U. S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended March 31, 1998.
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1943 (NO FEE REQUIRED)
For the transition period from _______________ to ________________.
COMMISSION FILE NUMBER 0-20924
RECONDITIONED SYSTEMS, INC.
(Name of small business issuer in its charter)
ARIZONA 86-0576290
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
444 WEST FAIRMONT, TEMPE, ARIZONA 85282
(Address of principal executive offices, including zip code)
602-968-1772
(Issuer's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
TITLE OF EACH CLASS
-------------------
Common stock, no par value
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 if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
The issuer's revenues for the fiscal year ended March 31, 1998 were $9,583,441.
As of June 19, 1998, the aggregate market value of the Common Stock (based on
the closing price as quoted on the Nasdaq Small Cap Market on that date) held by
non-affiliates of the Registrant was approximately $4,421,850.
As of June 19, 1998, the number of outstanding shares of the Registrant's Common
Stock was 1,473,950.
Portions of the Registrant's definitive Proxy Statement, dated June 19, 1998,
for the 1998 Annual Meeting of Stockholders to be held August 14, 1998, are
incorporated herein by reference into Part III of this Report.
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Reconditioned Systems, Inc. ("RSI" or the "Company"), an Arizona corporation
formed in March, 1987, reconditions and markets modular office workstations
consisting of panels, work surfaces, file drawers, book and binder storage and
integrated electrical components ("workstations"). The Company specializes in
reconditioning and marketing workstations originally manufactured by Haworth,
Inc. ("Haworth"). RSI purchases used workstations from manufacturers, dealers,
brokers, and end-users throughout the United States through competitive bids or
directly negotiated transactions. After purchasing used workstations, the
Company transports them to its manufacturing facility in Tempe, Arizona where it
disassembles and inventories the workstations by component parts, stores and,
upon receipt of purchase orders, reconditions and reassembles the workstations.
The Company sells the reconditioned workstations throughout the United States to
dealers and end-users.
There are more than 50 manufacturers of new workstations in the United States.
Steelcase, Inc. ("Steelcase"), Herman Miller, Inc. ("Herman Miller"), and
Haworth constitute the dominant manufacturers, controlling a majority of the
market for new workstations. Steelcase, Herman Miller, and Haworth have each
created a unique system for connecting panels, power and telecommunications
raceways, resulting in virtually no interchangability between their respective
products. Due to the lack of interchangability of parts for workstations of
these dominant manufacturers, the Company has generally specialized in
reconditioning and marketing workstations originally manufactured by just one of
the dominant manufacturers. The Company elected to specialize in reconditioning
and marketing workstations originally manufactured by Haworth as a result of the
extensive experience of the Company's founders with Haworth workstations.
The Company's executive offices are located at 444 West Fairmont, Tempe, Arizona
85282 and its telephone number is 602-968-1772.
PRINCIPAL LINE OF BUSINESS
The Company's principal line of business is the sale of reconditioned Haworth
workstations. Historically, these sales have accounted for approximately 75 -
80% of the Company's revenues.
The Company purchases used Haworth workstations from manufacturers, dealers,
brokers, and end-users and transports them to its manufacturing facility in
Tempe, Arizona where it disassembles and inventories the workstations by
component parts, stores, and, upon receipt of purchase orders, reconditions and
reassembles the workstations. The reconditioning process includes sanding,
painting, laminating, and reupholstering. Certain parts of the used Haworth
workstations the Company purchases are damaged beyond repair and must be
replaced with new parts purchased from Haworth, clone parts which the Company
purchases from various vendors, and new parts which the Company manufactures
from raw materials. The Company markets these reconditioned Haworth workstations
throughout the United States. Orders received by the Company range from as few
as one workstation to as many as several hundred workstations. However, orders
for more than fifty workstations are rare because the manufacturers of new
workstations offer deeper discounts on orders of this size, which makes it more
difficult for the Company to offer its reconditioned workstations at a lower
price than the new workstations.
The Company believes that workstations offer advantages over the traditional
desk, free standing file, and permanent dry wall dividers common to historical
office layouts since workstations enable businesses to house more people in a
given space than traditional structures and are easier to move and reconfigure.
In addition, the Company believes its reconditioned Haworth workstations offer
an advantage over much of its competition because they are higher quality than
new workstations available in the same price range.
2
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OTHER LINES OF BUSINESS
The Company derives certain revenues outside of its principal line of business.
Other lines of business in which the Company engages include: brokering "as is"
used workstations, selling new office furniture produced by other manufacturers
(primarily desks, files, and chairs), installing workstations, and
reconditioning product already owned by customers. Historically, these other
lines of business have accounted for approximately 20 - 25% of the Company's
revenues.
INVENTORY AND SOURCES OF SUPPLY
The Company purchases used Haworth workstations throughout the United States
through competitive bids or private negotiations with new workstation
manufacturers and dealers, used workstation brokers, and end-users. The Company
then transports the used Haworth workstations to its facility in Tempe, Arizona
where it disassembles, inventories by component part, and stores the used
Haworth workstation components until purchase orders are received which require
the various component parts. The Company also maintains inventories of new
workstation components purchased from Haworth, clone workstation components, and
raw materials used in the reconditioning process. These raw materials include
items such as fabric, particle board, laminate, and paint.
The Company carries a limited amount of work in process and finished goods
inventory because it generally does not initiate the reconditioning process
until a purchase order has been received and because the reconditioning process
rarely takes more than a couple of days due to the relatively small size of most
orders. However, a significant portion of the labor related to the
reconditioning process is completed at the time the used Haworth workstations
are originally received and disassembled, and as a result, the value of this
labor is capitalized and added to the value of the Company's inventory.
The Company currently has sufficient amounts of inventory to meet its
anticipated demand. However, because there is not a principal supplier of used
Haworth workstations and the supply is based upon end-user decisions regarding
disposal of or enhancement to existing furniture, there can be no assurance that
the Company will be able to purchase adequate levels of inventory in the future
at competitive prices. Because the Company's principal line of business is the
sale of reconditioned Haworth workstations, any unavailability of adequate
levels of inventory at competitive prices would have a material adverse effect
on the Company's business, operating results, and financial condition.
RECONDITIONING PROCESS
The Company's reconditioning process for used Haworth workstations includes
sanding, painting, laminating, and reupholstering. The reconditioning process
also includes replacing certain components with new components purchased from
Haworth, clone components purchased from various vendors, or new components
manufactured by the Company from raw materials. The Company's facility in Tempe,
Arizona includes all of the equipment required to recondition workstations,
including closed and open paint booths, a paint drying booth, sanding equipment,
saws, and laminating equipment.
The reconditioned Haworth workstations that the Company sells generally consist
of panels, worksurfaces, pedestals, overhead storage units, lateral file storage
units, task lights, and electrical raceways. Typically, the Company reconditions
all of these items with the exception of worksurfaces, which it manufactures
because the labor charges to repair used worksurfaces are typically greater than
the cost to manufacture them using raw materials such as particle board, backer,
laminate, and t-molding. Components that are often damaged and need to be
replaced with new or clone components include panel top caps, shelf ends for
overhead storage units, and task lights. The Company markets certain auxiliary
items such as chairs, file cabinets, and desks, but it usually purchases these
items new from other manufacturers rather than purchasing them used and
reconditioning them.
3
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The Company's facility has been designed to facilitate the natural flow of used
Haworth workstation components and raw materials in order to streamline the
reconditioning process through disassembly, storage, reconditioning, and
shipping. Storage capacity is maximized by utilizing narrow aisle storage. The
Company believes that its current facility will be able to handle any increase
in volume as a result of its plan to increase its distribution channels.
COMPETITION
In purchasing used Haworth workstations, the Company competes with used
workstation brokers and other entities that recondition Haworth workstations.
Even though the Company may not be the highest bidder for an end-user's used
Haworth workstations, it may still have the opportunity to purchase them at a
slightly higher cost if the highest bidder was a used workstation broker who is
simply trying to make a small profit without actually taking possession of the
used Haworth workstations. The Company attempts to procure the used Haworth
workstations directly from end-users so as to avoid the middleman (used
workstation brokers) and to obtain these used Haworth workstations at the lowest
possible cost.
The market for workstations is highly competitive. The Company competes with new
workstation manufacturers, their dealers, and other reconditioners in the sale
of its reconditioned Haworth workstations. New workstation manufacturers and
their dealers have certain competitive advantages over the Company including
established distribution channels and marketing programs, substantial financial
strength, long-term customers, ready access to all component parts, and the fact
that if everything is equal (price, lead-time, etc.), most people would choose
new workstations over reconditioned workstations. The Company has certain
competitive advantages over new workstation manufacturers and their dealers. On
orders of 50 workstations or less, the Company's pricing is usually
significantly less than pricing on new "Grade A" workstations ("Grade A"
workstations are considered to be those workstations manufactured by Haworth,
Herman Miller, and Steelcase) and the quality of the Company's reconditioned
Haworth workstations exceeds that of new "Grade B" workstations. In addition,
the Company can produce and install fully reconditioned Haworth workstations
within two to three weeks as compared to standard lead-times of approximately
six to eight weeks for the new workstation manufacturers. The Company believes
that its reconditioning services are more comprehensive than most other
reconditioners. This results in a competitive advantage for the Company because
it has the ability to produce more reconditioned workstations and higher quality
reconditioned workstations than most other reconditioners. There are no
significant barriers to entry into the markets served by the Company. An
increase in competition from existing competitors or the entry of new
competitors could have a material adverse effect on the Company's business,
operating results and financial condition. There can be no assurance that the
Company will be able to compete successfully in the future with existing or new
competitors.
DISTRIBUTION
The Company markets its products on a wholesale basis to new workstation
dealerships, design firms, and installation companies throughout the United
States. The Company also markets on a retail basis to end-users in Arizona and
throughout the country. The Company's sales ratio historically had been
approximately 50% retail sales within Arizona and 50% wholesale and retail sales
in other parts of the United States. As a result of increased marketing efforts
in the wholesale division, the Company's sales ratio for the current year
approximated 60% wholesale and 40% retail. The Company maintains a broad
customer base and is not dependent on any one customer. The Company employs two
full-time salespeople who concentrate on telemarketing and servicing its
wholesale sales, seven full-time salespeople who concentrate on local retail
sales in the greater Phoenix, Arizona area, and one full-time sales manager who
directs and assists the local retail sales effort.
4
<PAGE>
PERSONNEL
The Company currently has approximately 64 full-time employees of whom 37 are
production personnel directly involved in the reconditioning process, five are
in the installation department, 13 are in the sales and design department, and
nine are administrative personnel. The Company believes that its ability to grow
and attain its desired profitability levels depends on its ability to attract
and retain highly qualified personnel. There can be no assurance that the
Company will be successful in attracting and retaining such personnel.
The Company has employment agreements, which include severance benefits, with
certain of its executive officers. See Item 10 - Executive Compensation. None of
the Company's personnel are covered by a collective bargaining agreement, and
the Company has never suffered a work stoppage. The Company considers its
relations with its employees to be excellent.
ENVIRONMENTAL REGULATIONS
The Company's operations are subject to a variety of federal, state, and local
environmental laws and regulations, including those governing air quality, water
quality, and hazardous materials. The Company's principal environmental concerns
relate to the handling and disposal of paints, solvents, and related materials
in connection with product finishes and composite fabrication. The Company
contracts with various independent waste disposal companies for services. The
Company may be exposed to certain environmental liabilities which may or may not
be covered by the insurance of the independent contractors naming the Company as
additional insured or by the Company's own insurance.
The Company believes that it has been operating in substantial compliance in all
material respects with existing environmental laws and regulations and that
costs and effects of such compliance are not material. The Company cannot
predict the nature, scope or effect of legislation or regulatory requirements
that could be imposed or how existing or future laws or regulations will be
administered or interpreted with respect to products or activities to which they
have not previously been applied. Compliance with more stringent laws or
regulations, or more vigorous enforcement policies or regulatory agencies, could
require substantial expenditures by the Company and could adversely affect its
business, financial condition and results of operations.
ITEM 2. PROPERTIES
The Company presently leases a 50,000 square foot facility in Tempe, Arizona
that houses its corporate offices, its reconditioning operations, and its
warehouse space. The current lease on the Tempe facility expires March, 2001.
The Company believes its existing facilities are adequate for its current and
projected sales volume. In addition, the Company believes suitable additional
space will be available as needed.
The Company owns substantially all of its equipment, including its office
equipment and its reconditioning equipment. The Company's equipment has been
assigned as collateral for amounts borrowed under loan agreements with M&I
Thunderbird Bank.
The Company has no investments or interests in real estate, real estate
mortgages or securities of persons primarily engaged in real estate activities.
ITEM 3. LEGAL PROCEEDINGS
The Company is not party to any pending legal proceedings other than routine
litigation incidental to the business.
5
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ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the stockholders during the fourth quarter
of the fiscal year ended March 31, 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The following table sets forth the high and low closing sales price, as reported
by the Nasdaq Small Cap Market, in dollars per share for the quarters then
ended:
COMMON STOCK
DATE LOW HIGH
- ---- --- ----
June, 1996 3/8 3/4
September, 1996 3/8 2 3/4
December, 1996 1 3/8 3
March, 1997 1 1/4 2
June, 1997 1 1/8 2 1/4
September, 1997 1 5/8 4 1/2
December, 1997 2 1/2 3 7/8
March, 1998 2 1/2 4 1/16
The total number of shares of Common Stock of the Company outstanding as of June
19, 1998 was 1,473,950. As of the close of business on June 19, 1998, the number
of record holders of the Company's Common Stock is 55 and the number of holders
of the Company's Common Stock including beneficial holders of shares held in
street name is estimated to be 350.
There were no unregistered sales of the Company's Common Stock during the period
covered by this Report.
The Company has not paid any cash dividends on its Common Stock during the past
two fiscal years and does not intend to pay any cash dividends on its Common
Stock in the foreseeable future. Future earnings, if any, will be retained to
fund the development and growth of the Company's business. In addition, the
Company's line of credit security agreement prohibits the payment of any
dividends on the Company's Common Stock. Further, state corporate law may, under
certain circumstances, restrict the Company's ability to pay dividends.
ITEM 6. 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 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, including this Report.
6
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RESULTS OF OPERATIONS
Reconditioned Systems, Inc. (the "Company") reported sales for the fiscal year
ended March 31, 1998 (the "reporting period") of $9,583,441 as compared to
$7,121,637 for the fiscal year ended March 31, 1997 (hereinafter the "comparable
period"), resulting in an increase of $2,461,804 or 35%. 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 $5,661,623 for the reporting period, an increase of 50%
over the comparable period. This was a result of expansion of the wholesale
division, implementation of a new marketing plan aimed at increasing the
Company's wholesale customer-base, and extended industry lead times during the
third quarter of the reporting period. 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.
Approximately 53% of wholesale sales during the reporting period were to
customers located in California. The remaining 47% was divided among many other
states with no individual state attributable for more than 8%.
Retail sales in the Phoenix and Tucson markets totaled $3,921,818 during the
reporting period, an increase of 17% over the comparable period. This increase
was primarily a result of additional sales personnel and support staff,
development of an extensive formal training program for the sales personnel and
increased advertising. During the comparable period, the Company employed five
to six retail salespeople and two sales support staff members. The Company now
employs seven to eight salespeople and three sales support staff members. 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. In addition, the Company invested nearly $100,000
in advertising and promotion during the reporting period, an increase of
approximately $15,000 over the comparable period.
The Company also benefited from a temporary competitive advantage during the
third quarter of the reporting period due to extended industry lead times.
Industry lead times during the third quarter averaged between ten and eleven
weeks, as compared to typical lead times of five to six weeks. Although the
Company normally is less competitive on larger projects, a number of end-users
were required to find alternative modular office furniture sources due to
scheduling demands. The Company was able to provide those end-users refurbished
product within their time constraints. Industry lead times have now returned to
normal levels.
The Company's gross profit margin for the reporting period was 25%, as compared
to a gross profit margin of 23% for the comparable period. Although the
Company's increase in the percentage of wholesale sales to retail sales would
normally indicate a lower gross profit margin, the increased sales volume
allowed the Company to capitalize on gains in economies of scale. In addition,
the Company's improved financial position provided the necessary cash to fund
large buys of used workstations at reduced rates. This allowed the Company to
reduce its average cost of used workstations by approximately 2% of the
manufacturer's list price over the comparable period.
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Another factor contributing to increased sales and an improved gross profit
margin during the reporting period was the Company's induction into the Haworth,
Inc. RetroFit Vendor Program late in the comparable period. Haworth selected the
Company to participate in this prestigious program which allows Haworth dealers
to buy refurbished Haworth workstations from the Company and allows the Company
to buy Haworth parts directly from Haworth. This has proved to be a good
partnership. Although the sales are made at a substantial discount, the
reduction in gross profit is offset by the right to buy parts directly from
Haworth at a discounted price.
The Company's selling and administrative expenses were reduced from 19% of sales
in the comparable period to 16% for the reporting period. The 3% 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
expense, improved by $67,478 or 86% 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. 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.
The increased revenues, improved gross margin, and lower selling, administrative
and interest expense resulted in a $581,416 or 225% increase in net income over
the comparable period.
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. The federal loss carryforwards expire through March 31, 2011 and the
state loss carryforwards expire through March 31, 2001. The Company will benefit
from the loss carryforwards at statutory rates to the extent it is profitable
before they expire. Due to significant losses incurred during the years ended
March 31, 1994, 1995 and 1996 and the uncertainty of the utilization of the loss
carryforwards in future periods, the Company established, and continues to
maintain, a valuation allowance equal to the full amount of the Company's
deferred tax assets.
FINANCIAL CONDITION AND LIQUIDITY
The Company's financial condition and liquidity have improved dramatically
during the reporting period. The primary forces affecting the Company's
financial condition and liquidity are results of operations, collection of
accounts receivable, ability to turn inventory, and rate of growth. The results
of operations and rate of growth during the period were discussed above.
The Company's accounts receivable turns improved substantially over the
comparable period. The number of days sales in the Company's accounts receivable
as of March 31, 1998 were 37, compared to 51 days as of March 31, 1997. As the
Company's standard terms are net 30 days for existing customers and 50% down/50%
net 30 days for new customers, the Company hopes to maintain a collection rate
at or near 30 days.
The Company was also able to improve its inventory turns. The Company's
inventory turns were 6.75 for the year ended March 31, 1998, as compared to 4.24
for the year ended March 31, 1997. This improvement was achieved through better
general management and purchasing practices, increased brokering of product to
other refurbishers, and implementation of a Just-In-Time Inventory whenever
possible.
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The cumulative effect of the improved accounts receivable and inventory turns
and the improved results of operations resulted in cash provided by operating
activities of $1,252,483 for the reporting period. The cash provided by
operations allowed the Company to pay off its credit line, further reduce
long-term debt and increase its cash on hand by $590,907.
As of March 31, 1998, the Company had net worth of $2,215,554 and working
capital of $1,912,692. Management believes cash flow from current operations,
cash reserves, and the availability on the Company's $1,000,000 credit line will
provide adequate funds to sustain the Company's growth without the need for
additional outside capital.
FUTURE OUTLOOK
Management is extremely proud of the operating results achieved during this
reporting period. The Company reported a 35% increase in revenues and a 225%
increase in net income. These results exceeded management's initial expectations
for the reporting period. Management plans to continue to pursue gradual and
focused growth; however, at a more modest rate than during the reporting period.
In order to facilitate continued growth, the Company intends to increase its
warehouse, office and showroom space at the Tempe, Arizona location through
building improvements and expansion. Management hopes to complete these
improvements before the end of the calendar year 1998.
The Company intends to pursue growth in both the wholesale and retail markets.
The wholesale division intends to develop, strengthen and maintain dealer/broker
relationships. In addition to nurturing the accounts established in the San
Francisco/Bay Area and Los Angeles markets, the Company will concentrate on
targeted growth in other markets throughout the western United States. The
retail division will continue to focus on hiring, training and maintaining a
qualified and competent sales staff and continue to develop advertising programs
designed to increase our local exposure.
Now that the Company has successfully navigated through its "turn-around" stage
and has shown significantly improved results of operations, management hopes to
continue to build on this growth and is open to a conservative acquisition
program for additional growth and increased shareholder 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 compliance. The Company intends to complete all corrective action by
June, 1999. Management believes the capital expenditure associated with the
corrective actions can be funded out of cash reserves and the effect on the
Company's future results of operations will not be material.
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ITEM 7 FINANCIAL STATEMENTS
RECONDITIONED SYSTEMS, INC.
FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
10
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INDEPENDENT AUDITORS' REPORT
To The Stockholders and Board of Directors of
Reconditioned Systems, Inc.
We have audited the accompanying balance sheets of Reconditioned Systems, Inc.
as of March 31, 1998 and 1997, and the related statements of operations,
stockholders' equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Reconditioned Systems, Inc. as
of March 31, 1998 and 1997, and the results of its operations, stockholders'
equity, and its cash flows for the years then ended, in conformity with
generally accepted accounting principles.
Semple & Cooper, LLP
Phoenix, Arizona
May 5, 1998
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RECONDITIONED SYSTEMS, INC.
BALANCE SHEETS
MARCH 31, 1998 AND 1997
ASSETS
CURRENT ASSETS: 1998 1997
---- ----
Cash and cash equivalents (Notes 1, 2 and 3) $ 733,031 $ 142,124
Accounts receivable - trade, net of allowance
for doubtful accounts of $30,000 and $31,000,
respectively (Notes 1, 5 and 6) 962,122 999,087
Inventory, net (Notes 1, 5 and 6) 925,258 1,197,840
Prepaid expenses and other current assets 58,885 25,439
---------- ----------
TOTAL CURRENT ASSETS 2,679,296 2,364,490
---------- ----------
PROPERTY AND EQUIPMENT: (NOTES 1, 5 AND 6)
Machinery and equipment 227,953 221,630
Office furniture and equipment 194,914 244,637
Leasehold improvements 36,682 35,620
Vehicles 13,632 13,632
---------- ----------
473,181 515,519
Accumulated depreciation (338,453) (334,413)
---------- ----------
134,728 181,106
---------- ----------
OTHER ASSETS:
Notes receivable - officers (Notes 3 and 4) 150,000 --
Refundable deposits 13,930 14,539
Other 4,204 11,074
---------- ----------
168,134 25,613
---------- ----------
$2,982,158 $2,571,209
========== ==========
The Accompanying Notes are an Integral Part
of the Financial Statements
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RECONDITIONED SYSTEMS, INC.
BALANCE SHEETS
MARCH 31, 1998 AND 1997
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES: 1998 1997
---- ----
Credit line (Note 5) $ -- $ 444,336
Current maturities of long-term debt (Note 6) 33,786 50,254
Accounts payable 444,900 437,333
Customer deposits 44,530 29,078
Accrued expenses and other current liabilities 243,388 201,124
----------- -----------
TOTAL CURRENT LIABILITIES 766,604 1,162,125
----------- -----------
LONG-TERM DEBT, LESS CURRENT MATURITIES (NOTE 6) -- 33,060
----------- -----------
COMMITMENTS (NOTE 7) -- --
STOCKHOLDERS' EQUITY: (NOTES 9 AND 10)
Common stock, no par value; 20,000,000
shares authorized; 1,474,084 shares
issued and 1,473,950 shares outstanding $ 4,586,982 $ 4,586,982
Accumulated deficit (2,367,674) (3,207,204)
----------- -----------
2,219,308 1,379,778
Less: treasury stock, 134 shares, at cost (3,754) (3,754)
----------- -----------
2,215,554 1,376,024
----------- -----------
$ 2,982,158 $ 2,571,209
=========== ===========
The Accompanying Notes are an Integral Part
of the Financial Statements
13
<PAGE>
RECONDITIONED SYSTEMS, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 1998 AND 1997
1998 1997
---- -----
Sales $9,583,441 $7,121,637
Cost of sales 7,168,365 5,453,597
---------- ----------
Gross profit 2,415,076 1,668,040
Selling & administrative expenses 1,564,819 1,331,721
---------- ----------
Income from operations 850,257 336,319
---------- ----------
Other income (expense):
Interest income 9,771 10,336
Interest expense (20,173) (96,320)
Other (325) 7,779
---------- ----------
(10,727) (78,205)
---------- ----------
Income before income taxes 839,530 258,114
Provision for income taxes (Note 8) -- --
---------- ----------
Net income $ 839,530 $ 258,114
========== ==========
Basic earnings per share (Notes 1 and 11) $ 0.57 $ 0.18
========== ==========
Basic weighted average number
of shares outstanding 1,473,950 1,473,950
========== ==========
Diluted earnings per common
and common equivalent share (Notes 1 and 11) $ 0.51 $ 0.16
========== ==========
Diluted weighted average number
of shares outstanding 1,655,762 1,593,704
========== ==========
The Accompanying Notes are an Integral Part
of the Financial Statements
14
<PAGE>
RECONDITIONED SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1998 AND 1997
<TABLE>
<CAPTION>
COMMON COMMON PREFERRED PREFERRED RETAINED
STOCK STOCK STOCK STOCK EARNINGS TREASURY
SHARES AMOUNT SHARES AMOUNT (DEFICIT) STOCK TOTAL
------ ------ ------ ------ --------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT
MARCH 31, 1996 1,621,300 $2,489,143 555,555 $2,156,717 $(3,465,318) $(3,754) $1,176,788
CONVERSION OF
PREFERRED STOCK 7,222,215 2,097,839 (555,555) (2,156,717) -- -- (58,878)
TO COMMON
STOCK, NET OF
COSTS OF $58,878
(NOTE 9)
REVERSE SPLIT OF
COMMON STOCK (7,369,565) -- -- -- -- -- --
(NOTE 9)
NET INCOME -- -- -- -- 258,114 -- 258,114
---------- ---------- -------- ---------- ----------- ------- ----------
BALANCE AT
MARCH 31, 1997 1,473,950 $4,586,982 -- $ -- $(3,207,204) $(3,754) $1,376,024
NET INCOME -- -- -- -- 839,530 -- 839,530
---------- ---------- -------- ---------- ----------- ------- ----------
BALANCE AT
MARCH 31, 1998 1,473,950 $4,586,982 -- $ -- $(2,367,674) $(3,754) $2,215,554
========== ========== ======== ========== =========== ======= ==========
</TABLE>
The Accompanying Notes are an Integral Part
of the Financial Statements
15
<PAGE>
RECONDITIONED SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1998 AND 1997
1998 1997
---- -----
Cash Flows from Operating Activities:
Cash received from customers $ 9,620,081 $ 6,686,906
Cash paid to suppliers and employees (8,353,071) (6,628,483)
Interest received 5,646 10,336
Interest paid (20,173) (101,026)
----------- -----------
Net cash provided (used) by
operating activities 1,252,483 (32,267)
----------- -----------
Cash Flows from Investing Activities:
Loans to officers (150,000) --
Purchase of property and equipment (17,712) (30,604)
Other -- 37,081
----------- -----------
Net cash provided (used) by
investing activities (167,712) 6,477
----------- -----------
Cash Flows from Financing Activities:
Proceeds from credit line and
long-term borrowings 2,643,000 6,400,000
Principal payments on credit line,
long-term borrowings and
obligations under capital leases (3,136,864) (6,273,906)
Preferred stock conversion costs -- (58,878)
----------- -----------
Net cash provided (used) by
financing activities (493,864) 67,216
----------- -----------
Increase in cash and cash equivalents 590,907 41,426
Cash and cash equivalents at beginning of year 142,124 100,698
----------- -----------
Cash and cash equivalents at end of year $ 733,031 $ 142,124
=========== ===========
The Accompanying Notes are an Integral Part
of the Financial Statements
16
<PAGE>
RECONDITIONED SYSTEMS, INC.
STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1998 AND 1997
1998 1997
---- ----
Reconciliation of Net Income to Net Cash
Provided (Used) by Operating Activities:
Net income $ 839,530 $ 258,114
Adjustments to reconcile net income to
net cash provided (used) by operating
activities:
Depreciation and amortization 68,256 64,415
Provision for doubtful accounts (1,198) 23,198
Loss on disposal of fixed assets 2,704 --
Changes in assets and liabilities:
Trade receivables 38,163 (465,708)
Inventory 272,582 178,691
Prepaid expenses and other current assets (32,837) (560)
Accounts payable and accrued expenses 65,283 (90,417)
---------- ---------
Net cash provided (used) by operating
activities $1,252,483 $ (32,267)
========== =========
Non-Cash Investing and Financing Activities:
During the year ended March 31, 1998, the Company had no non-cash activities.
During the year ended March 31, 1997, the Company recognized investing and
financing activities that affected its assets, liabilities and stockholders'
equity, but did not result in cash receipts or payments. These non-cash
activities are as follows:
Conversion of 555,555 share of the Company's Series A Preferred
Stock into 7,222,215 shares of common stock (See Note 9).
1 for 6 reverse-split of common stock (see Note 9).
Acquired equipment via trade-in of like-kind equipment.
The Accompanying Notes are an Integral Part
of the Financial Statements
17
<PAGE>
RECONDITIONED SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, NATURE OF OPERATIONS,
AND USE OF ESTIMATES
- --------------------------------------------------------------------------------
NATURE OF BUSINESS:
Reconditioned Systems, Inc. ("RSI" or the "Company"), is a corporation
which was incorporated in the State of Arizona in March, 1987. The
principal business purpose of the Company is the reconditioning and
sale of office workstations comprised of panel systems to customers
located throughout the country.
PERVASIVENESS OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
REVENUE RECOGNITION:
The Company recognizes a sale when its earnings process is complete. In
connection with projects that are to be installed by the customer or an
agent of the customer, the sale is recognized when the product is
shipped to or possession is taken by the customer. In connection with
projects installed by the Company, the sale is recognized upon
completion of the installation.
CASH AND CASH EQUIVALENTS:
The Company considers all highly liquid debt instruments and money
market funds purchased with an initial maturity of three (3) months or
less to be cash equivalents.
ACCOUNTS RECEIVABLE - TRADE:
The Company provides for potentially uncollectible accounts receivable
by use of the allowance method. The allowance is provided based upon a
review of the individual accounts outstanding, and the Company's prior
history of uncollectible accounts receivable.
INVENTORY:
Inventory, composed of used office workstations and reconditioning
supplies, is stated at the lower of cost (weighted-average method) or
market. The Company reviews its inventory monthly and makes provisions
for damaged and obsolete items. The Company contemplates its ability to
alter the size of panels and other workstation components and designs
projects so that the workstations are comprised of products currently
in inventory in establishing its obsolescence reserve. At March 31,
1998 and 1997, the Company had established a reserve for damaged and
obsolete inventory in the amount of $25,000.
PROPERTY AND EQUIPMENT:
Property and equipment are recorded at cost. Depreciation is generally
provided for on the straight-line basis over the following estimated
useful lives of the assets:
Years
-----
Machinery and equipment 5 - 7
Office furniture and equipment 5 - 7
Leasehold improvements Lease term
Vehicles 4 - 5
18
<PAGE>
RECONDITIONED SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
NOTE 1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, NATURE OF OPERATIONS,
AND USE OF ESTIMATES (CONTINUED)
- --------------------------------------------------------------------------------
DEFERRED INCOME TAXES:
Deferred income taxes are provided on a liability method, whereby
deferred tax assets are recognized for deductible temporary differences
and operating loss and tax credit carryforwards and deferred tax
liabilities are recognized for taxable temporary differences. Temporary
differences are the differences between the reported amounts of assets
and liabilities and their tax basis. Deferred tax assets are reduced by
a valuation allowance when, in the opinion of management, there is
uncertainty of the utilization of the operating losses in future
periods. Deferred tax assets and liabilities are adjusted for the
effects of changes in tax laws and rates on the date of enactment.
STOCK-BASED COMPENSATION:
The Company has elected to follow Accounting Principles Board Opinion
No. 25 Accounting for Stock Issued to Employees (APB 25) and the
related interpretations in accounting for its employee stock options.
Under APB 25, because the exercise price of employee stock options
equals the market price of the underlying stock on the date of grant,
no compensation expense is recorded. The Company has adopted the
disclosure-only provisions of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" (Statement
No. 123).
EARNINGS PER 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.
In addition, certain outstanding warrants which expired June 30, 1997
and 1996 are not included in the computation of diluted earnings per
share because their effect would be antidilutive. The earnings per
share and the weighted average number of shares outstanding for the
year ended March 31, 1997 give retroactive effect to the conversion of
preferred stock to common stock and the reverse split of common stock
which were effective on August 12, 1996 (see Note 9).
NEW ACCOUNTING PRONOUNCEMENTS:
During the year ended March 31, 1998, the Company adopted Statement of
Financial Accounting Standards No. 128, "Earnings per Share" (SFAS No.
128). This pronouncement provides a different method of calculating
earnings per share than was required by APB 15, "Earnings per Share".
The earnings per share for the year ended March 31, 1997 were restated
to give effect to this pronouncement.
19
<PAGE>
RECONDITIONED SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
NOTE 1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, NATURE OF OPERATIONS,
AND USE OF ESTIMATES (CONTINUED)
- --------------------------------------------------------------------------------
NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED):
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (SFAS No. 130) issued by the FASB is effective
for financial statements with fiscal years beginning after December
15, 1997. Earlier application is permitted. SFAS No. 130 establishes
standards for reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements. The
Company does not expect adoption of SFAS No. 130 to have a material
effect, if any, on its financial position or results of operations.
- --------------------------------------------------------------------------------
NOTE 2.
CONCENTRATIONS
- --------------------------------------------------------------------------------
The Company maintains cash balances at various financial institutions. Deposits
not to exceed $100,000 at the financial institutions are insured by the Federal
Deposit Insurance Corporation. As of March 31, 1998, the Company had
approximately $417,000 of uninsured cash.
In addition, the Company specializes in reconditioning one particular original
equipment manufacturer's (OEM) line of office workstations. The business is
dependent upon a readily available supply of new parts from the OEM, as well as
used product.
- --------------------------------------------------------------------------------
NOTE 3.
FAIR VALUE OF FINANCIAL INSTRUMENTS
- --------------------------------------------------------------------------------
Estimated fair values of the Company's financial instruments (all of which are
held for non-trading purposes), are as follows:
March 31, 1998 March 31, 1997
-------------- --------------
Carrying Carrying
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
Cash and cash equivalents $733,031 $733,031 $142,124 $142,124
The carrying amount approximates fair value of cash and short-term instruments.
The fair value of Notes receivable - officers cannot be determined due to its
related party nature.
20
<PAGE>
RECONDITIONED SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
NOTE 4.
NOTES RECEIVABLE - OFFICERS
- --------------------------------------------------------------------------------
On December 19, 1997, the Company loaned $150,000 to officers of the Company.
These funds enabled the officers to purchase 100,000 shares of the Company's
Common Stock from a former shareholder in a privately negotiated transaction.
The notes are payable in one payment on or before December 19, 2002, and are
collateralized by the purchased shares of Common Stock. Interest on the notes
accrues at a rate equal to that of the Company's lender's base rate plus 2.5%,
payable annually beginning December 19, 1998.
- --------------------------------------------------------------------------------
NOTE 5.
PLEDGED ASSETS AND LINE OF CREDIT
- --------------------------------------------------------------------------------
As of March 31, 1997, the Company had outstanding borrowings of $444,336 under a
$1,200,000 revolving line of credit agreement with Norwest Business Credit, Inc.
Interest on that line of credit agreement was payable at the bank's base rate
plus four percent (4%), and had a minimum monthly interest requirement of
$4,000. Borrowings on the line of credit could not exceed a total of eighty
percent (80%) of eligible accounts receivable and thirty percent (30%) of
eligible inventory. At March 31, 1997, the maximum amount available on the line
of credit was approximately $675,000. Accounts receivable, inventory, property
and equipment and intangibles were assigned as collateral for amounts borrowed
under this loan agreement. The credit facility contained various convenants by
the Company, including covenants that the Company would maintain certain net
worth thresholds, would meet certain annual net income requirements, would
maintain certain debt service coverage ratios, and would not enter into or
engage in various types of agreements or business activities without written
approval from Norwest Business Credit, Inc.
On July 30, 1997, the Company terminated its line of credit agreement with
Norwest Business Credit, Inc. and entered into a line of credit agreement with
M&I Thunderbird Bank. Under this new $1,000,000 revolving line of credit
agreement, which is effective through July 31, 1998, interest is payable at the
bank's base rate plus two percent (2%). Borrowings on the line of credit may not
exceed seventy-five percent (75%) of eligible accounts receivable and thirty
percent (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 March 31, 1998, the Company had no outstanding
borrowings on the line of credit and was in compliance with all of the covenants
of the agreement.
21
<PAGE>
RECONDITIONED SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
NOTE 6.
LONG-TERM DEBT
- --------------------------------------------------------------------------------
Long-term debt consists of the following: 1998 1997
---- ----
8.25% note payable to M&I Thunderbird Bank, due in monthly
installments of $3,440, including principal and interest,
until paid in full; collateralized by accounts receivable,
inventory, property and equipment, and intangibles. In
connection with this loan agreement, the Company has agreed
to maintain certain financial ratios and various other
covenants. As of March 31, 1998, the Company was in
compliance with these financial ratios and other covenants. $ 32,854 $ --
8.25% note payable to National Bank of Arizona, due in
monthly installments of $4,087, including principal and
interest, until paid in full; collateralized by accounts
receivable, inventory, property and equipment, and
intangibles. In connection with this loan agreement, the
Company has agreed to maintain certain financial ratios and
various other covenants. As of March 31, 1997, the Company
was in compliance with these financial ratios and other
covenants. In addition, this note payable was guaranteed by
certain former Board members. -- 76,071
Capital lease obligations 932 7,243
-------- -------
33,786 83,314
Less: current maturities (33,786) (50,254)
-------- -------
Long-term portion $ -- $33,060
======== =======
22
<PAGE>
RECONDITIONED SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
NOTE 7.
OPERATING LEASE COMMITMENTS
- --------------------------------------------------------------------------------
The Company leases warehouse and office space in Tempe, Arizona, as well as
certain equipment and vehicles under non-cancelable operating lease agreements
expiring at various times through March, 2001. Certain of the lease agreements
require the Company to pay property taxes, insurance and maintenance costs. The
lease on the Tempe, Arizona facility expires March, 2001.
The total minimum rental commitment due is as follows:
March 31, Amount
--------- ------
1999 $282,974
2000 280,971
2001 280,412
--------
$844,357
========
Rent expense under operating lease agreements for the years ended March 31, 1998
and 1997 was approximately $268,750 and $277,500, respectively.
- --------------------------------------------------------------------------------
NOTE 8.
INCOME TAXES
- --------------------------------------------------------------------------------
Deferred tax assets consists of the following components:
March 31, 1998 March 31, 1997
-------------- --------------
Deferred tax assets:
State loss carryforwards $ 175,000 $ 250,000
Federal loss carryforwards 725,000 1,015,000
--------- -----------
900,000 1,265,000
Less: valuation allowance (900,000) (1,265,000)
--------- -----------
$ -- $ --
========= ===========
23
<PAGE>
RECONDITIONED SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
NOTE 8.
INCOME TAXES (CONTINUED)
- --------------------------------------------------------------------------------
Due to significant losses incurred during the years ended March 31, 1994, 1995
and 1996 and the uncertainty of the utilization of the operating losses in
future periods, the Company established, and continues to maintain, a valuation
allowance equal to the full amount of its deferred tax assets.
The Company's tax expense (benefit) differed from the statutory rate, as
follows:
1998 1997
---- ----
Statutory rate applied to income $ 331,000 $ 97,000
before income taxes
Increase (decrease) in income taxes resulting from:
Utilization of net operating loss deductions (343,000) (119,000)
Other 12,000 22,000
--------- ---------
$ -- $ --
========= =========
The Company's approximate net operating loss carryforwards and their respective
expiration dates, are as follows:
Amount Expiration
------ ----------
Federal $2,120,000 2011
Arizona $1,920,000 2001
- --------------------------------------------------------------------------------
NOTE 9.
REORGANIZATION OF CAPITAL STRUCTURE
- --------------------------------------------------------------------------------
On August 5, 1996, at the Company's annual shareholders meeting, the Company's
shareholders approved, among other things, a reorganization of the Company's
capital structure. The reorganization, which was effective on August 12, 1996,
consisted of the automatic conversion of each share of the Company's Series A
Convertible Preferred Stock, together with any and all accrued but unpaid
dividends through the conversion date, into thirteen shares of common stock and
a one-for-six reverse stock split (immediately following the preferred stock
conversion). All fractional shares resulting from the reverse split were rounded
up to the next whole share.
24
<PAGE>
RECONDITIONED SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
NOTE 10.
COMMON STOCK OPTIONS
- --------------------------------------------------------------------------------
On August 19, 1996, the Board of Directors approved the repricing of 16,666
stock options held by the Company's President and Chief Executive Officer, and
16,666 stock options held by the Company's Chief Financial Officer from $16.50
per share to $1.00 per share. In addition, at the same time, the Board issued
83,334, 83,334, and 100,000 stock options with an exercise price of $1.00 per
share to the Company's President and Chief Executive Officer, Chief Financial
Officer, and Chairman of the Board, respectively. All of these stock options are
presently exercisable. The Company has agreed to register the shares issuable
upon exercise of the option by filing a registration statement on Form S-8 with
the Securities and Exchange Commission. The option exercise price equals the
fair market value of the underlying common stock on August 19, 1996.
In accordance with accounting for such options utilizing the intrinsic value
method, there is no related compensation expense recorded in the Company's
financial statements for the year ended March 31, 1997. There were no options
granted during the year ended March 31, 1998. Had compensation cost for
stock-based compensation been determined based on the fair value of the options
at the grant dates consistent with the method of SFAS 123, the Company's net
income and earnings per share for the year ended March 31, 1997 would have been
reduced to the pro forma amounts presented below:
1997
----
Net income, as reported $258,114
Net income, pro forma 253,054
Basic earnings per share, as reported $ 0.18
Basic earnings per share, pro forma $ 0.17
Diluted earnings per share, as reported $ 0.16
Diluted earnings per share, pro forma $ 0.16
The fair value of option grants is estimated as of the date of grant utilizing
the Black-Scholes option-pricing model with the following weighted average
assumptions for grants in 1998 and 1997, expected life of options of two (2)
years, expected volatility of forty percent (40%), risk-free interest rate of
eight percent (8.0%), and a zero percent (0%) dividend yield. The weighted
average fair value at date of grant for options granted during 1997 approximated
$.03.
25
<PAGE>
RECONDITIONED SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
NOTE 11.
EARNINGS PER SHARE
- --------------------------------------------------------------------------------
For the years ended March 31, 1998 and 1997, the following data shows amounts
used in computing earnings per share and the effect on income and the weighted
average number of shares of dilutive potential common stock. The earnings per
share and the weighted average number of shares outstanding for the year ended
March 31, 1997 give retroactive effect to the conversion of preferred stock to
common stock and the reverse split of common stock which were effective on
August 12, 1996 (see Note 9).
MARCH 31,
1998 1997
---- ----
BASIC EPS
Net income $ 839,530 $ 258,114
========== ==========
Weighted average number of shares
outstanding 1,473,950 1,473,950
========== ==========
Basic earnings per share $ 0.57 $ 0.18
========== ==========
DILUTED EPS
Net income $ 839,530 $ 258,114
========== ==========
Weighted average number of shares
outstanding 1,473,950 1,473,950
Effect of dilutive securities:
Stock options 181,812 92,224
---------- ----------
Common stock including assumed
conversions 1,655,762 1,566,174
========== ==========
Diluted earnings per share $ 0.51 $ 0.16
========== ==========
Certain outstanding warrants which expired June 30, 1997 and 1996 are not
included in the computation of diluted earnings per share because their effect
would be antidilutive.
26
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
The information required by Items 9-11 of Part III is omitted from this Report
by virtue of the fact that the Company will file with the Securities and
Exchange Commission (the "SEC"), pursuant to Regulation 14A, within 120 days
after the end of the fiscal year covered by this Report, a definitive proxy
statement (the "Proxy Statement") relating to the Company's Annual Stockholders'
Meeting to be held August 14, 1998. Such information included in the Proxy
Statement is incorporated herein by reference. The Company expects to
disseminate the Proxy Statement to stockholders on or about July 1, 1998.
MATERIAL INCORPORATED HEREIN BY REFERENCE AND LOCATION
IN PROXY STATEMENT FOR 1998 ANNUAL MEETING:
ITEM NO. ITEM DESCRIPTION PROXY STATEMENT
- -------- ---------------- ---------------
9 Directors, Executive Officers, Proposal One - Election of
Promoters, and Control Persons; Directors
Compliance with Section 16(a)
of the Exchange Act
10 Executive Compensation Proposal One - Election of
Directors
11 Security Ownership of Certain General Information - Security
Beneficial Owners and Management Ownership of Certain Principal
Stockholders and Management
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company holds $150,000 in notes receivable from officers. The funds provided
by these notes were used by the officers to purchase 100,000 shares of the
Company's Common Stock from a former shareholder in a privately negotiated
transaction. The notes are payable in one payment on or before December 19,
2002, and are collateralized by the purchased shares of Common Stock. Interest
on the notes accrues at a rate equal to that of the Company's lender's base rate
plus 2.5%, payable annually beginning December 19, 1998.
27
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a)(1) EXHIBITS
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
4.8 Warrants issued to Nutmeg Securities, Inc. 4
*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
27 Financial Data Schedule 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 herewith
(*) Indicates a compensatory plan or arrangement
(b) REPORT ON FORM 8-K
No reports on Form 8-K were filed during the last quarter of the fiscal year
covered by this Report.
28
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
RECONDITIONED SYSTEMS, INC.
BY: /s/ WAYNE R. COLLIGNON
---------------------------
Wayne R. Collignon, President and Chief Executive Officer
DATE: June 26, 1997
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and the
dates indicated.
RECONDITIONED SYSTEMS, INC.
BY: /s/ WAYNE R. COLLIGNON
---------------------------
Wayne R. Collignon, President and Chief Executive Officer (Principal
Executive Officer) and Director
DATE: June 26, 1997
BY: /s/ DIRK D. ANDERSON
---------------------------
Dirk D. Anderson, Chief Financial Officer (Principal Financial Officer and
Principal Accounting Officer) and Director
DATE: June 26, 1997
BY: /s/ SCOTT W. RYAN
---------------------------
Scott W. Ryan, Chairman of the Board of Directors
DATE: June 26, 1997
BY: /s/ SUSAN J. ZINGA
---------------------------
Susan J. Zinga, Member of the Board of Directors
DATE: June 26, 1997
29
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<NAME> RECONDITIONED SYSTEMS, INC.
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