<PAGE> 1
FORM 10-QSB
U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For Quarter Ended: DECEMBER 31, 1998
Commission File Number: 0-23100
RECONVERSION TECHNOLOGIES, INC.
(Exact name of small business issuer as specified in its charter)
DELAWARE 22-2649848
(State of Incorporation) (IRS Employer ID No)
2 HENDERSONVILLE ROAD, SUITE E, ASHEVILLE, NORTH CAROLINA 28803
(Address of principal executive office)
(828) 255-0307
(Issuer's telephone number)
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 .
--- ---
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes No X .
--- ---
The number of shares outstanding of registrant's common stock, par value $.0001
per share, as of December 31, 1998 was 11,135,749.
Transitional Small Business Disclosure Format (Check one): Yes No X .
--- ---
<PAGE> 2
RECONVERSION TECHNOLOGIES, INC.
INDEX
<TABLE>
<CAPTION>
Page
No.
----
<S> <C>
Part I. Financial Information
Item 1. Balance Sheet - December 31, 1998 (unaudited) and June 30, 1998 (audited) 3
Statement of Operations - 4
Three and Six Months Ended December 31, 1998 and 1997
Statement of Stockholders' Deficit - 5
Six Months Ended December 31, 1998
Statements of Cash Flows - 6-7
Six Months Ended December 31, 1998 and 1997
Notes to Financial Statements - 8-10
Six Months Ended December 31, 1998 and 1997
Item 2. Managements Discussion and Analysis of Financial Condition 11-12
and Results of Operations
Part II. Other Information 13
</TABLE>
2
<PAGE> 3
RECONVERSION TECHNOLOGIES, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
December 31, June 30,
1998 1998
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 127,460 $ 124,746
Marketable equity securities less allowance of $33,362 and $46,141 13,911 9,780
Accounts receivable less allowance of $12,000 and $12,000 64,602 90,933
Due from employees 47,605 47,605
Due from related parties 39,000 29,000
Prepaid expenses 5,878 17,128
Deferred income taxes 106,004 61,647
----------- -----------
Total current assets 404,460 380,839
Property and equipment, net 205,811 161,776
Due from Liquidating Trust of Reconversion Technologies of Texas, Inc. 100,000 100,000
Goodwill, less accumulated amortization of $6,812 and $3,668 87,510 90,654
----------- -----------
$ 797,781 $ 733,269
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current installments of long-term debt $ 26,249 $ 24,912
Current installments of capital leases payable 129,084 $ 116,450
Accounts payable 151,281 112,476
Unresolved bankruptcy claims 7,951 7,951
Obligations to be paid with common stock 1,782,186 3,226,245
Accrued expenses 26,557 26,557
Deferred gain on sale-leaseback -- 17,548
----------- -----------
Total current liabilities 2,123,308 3,532,139
Long-term debt and obligations under capital leases less current installments 99,368 73,269
Deferred income tax liability 29,236 29,236
STOCKHOLDERS' DEFICIT
Common stock, $.0001 par value. Authorized 200,000,000 shares; issued and 1,114 1,026
outstanding 11,135,749 and 10,260,749 shares
Paid-in capital 650,006 615,093
Retained earnings (deficit) (323,065) (291,249)
Stock issuable under bankruptcy plan (1,782,186) (3,226,245)
----------- -----------
Total stockholders' deficit (1,454,131) (2,901,375)
----------- -----------
$ 797,781 $ 733,269
=========== ===========
</TABLE>
See accompanying notes to financial statements.
3
<PAGE> 4
RECONVERSION TECHNOLOGIES, INC.
STATEMENT OF OPERATIONS
THREE AND SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
SALES AND REVENUES $ 468,301 $ 448,102 $ 983,102 $ 877,949
COST OF SALES 104,963 114,595 241,520 214,693
------------ ------------ ------------ ------------
GROSS PROFIT 363,338 333,507 741,582 663,256
OTHER EXPENSE (INCOME)
Selling, general and administrative expense 405,847 276,431 828,325 563,326
Interest expense 7,883 6,453 15,223 8,684
Gain on sale-leaseback (7,019) -- (17,548) --
Sale of marketable securities 4,865 -- 4,865 --
Other income (332) -- (332) --
Unrealized (gain) loss on marketable equity securities (10,965) 30,865 (12,778) 39,574
------------ ------------ ------------ ------------
400,279 313,749 817,755 611,584
------------ ------------ ------------ ------------
EARNINGS (LOSS) BEFORE INCOME TAXES (36,941) 19,758 (76,173) 51,672
DEFERRED INCOME TAX EXPENSE (BENEFIT) (22,877) 4,000 (44,357) 15,000
------------ ------------ ------------ ------------
NET EARNINGS (LOSS) (14,064) 15,758 (31,816) 36,672
============ ============ ============ ============
NET EARNINGS (LOSS) PER SHARE $ (0.00) $ 0.00 $ (0.00) $ 0.00
============ ============ ============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING 10,844,082 10,243,249 10,552,416 10,243,249
============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
4
<PAGE> 5
RECONVERSION TECHNOLOGIES, INC.
STATEMENT OF STOCKHOLDERS' DEFICIT
SIX MONTHS ENDED DECEMBER 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Stock Issuable
Common Stock Paid-in Accumulated Under
Shares Par Value Capital Deficit Bankruptcy Plan Total
------ --------- ------- ------- --------------- -----
<S> <C> <C> <C> <C> <C> <C>
BALANCE, June 30, 1998 10,260,749 $ 1,026 $ 615,093 $ (291,249) $(3,226,245) $(2,901,375)
Common stock transferred for
obligations pursuant to
bankruptcy plan 1,444,059 1,444,059
Common stock issued for
directors fees 875,000 88 34,913 35,001
Net income (loss) (31,816) (31,816)
----------- ----------- ----------- ----------- ----------- -----------
BALANCE, December 31, 1998 11,135,749 $ 1,114 $ 650,006 $ (323,065) $(1,782,186) $(1,454,131)
=========== =========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
5
<PAGE> 6
RECONVERSION TECHNOLOGIES, INC.
STATEMENT OF CASH FLOWS
SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss) $ (31,816) $ 36,672
Adjustments to reconcile net earnings (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 31,144 22,500
Deferred income taxes (44,357) 15,000
Amortization of deferred gain on sale-leaseback (17,548) --
Common stock issued for services 35,000 --
Marketable securities (4,132) (14,975)
Accounts receivable 26,332 (3,684)
Prepaid expenses 11,250 --
Accounts payable and accrued expenses 38,804 (103,554)
--------- ---------
Net cash provided by (used in) operating activities 44,677 (48,041)
--------- ---------
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES
Capital expenditures (593) (2,360)
--------- ---------
Net cash provided by (used in) investing activities (593) (2,360)
--------- ---------
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES
Proceeds from sale-leaseback transaction -- 120,000
Repayment of long-term debt and capital leases (31,370) (14,211)
Loans to related parties (10,000) (71,000)
Loans to employees -- (75,280)
--------- ---------
Net cash provided by (used in) financing activities (41,370) (40,491)
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,714 (90,892)
CASH AND CASH EQUIVALENTS, beginning of period 124,746 165,285
--------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 127,460 $ 74,393
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
Continued
6
<PAGE> 7
RECONVERSION TECHNOLOGIES, INC.
STATEMENT OF CASH FLOWS
SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997
(UNAUDITED)
(CONTINUED)
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest and income taxes are as follows:
Interest $ 15,223 $ 8,684
Income taxes $ -- $ --
Noncash investing and financing activities are as follows:
Common stock transferred for liabilities pursuant to bankruptcy plan $1,444,059
Acquisition of lab equipment in exchange for a capital lease obligation $ 71,442
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE> 8
RECONVERSION TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997
(UNAUDITED)
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(1) PRINCIPLES OF CONSOLIDATION AND NATURE OF BUSINESS - The financial
statement of Reconversion Technologies, Inc. (the "Company") includes
the accounts of Reconversion Technologies, Inc., which is a holding
company principally engaged in acquiring and developing businesses and
the accounts of its wholly owned subsidiary, Keystone Laboratories,
Inc. ("KLI"). Prior to its acquisition of KLI, the Company had three
wholly-owned subsidiaries: Reconversion Technologies of Texas, Inc., a
Texas Corporation, organized on February 24, 1992 ("RETEX"),
Reconversion Products, Inc. ("RPI"), formerly Thomas Engineering, Inc.,
a Georgia Corporation organized on October 9, 1992, and Spectrum
Recycling Technologies, Inc. ("Spectrum"), a New York Corporation.
On March 23, 1995, the Company voluntarily filed for bankruptcy
protection in the United States Bankruptcy Court for the Northern
District of Oklahoma. During the pendency of the bankruptcy, RETEX,
Spectrum and RPI discontinued operations. Spectrum and RPI have been
liquidated and the remaining asset of RETEX, the Brenham Plant
facility, located in Brenham, Texas, is discussed in the Plan of
Reorganization.
On November 13, 1997, the Company was formally reorganized pursuant to
a confirmed Bankruptcy Plan of Reorganization. As a result, the Company
acquired 100% of the issued and outstanding common stock of Keystone
Laboratories, Inc. ("KLI"), a Delaware corporation organized on July
20, 1987. KLI is a forensic urine drug screening and confirmatory
testing laboratory. For accounting purposes, the acquisition has been
treated as the acquisition of KLI by the Company with KLI as the
acquiror (reverse acquisition). The historical financial statements
prior to December 1, 1997 are those of KLI.
The financial statements included in this report have been prepared by
the Company pursuant to the rules and regulations of the Securities and
Exchange Commission for interim reporting and include all adjustments
(consisting only of normal recurring adjustments) which are, in the
opinion of management, necessary for a fair presentation. These
financial statements have not been audited.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such
rules and regulations for interim reporting. The Company believes that
the disclosures contained herein are adequate to make the information
presented not misleading. However, these financial statements should be
read in conjunction with the financial statements and notes thereto
included in the Company's Annual Report for the year ended June 30,
1998, which is included in the Company's Form 10-KSB for the year ended
June 30, 1998. The financial data for the interim periods presented may
not necessarily reflect the results to be anticipated for the complete
year. Certain reclassifications of the amounts presented for the
comparative period have been made to conform to the current
presentation.
(2) MARKETABLE EQUITY SECURITIES - Marketable equity securities are
comprised of trading securities held for short-term investment purposes
and are stated at fair value, with the change in fair value during the
period included in earnings.
8
<PAGE> 9
(3) MACHINERY AND EQUIPMENT - Owned machinery and equipment are stated
at cost and depreciated using the straight-line method over the
estimated useful lives of the respective assets. Machinery and
equipment under capital leases are stated at the lower of the present
value of minimum lease payments at the beginning of the lease term or
fair value at the inception of the lease and are amortized over the
lesser of the lease term or the estimated useful lives of the related
assets.
(4) INCOME TAXES - Deferred income taxes are recognized for income and
expense items that are reported for financial purposes in different
years than for income tax purposes.
(5) NET EARNINGS PER SHARE - Net earnings per share amounts are
computed using the weighted average number of shares outstanding during
the period. Fully diluted earnings per share is presented if the
assumed conversion of common stock equivalents results in material
dilution.
B. MARKETABLE SECURITIES
As of December 31, 1998, the Company has an investment in marketable
equity securities that are classified as trading securities. As of
December 31, 1998 the cost of $47,274 exceeded the fair value of the
securities by $33,362. Income in the amount of $12,778 has been
recognized to account for the change in value of the marketable
securities during the six-month period ended December 31, 1998. A loss
in the amount of $39,574 was recognized in the corresponding prior year
period. The Company recognized a loss on the sale of a portion of their
marketable securities in the amount of $4,865 during the six months
ended December 31, 1998.
C. CAPITAL LEASES AND LONG TERM OBLIGATIONS
During the six months ended December 31, 1998, the Company reduced
capital leases and other long-term obligations by $31,370. During the
three months ended December 31, 1997, the Company entered into a
sale-leaseback transaction which provided net proceeds in the amount of
$120,000.
D. INCOME TAXES
The Company follows SFAS No. 109, "Accounting for Income Taxes".
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. SFAS No. 109 requires that a valuation allowance be
established to reduce deferred tax assets to the amount that is more
likely than not to be realized.
Deferred income taxes result primarily from temporary differences in
recognizing net operating losses for tax and financial reporting
purposes.
Income tax expense (benefit) for the six months ended December 31, 1998
and 1997 consisted of deferred taxes in the amounts of $(44,357) during
the six months ended December 31, 1998 and $15,000 during the six
months ended December 31, 1997.
9
<PAGE> 10
Actual income tax expense (benefit) applicable to earnings (loss)
before income taxes is reconciled with the "normally expected" federal
income tax expense (benefit) as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
"Normally expected" income tax (benefit) $(25,898) 17,568
Increase (decrease) in taxes resulting from:
State income taxes, net of Federal income
tax effect (7,170) 3,953
Change in valuation allowance (11,289) --
Other -- (6,521)
-------- --------
Actual income tax expense (benefit) $(44,357) 11,000
-------- --------
</TABLE>
The deferred income tax assets and liabilities at September 30, 1998
are comprised of the following:
<TABLE>
<CAPTION>
CURRENT NONCURRENT
<S> <C> <C>
Allowance for uncollectible accounts receivable $ 4,998 --
Allowance for unrealized loss on marketable
Securities 13,895 --
Net operating loss carryforwards 101,005 1,791,867
----------- -----------
119,898 1,791,867
Less valuation allowance (13,894) (1,791,867)
----------- -----------
Deferred income tax asset 106,004 --
Deferred income tax liability - asset basis -- (29,236)
----------- -----------
Net deferred income tax assets (liabilities) $ 106,004 (29,236)
----------- -----------
</TABLE>
E. RIGHTS TO PURCHASE STOCK
As of December 31, 1998, there were Class A warrants issued which allow
the purchase of 1,624,172 shares of the common stock of the Company at
$1.00 per share until March 15, 1999, Class B warrants issued which
allow the purchase of 1,475,973 shares of the common stock of the
Company at $1.00 per share until June 15, 1999 and Class C warrants
issued which allow the purchase of 17,500 shares of the common stock of
the Company at $1.75 per share until September 15, 1999. There were no
warrants exercised during the six months ended December 31, 1998.
F. RELATED PARTY TRANSACTIONS
The Company made loans to a major shareholder in the amount of $10,000
during the six months ended December 31, 1998, which increased the
total due from major shareholders to $39,000 at December 31, 1998.
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
A. LIQUIDITY AND CAPITAL
On March 23, 1995, Reconversion Technologies, Inc.,
Debtor-in-Possession ("RETEK"), a Delaware corporation filed voluntary
petition for relief under Chapter 11 of the United States Bankruptcy
Code.
On July 3, 1997, Richard T. Clark and Joel C. Holt, shareholders and
creditors of the Company, filed a Disclosure Statement and Plan of
Reorganization ("Plan"). On November 13, 1997, the Plan was confirmed
pursuant to 11 U.S.C. Section 1126 and has been filed with the
Securities and Exchange Commission on Form 8-K dated November 13, 1997.
This Plan is premised on the concept that the Claims and Interests of
Creditors and Equity Security Holders are best served by an orderly
reorganization of the Company built around the acquisition of Keystone
Laboratories, Inc. and the establishment of a less expensive procedure
for resolution of RETEK claims. KLI was acquired effective December 1,
1997.
As of December 31, 1998, the Company had a working capital deficit in
the amount of $1,718,848, which primarily is the result of the
$1,782,186 current obligation, which is to be retired through issuance
of the Company's common stock. During the three months ended December
31, 1998, $1,444,059 of the obligations were retired upon transfer of
the related common stock. The Company's working capital deficit at June
30, 1998 was $3,151,300. The Company expects to utilize earnings to
provide its other working capital requirements.
The Company's capital expenditure requirements are not significant and
can be met from the working capital generated by net earnings and lease
financing. During the six months ended December 31, 1998, the Company
had capital expenditures in the amount of $593 and acquired lab
equipment in the amount of $71,442 in exchange for a capital lease
obligation.
B. RESULTS OF OPERATIONS
The Company operates solely as a forensic urine drug screening and
confirmatory testing laboratory and has no other operating segments.
SALES AND COST OF SALES
Total revenues increased $105,153 (12%) during the six months ended
December 31, 1998 as compared to the same six-month period ended
December 31, 1997. Total revenues increased $20,199 (5%) during the
three months ended December 31, 1998 as compared to the same
three-month period ended December 31, 1997. The Company realized gross
profit margins of 75% during the six months ended December 31, 1998 and
76% during the same 1997 period.
The Company's increased revenues is the result of (1) an increase in
drug testing charges, which had been under pressure from outside
competition the previous two years; and (2) the marketing and sales of
an onsite drug test which was recently introduced. As a result there
have been only nominal cost increases. The Company expects its
operations to continue at the current levels.
11
<PAGE> 12
OTHER EXPENSE AND INCOME
The selling, general and administrative expenses of the Company
increased $264,999 (47%) during the six months ended December 31, 1998
as compared to the same year earlier period. Approximately $178,000 of
this increase is associated with the costs of maintaining a public
company, as well as, legal costs associated with completion of the
bankruptcy plan. The onsite drug kits increased selling, general and
administrative costs by an additional $77,000 during the six months
ended December 31, 1998. Selling, general and administrative expenses
were 84% of revenues during the six-month period ended December 31,
1998 as compared to 64% during the same year earlier period.
Other expense includes interest expense incurred during the six months
ended December 31, 1998 in the amount of $15,223 as compared to $8,684
in the same year earlier period. The increase is due primarily to the
additional debt associated with the sale-leaseback transaction
completed at the end of 1997.
Other income includes $17,548 from amortization of the deferred gain
realized in the sale-leaseback transaction during the six months ended
December 31, 1998. The sale-leaseback transaction was entered into
during the quarter ended December 31, 1997.
During the six months ended December 31, 1998, the Company recognized
an unrealized gain from their marketable equity securities in the
amount of $12,778. During the same year earlier period, the Company
recognized a loss in the amount of $39,574. In addition, the Company
sold a portion of their marketable equity securities during the three
months ended December 31, 1998 and realized a loss in the amount of
$4,865.
12
<PAGE> 13
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - Not applicable
(b) Reports on Form 8-K - None during the current quarter.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
RECONVERSION TECHNOLOGIES, INC.
Date: February 26, 1999 By: /s/ Joel C. Holt
----------------------------
Joel C. Holt, President and
Principal Accounting Officer
13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS AS OF DECEMBER 31, 1998 AND FOR THE SIX MONTHS THEN ENDED AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-QSB FOR THE SIX MONTHS
ENDED DECEMBER 31, 1998.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> DEC-31-1998
<CASH> 127,460
<SECURITIES> 13,911
<RECEIVABLES> 76,602
<ALLOWANCES> 12,000
<INVENTORY> 0
<CURRENT-ASSETS> 404,460
<PP&E> 324,328
<DEPRECIATION> 118,517
<TOTAL-ASSETS> 797,781
<CURRENT-LIABILITIES> 2,123,308
<BONDS> 0
0
0
<COMMON> 1,114
<OTHER-SE> (1,455,245)
<TOTAL-LIABILITY-AND-EQUITY> 797,781
<SALES> 983,102
<TOTAL-REVENUES> 983,102
<CGS> 241,520
<TOTAL-COSTS> 241,520
<OTHER-EXPENSES> 828,325
<LOSS-PROVISION> (12,778)
<INTEREST-EXPENSE> 15,223
<INCOME-PRETAX> (76,173)
<INCOME-TAX> (44,357)
<INCOME-CONTINUING> (31,816)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (31,816)
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
