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, 1999
[ ] 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)
480-968-1772
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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 10, 2000, the number
of shares outstanding of the Registrant's common stock was 1,323,594.
Transitional Small Business Disclosure Format. Yes [ ] No [X].
ITEM 1
PART 1 - FINANCIAL STATEMENTS
RECONDITIONED SYSTEMS, INC.
Unaudited Financial Statements
December 31, 1999
2
RECONDITIONED SYSTEMS, INC.
BALANCE SHEETS
December 31, 1999 and 1998
(Unaudited)
1999 1998
---- ----
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 756,455 $1,091,614
Accounts receivable - trade, net of allowance
for doubtful accounts of approximately
$32,000 and 31,000, respectively 2,256,085 1,225,790
Inventory 1,038,446 922,247
Prepaid expenses and other current assets 280,897 97,568
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TOTAL CURRENT ASSETS 4,331,883 3,337,219
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PROPERTY AND EQUIPMENT, NET: 270,357 144,390
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OTHER ASSETS:
Notes receivable - officer 75,000 150,000
Other 53,382 38,896
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128,382 188,896
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TOTAL ASSETS $4,730,622 $3,670,505
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 0 $ 3,134
Accounts payable 933,478 448,762
Customer deposits 33,285 20,888
Accrued severance charges (Note 3) 90,000 0
Accrued expenses and other current liabilities 324,198 215,780
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TOTAL CURRENT LIABILITIES 1,380,961 688,564
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STOCKHOLDERS' EQUITY:
Common stock, no par value; 20,000,000 shares
shares authorized $4,587,580 $4,586,982
Accumulated deficit (875,814) (1,605,041)
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3,711,766 2,981,941
Less: treasury stock, 147,348 and 0 shares
respectively, at cost (362,105) 0
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3,349,661 2,981,941
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $4,730,622 $3,670,505
========== ==========
3
RECONDITIONED SYSTEMS, INC.
STATEMENTS OF OPERATIONS
For the Three and Nine Month Periods Ended December 31, 1999 and 1998
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1999 1998 1999 1998
---- ---- ---- ----
Sales $3,066,267 $2,543,315 $7,822,153 $8,317,781
Cost of sales 2,207,686 1,919,714 5,758,948 6,399,630
---------- ---------- ---------- ----------
Gross profit 858,581 623,601 2,063,205 1,918,151
Selling & administrative expenses 525,604 360,661 1,376,566 1,189,424
Severance charge 0 0 292,984 0
---------- ---------- ---------- ----------
Income from operations 332,977 262,940 393,655 728,727
Other income (expense):
Interest income 15,115 13,852 50,361 35,446
Interest expense 0 (205) 0 (1,252)
Other 625 1,023 782 3,466
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Net income $ 348,717 $ 277,610 $ 444,798 $ 766,387
========== ========== ========== ==========
Basic earnings per share (Notes 1 and 3) $ 0.26 $ 0.19 $ 0.32 $ 0.52
========== ========== ========== ==========
Basic weighted average number
of shares outstanding 1,340,765 1,473,950 1,383,478 1,473,950
========== ========== ========== ==========
Diluted earnings per common
and common equivalent share
(Notes 1 and 3) $ 0.24 $ 0.16 $ 0.29 $ 0.45
========== ========== ========== ==========
Diluted weighted average number
of shares outstanding 1,456,567 1,702,691 1,557,870 1,698,491
========== ========== ========== ==========
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RECONDITIONED SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
For the Year Ended March 31, 1999 and the Nine Month Period Ended
December 31, 1999
(Unaudited)
| COMMON COMMON RETAINED
| STOCK STOCK EARNINGS TREASURY
| SHARES AMOUNT (DEFICIT) STOCK TOTAL
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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
|
PURCHASE OF |
TREASURY SHARES | (150,000) -- -- (368,412) (368,412)
|
TRANSFER OF |
SHARES TO ESOP |
PLAN | 2,652 598 -- 6,307 6,905
|
NET INCOME | -- -- 444,798 -- 444,798
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|
BALANCE AT |
DECEMBER 31, 1999 | 1,326,468 $4,587,580 $ (875,814) $(362,105) $3,349,661
|==========================================================================
5
RECONDITIONED SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
For the Three and Nine Month Periods Ended December 31, 1999 and 1998
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
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1999 1998 1999 1998
---- ---- ---- ----
Cash and cash equivalents provided/(used) by
operating activities $ (597,596) $ 270,085 $ 67,855 $ 438,686
Cash and cash equivalents used by investing
activities (69,714) (3,874) (133,702) (49,451)
Cash and cash equivalents used by financing
activities (99,805) (11,008) (281,023) (30,652)
----------- ----------- ----------- -----------
Increase/(Decrease) in cash and cash
equivalents (767,115) 255,203 (346,870) 358,583
Cash and cash equivalents at beginning of
period 1,523,570 836,411 1,103,325 733,031
----------- ----------- ----------- -----------
Cash and cash equivalents at end of period $ 756,455 $ 1,091,614 $ 756,455 $ 1,091,614
=========== =========== =========== ===========
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, 1999
are not necessarily indicative of the results that may be expected for the
entire year ending March 31, 2000. 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 the
financial statements and notes thereto included in the Company's Form
10-KSB for the year ended March 31, 1999.
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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RECONDITIONED SYSTEMS, INC.
Notes to Financial Statements
(Unaudited)
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NOTE 2.
EARNINGS PER SHARE
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THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
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1999 1998 1999 1998
---- ---- ---- ----
BASIC EPS
Net Income $ 348,717 $ 277,610 $ 444,797 $ 766,387
========== ========== ========== ==========
Weighted average number of shares outstanding 1,340,765 1,473,950 1,383,478 1,473,950
Basic earnings per share $ 0.26 $ 0.19 $ 0.32 $ 0.52
========== ========== ========== ==========
DILUTED EPS
Net Income $ 348,717 $ 277,610 $ 444,797 $ 766,387
========== ========== ========== ==========
Weighted average number of shares outstanding 1,340,765 1,473,950 1,383,478 1,473,950
Effect of dilutive securities:
Stock options 115,802 228,741 174,392 224,541
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Total common shares + assumed conversions 1,456,567 1,702,691 1,557,870 1,698,491
========== ========== ========== ==========
Per Share Amount $ 0.24 $ 0.16 $ 0.29 $ 0.45
========== ========== ========== ==========
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NOTE 3.
SEVERANCE CHARGES
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Effective September 30, 1999, the Board of Directors entered into a Severance
Agreement with and accepted the resignation of Wayne R. Collignon, the Company's
President and Chief Executive Officer (CEO). Under the terms of this agreement,
the Company agreed to pay Mr. Collignon $430,484 in exchange for 50,000 shares
of the Company's Common Stock and options to purchase 100,000 shares of the
Company's Common Stock held by Mr. Collignon. The agreement is payable in one
installment of $260,000 paid on November 10, 1999, through the relief of a note
and interest receivable owed by Mr. Collignon to the Company, and a final
payment of $90,000 which is currently in dispute.
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ITEM 2. 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 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 successfully
diversify its operations, the risk that the Company may not see increased sales
and profitability, and the risk that the stock market may not recognize the
Company's financial results and potential for future prospects. 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, including
the Company's Annual Report on Form 10-KSB for the fiscal year ended March 31,
1999.
RESULTS OF OPERATIONS
SALES REVENUE
The Company reported sales revenue of $3,066,267 for the quarter ended December
31, 1999 (hereinafter the reporting quarter) as compared to $2,543,315 for the
quarter ended December 31, 1998 (hereinafter the comparable quarter), an
increase of $522,952 or 20.6%. This increase was due to improved retail sales.
Sales revenues for the nine month period ended December 31, 1999 (hereinafter
the reporting period) totaled $7,822,153, down 6% over the nine month period
ended December 31, 1998 (hereinafter the comparable period). This decrease was
primarily attributed to lower wholesale sales.
Retail sales totaled $1,719,398 during the reporting quarter, up 74.9% over the
comparable quarter. Retail sales for the reporting period totaled $3,663,813, an
increase of 18.3% over the comparable period. Management believes these
increases are a result of the Company's focus during the current fiscal year on
building a stronger retail business operating as "Total Office Interiors." This
was achieved through the addition of the Company's new sales manager in July
1999, increased commitment to improving customer service and sales support, the
continued development of qualified sales personnel and improvements to the
Company's retail showroom facilities. These efforts have begun to pay off
through increased sales, particularly repeat and referral business.
Wholesale sales totaled $1,346,869 for the reporting quarter and $4,158,340 for
the reporting period, down 13.7% and 20.4% over the comparable quarter and
comparable period, respectively. These decreases were primarily due to increased
competitive pressures from new "bargain" product-lines. The Company implemented
a new pricing and freight program designed to counter the effects of this
increased competition. For further discussion, see "Forward Looking Statements"
below.
GROSS MARGIN
The Company's gross profit margin for the reporting quarter was 28%, as compared
to 24.5% for the comparable quarter, a 3.5% improvement. The gross margin for
the reporting period was 26.4% versus 23.1% in the comparable period, a 3.3%
improvement. These improvements were primarily attributable to an increased
percentage of retail to wholesale sales and lower product costs. Retail sales
comprised 56% of total sales during the reporting quarter and 47% during the
reporting period, up 17.4% from the comparable quarter and 9.6% from the
comparable period. As retail margins are typically higher than those charged on
wholesale sales, this change in the retail/wholesale mix accounts for a portion
of the improved margins. In addition, increased supply of used Haworth product
available on the aftermarket has driven the Company's product costs down.
9
OPERATING EXPENSES
The Company's selling and administrative expenses increased from 14% of sales in
the comparable quarter to 17% for the reporting quarter. This increase is
primarily attributed to the change in the retail/wholesale mix and the higher
selling expenses associated with retail sales as compared to wholesale sales.
The Company reported selling and administrative expenses for the comparable
period of 14.3% versus 21.3% for the reporting period. In addition to the higher
retail selling expenses, this 7% increase is also attributed to a one time
severance charge of $292,984 reported during the previous quarter and additional
expenditures related to the Company's computer conversion (see "Year 2000
Compliance" below).
OTHER INCOME AND EXPENSES
The Company's other income and expenses, which consists primarily of interest
income and expense, improved by $1,070 from the comparable quarter to the
reporting quarter and by $13,483 from the comparable period to the reporting
period. These improvements were primarily attributable to increased interest
income generated from the Company's current cash reserves.
FORWARD LOOKING STATEMENTS
The Company continues to face increasing competition with "budget" newly
manufactured product-lines. These product-lines have had a significant impact on
the Company wholesale sales. Management has responded to this competitive
pressure by implementing a new pricing structure for the wholesale market.
Beginning July 1, 1999, the Company's wholesale department began offering deeper
discounts and implemented a new freight policy modeled after those offered by
new furniture manufacturers. In addition, the Company has re-directed its
wholesale marketing efforts, focusing on strengthening and further developing
relationships with the network of dealers who have consistently been successful
in marketing the Company's products. This marketing plan includes, but is not
limited to, joint venture advertising and improved dealer support services.
However, there can be no assurance that the new pricing structure and new
wholesale marketing efforts will enable the Company to compete successfully with
the "budget" newly manufactured product-lines on a wholesale level.
In an effort to counter the effects of deeper wholesale discounts on the
Company's gross margin and pursue long-term growth, management implemented a new
retail marketing program. Beginning July 1, 1999, the Company instituted its new
retail sales expansion program. The Company hired a sales manager, added
additional sales personnel and began tenant improvements to its existing
facility, which included remodeling and expansion of the Company's showroom and
office space. The primary focus of this program is to change the Company's image
in the Phoenix marketplace from that of a used furniture refurbisher to that of
a full service office furniture dealership. The Company began doing business
under the new trade name of "Total Office Interiors" in October 1999. Along with
the new trade name, the Company's new retail sales showroom and remodeled office
space within its existing Tempe facility was completed during October 1999. In
addition to showcasing and marketing the Company's refurbished systems
furniture, the space now features the Company's new expanded product-line,
including files, chairs, desks and new systems furniture manufactured by
Teknion. Management believes this name change and expanded product line will
help potential customers to identify the Company's line of business and position
the Company as a source for all office furniture needs, further building on the
momentum generated by the personnel changes within the retail department.
However, the full service office furniture market is highly competitive, and
there can be no assurance that the new retail marketing program will lead to
improved margins or long-term growth.
10
INCOME TAXES
During the periods ended December 31, 1999 and 1998, the Company's taxable net
income was fully offset by net operating loss carryforwards. As a result the
Company incurred no income tax expense during these periods.
FINANCIAL CONDITION AND LIQUIDITY
As of December 31, 1999, the Company's cash and cash equivalents totaled
$756,455. In addition, the Company's net worth and working capital totaled
$3,349,661 and $2,950,922, respectively. The Company has no 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 $67,855 during the reporting
period. This was primarily a result of operating income reduced by cash flows
for severance charges paid. The Company's accounts receivable, inventory and
prepaid expenses all increased during the reporting period, however they were
partially offset by increased accounts payable. Management attributes these
increases to timing issues, which should be self-correcting during the next
quarter. The Company used approximately $134,000 for capital expenditures and it
used approximately $281,000 to finance the purchase of treasury shares.
Cash provided by operations in the near future should closely follow operating
income. Management believes current cash reserves and cash flows from operations
will be adequate to fund the needs of the Company through the end of the next
fiscal year without the need for outside financing.
YEAR 2000 COMPLIANCE
The "Year 2000 problem" arose because many 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 replaced its computer hardware and accounting software program to
prevent any potential Year 2000 problems and to improve administrative
efficiency. As of December 31, 1999 the total expenditures related to the Year
2000 project were approximately $105,000. As of February 14, 2000, the Company
has not experienced any significant problems related to Year 2000.
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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 AND USE OF PROCEEDS
None.
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 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
10.33 Loan document between M&I Thunderbird Bank and the Registrant 6
*10.34 Agreement between Wayne R. Collignon and Registrant 7
(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 September 26, 1997
(6) Filed with 10-QSB on August 11, 1999
(7) Filed with 10-QSB on November 16, 1999
(*) Indicates a compensatory plan or arrangement
(b) Reports on Form 8-K:
No reports were filed on Form 8-K during the quarter ended December 31, 1999.
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: February 14, 2000 /s/ SCOTT W. RYAN
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Scott Ryan, CEO
Date: February 14, 2000 /s/ DIRK D. ANDERSON
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Dirk D. Anderson, COO
14