a leader in the remanufactured
modular office furniture industry since 1988, specializing in the reconditioning
and marketing of workstations originally manufactured by Steelcase and Herman
Miller. The acquisition, scheduled for closing in early 1999, is subject to,
among other things, RSI meeting certain financial conditions, the completion of
satisfactory due diligence by CNI, approval of the transaction by relevant
regulatory agencies and RSI shareholder approval. The Company is currently
drafting a proxy statement which is expected to be filed with the SEC pursuant
to the requirements of the Securities Exchange Act of 1934 during the month of
November, 1998.
9
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, and 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 and Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998.
RESULTS OF OPERATIONS
FOR THE QUARTERS ENDED SEPTEMBER 30, 1998 AND 1997
Reconditioned Systems, Inc. (the "Company") reported net income for the three
month period ended September 30, 1998 (hereinafter the "reporting quarter") of
$246,230 as compared to $161,078 for the three month period ended September 30,
1997 (hereinafter the "comparable quarter"). This $85,152 or 52.9% increase is
primarily a result of increased sales volume.
The Company reported sales for the reporting quarter of $3,121,374 as compared
to $2,245,816 for the comparable quarter, resulting in an increase of $875,558
or 39%. This increase was primarily attributable to a significant new wholesale
contract and the addition of new retail sales representatives.
Wholesale sales totaled $2,022,024 for the reporting quarter, an increase of
$608,186 or 43% over the comparable quarter. This increase is primarily
attributable to the continued success of RSI's wholesale marketing plan which
was implemented during fiscal 1998. In addition to actively pursuing new
dealer/broker relationships, the wholesale division was awarded an exclusive
sales contract to provide modular furniture in excess of $1 million over a
period of 18-24 months. The first phase of this contract began in late June with
$135,451 in sales. Sales under this contract totaled $336,426 for the reporting
quarter.
Retail sales in the Phoenix and Tucson markets totaled $1,099,350 during the
reporting quarter, an increase of $267,372 or 32% over the comparable quarter.
During the quarter ended June 30, 1998, the Company hired and trained additional
new sales representatives to add to the existing sales staff. The Company has
developed a formal training program designed to equip new salespeople with the
proper training and product knowledge. While the Company believes the 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.
10
The Company's gross profit margin for the reporting quarter was 21.5%, as
compared to a gross profit margin of 23.9% for the comparable quarter. This 2.4%
decrease in the gross margin was primarily attributed to higher product costs
and lower wholesale pricing. Recent tougher competition with newly manufactured
"bargin" product-lines has driven profit margins down. In addition, the
Company's gross margin was negatively impacted by changes in customer demand
which required the Company to supplement and modify its inventory.
The Company's selling and administrative expenses were reduced from 16.6% of
sales in the comparable quarter to 14.0% for the reporting quarter. The 2.6%
decrease was primarily a result of the significant increase in sales.
The Company's other income and expenses, which consists primarily of interest
income and expense, improved by $17,068 from the comparable quarter to the
reporting quarter. 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. At September
30, 1998, the Company carried a zero dollar balance on its line of credit.
FOR THE SIX MONTH PERIOD ENDED SEPTEMBER 30, 1998 AND 1997
The Company reported net income of $488,777 for the six month period ended
September 30, 1998 (hereinafter the "reporting period") as compared to $309,886
for the six month period ended September 30, 1997 (hereinafter the "comparable
period"), an increase of 57.7%.
Sales revenues for the reporting period totaled $5,774,466, a $1,261,288 or 28%
increase over the comparable period. Improved wholesale revenues accounted for
86% of the total increased sales.
Wholesale sales for the reporting period totaled $3,660,608, a $1,090,133 or
42.4% increase over the comparable period. The wholesale division continues to
actively pursue sales growth by targeting the western region of the United
States and has been successful in breaking into some of these markets.
The Company generated $2,113,858 in retail sales during the reporting period.
This represents a $171,156 or 8.81% increase over the comparable period. The
Company continues to pursue growth in the Phoenix and Tucson markets through
advertising and maintaining a well-trained and hard-working sales staff.
Despite the increased revenues, the Company's gross profit margin fell from
24.8% in the comparable period to 22.4% in the reporting period. This was due to
the higher product costs and lower profits margins as a result of increased
competition, changes to the product-mix and greater demand for newer Haworth
product-lines.
Selling and administrative expenses as a percentage of sales improved by 3.3%,
from 17.6% in the comparable period to 14.3% during the reporting period. This
was a result of the overall lower percentage of fixed expenses to increased
sales revenues.
11
The Company generated an additional $38,111 over the comparable period in other
income by eliminating interest expense and increasing interest income as
discussed above.
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 periods ended September 30, 1998 and 1997, the Company
benefited from these loss carryforwards in the approximate amounts of
$195,000and $124,000, respectively.
FINANCIAL CONDITION AND LIQUIDITY
As of September 30, 1998, the Company's cash and cash equivalents totaled
$836,411. In addition, the Company's net worth and working capital totaled
$2,704,331 and $2,362,795, respectively. The Company has no material long-term
debt and $1,000,000 available on its line of credit through M&I Thunderbird
Bank.
The Company reported cash flows from operations of $168,601 during the reporting
period. This was primarily a result of the increase in sales and improved
results of operations as discussed above. The Company's sales growth resulted in
increasing the Company's accounts receivable balances by $464,095 at September
30, 1998 as compared to March 31, 1998. The Company's collection rate improved
from 40 days in the comparable period to 38 days in the reporting period. The
Company's long-term goal is to maintain a collection rate at or near 30 days.
The increased accounts receivables were offset by the Company's strong operating
results and increased inventory turns during the reporting period. Annualized
inventory turns for the reporting period were 10.4, as compared to 6.75 for the
year ended March 31, 1998. This improvement was primarily a result of the
Company's ability to increase sales without increasing inventory levels.
However, management believes any additional sales increases may require the
Company to increase current inventory levels.
YEAR 2000 COMPLIANCE
The Company has completed its assessment of Year 2000 compliance issues and is
currently investigating new computer accounting software programs. The Company
estimates the cost to replace its current hardware and software will total
approximately $100,000 and will take between six and nine months to implement. A
contingeny plan has been adopted which would upgrade the Company's current
systems to Year 2000 Compliance. This plan would require 30 to 60 days to
implement at a cost of approximately $50,000. The Company intends to fund the
project from current cash reserves.
SUBSEQUENT EVENTS
On October 30, 1998, the Board of Directors of Reconditioned Systems, Inc. (RSI)
signed a definitive merger agreement with Cort Investment Group, Inc., a
privately owned Texas corporation d/b/a Contract Network ("CNI"). Under the
terms of the agreement, CNI will acquire RSI for $8,575,000 in cash. CNI has
been a leader in the remanufactured modular office furniture industry since
12
1988, specializing in the reconditioning and marketing of workstations
originally manufactured by Steelcase and Herman Miller. The acquisition,
scheduled for closing in early 1999, is subject to, among other things, RSI
meeting certain financial conditions, the completion of satisfactory due
diligence by CNI, approval of the transaction by relevant regulatory agencies
and RSI shareholder approval. The Company is currently drafting a proxy
statement which is expected to be filed with the SEC pursuant to the
requirements of the Securities Exchange Act of 1934 during the month of
November, 1998.
13
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
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting was held on August 14, 1998. Shareholders voted on
the appointment of the Company's auditors and election of the Company's Board of
Directors. The following table provides the voting results:
Voted Broker
Proposal Shares Eligible Voted For Against Abstentions Non-Votes
- --------------------------------------------------------------------------------
1 - Election of
directors:
- --------------------------------------------------------------------------------
Wayne Collignon 1,473,950 1,058,761 0 0 0
- --------------------------------------------------------------------------------
Dirk Anderson 1,473,950 1,058,761 0 0 0
- --------------------------------------------------------------------------------
Scott Ryan 1,473,950 1,058,761 0 0 0
- --------------------------------------------------------------------------------
Susan Zinga 1,473,950 691,022 0 0 0
- --------------------------------------------------------------------------------
Warren Palitz 1,473,950 782,928 0 0 0
- --------------------------------------------------------------------------------
2- Appointment
of auditors 1,473,950 1,057,660 0 1,101 0
- --------------------------------------------------------------------------------
ITEM 5. OTHER INFORMATION
None.
14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) 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
(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 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 September 30, 1998.
15
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: November 13, 1998 /s/ Wayne R. Collignon
-------------------------------------
Wayne R. Collignon, President and CEO
Date: November 13, 1998 /s/ Dirk D. Anderson
-------------------------------------
Dirk D. Anderson, CFO
16