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, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from__________ to ___________.
Commission file number 0-20924
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RECONDITIONED SYSTEMS, INC.
-----------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
ARIZONA 86-0576290
------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
444 WEST FAIRMONT, TEMPE, ARIZONA 85282
----------------------------------------
(Address of principal executive offices)
602-968-1772
--------------------------
(Issuer's telephone number)
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ].
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of February 5, 1999, the number of
shares outstanding of the Registrant's common stock was 1,473,950.
<PAGE>
ITEM 1
PART 1 - FINANCIAL STATEMENTS
RECONDITIONED SYSTEMS, INC.
UNAUDITED FINANCIAL STATEMENTS
DECEMBER 31, 1998
2
<PAGE>
RECONDITIONED SYSTEMS, INC.
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BALANCE SHEETS
December 31, 1998 and 1997
(Unaudited)
- --------------------------------------------------------------------------------
1998 1997
---------- ----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $1,091,614 $ 38,446
Accounts receivable - trade, net of allowance
for doubtful accounts of $32,000 and
$70,403, respectively 1,225,790 1,328,858
Inventory 922,247 1,082,855
Prepaid expenses and other current assets 97,568 28,941
---------- ----------
TOTAL CURRENT ASSETS 3,337,219 2,479,100
PROPERTY AND EQUIPMENT; NET OF ACCUMULATED
depreciation of $365,237 and
$381,146, respectively 144,390 148,185
OTHER ASSETS
Notes receivable - Officers 150,000 150,000
Deferred merger costs (Note 5) 29,738 --
Other assets 9,158 14,188
---------- ----------
$3,670,505 $2,791,473
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt 3,134 41,577
Accounts payable 448,762 444,629
Customer deposits 20,888 18,955
Accrued expenses and other current liabilities 215,780 277,075
---------- ----------
TOTAL CURRENT LIABILITIES 688,564 782,236
LONG-TERM DEBT, LESS CURRENT MATURITIES -- 3,415
STOCKHOLDERS' EQUITY 2,981,941 2,005,822
---------- ----------
$3,670,505 $2,791,473
========== ==========
3
<PAGE>
RECONDITIONED SYSTEMS, INC.
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STATEMENTS OF OPERATIONS
For the Three and Nine Month Periods Ended December 31, 1998 and 1997
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales $ 2,543,315 $ 2,827,429 $ 8,317,781 $ 7,340,607
Cost of sales 1,919,714 2,065,594 6,399,630 5,461,608
----------- ----------- ----------- -----------
Gross profit 623,601 761,835 1,918,151 1,878,999
Selling & administrative expenses 360,661 439,341 1,189,424 1,231,498
----------- ----------- ----------- -----------
Income from operations 262,940 322,494 728,727 647,501
----------- ----------- ----------- -----------
Other income (expense):
Interest income 13,852 1,806 35,446 2,158
Interest expense (205) (1,107) (1,252) (19,267)
Other 1,023 (3,281) 3,466 (594)
----------- ----------- ----------- -----------
14,670 (2,582) 37,660 (17,703)
----------- ----------- ----------- -----------
Net income $ 277,610 $ 319,912 $ 766,387 $ 629,798
=========== =========== =========== ===========
Basic earnings per share
(Notes 1 and 3) $ 0.19 $ 0.22 $ 0.52 $ 0.43
=========== =========== =========== ===========
Basic weighted average number
of shares outstanding 1,473,950 1,473,950 1,473,950 1,473,950
=========== =========== =========== ===========
Diluted earnings per common
and common equivalent share
(Notes 1 and 3) $ 0.16 $ 0.19 $ 0.45 $ 0.38
=========== =========== =========== ===========
Diluted weighted average number
of shares outstanding 1,702,691 1,668,105 1,698,491 1,661,745
=========== =========== =========== ===========
</TABLE>
4
<PAGE>
RECONDITIONED SYSTEMS, INC.
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STATEMENTS OF STOCKHOLDERS' EQUITY
For the Year Ended March 31, 1998 and the Nine Month Period
Ended December 31, 1998
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON COMMON RETAINED TREASURY
STOCK STOCK EARNINGS STOCK
SHARES AMOUNT (DEFICIT) (134 SHARES) TOTAL
--------- ---------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Balance at
March 31, 1997 1,473,950 $4,586,982 $(3,207,204) $ (3,754) $ 1,376,024
Net income -- 0 839,530 0 839,530
--------- ---------- ----------- ------------ -----------
Balance at
March 31, 1998 1,473,950 4,586,982 (2,367,674) (3,754) 2,215,554
Treasury Stock Retired -- 0 (3,754) 3,754 0
Net income -- 0 766,387 0 766,387
--------- ---------- ----------- ------------ -----------
BALANCE AT
DECEMBER 31, 1998 1,473,950 $4,586,982 $(1,605,041) $ 0 $2,981,941
========= ========== =========== ============ ===========
</TABLE>
5
<PAGE>
RECONDITIONED SYSTEMS, INC.
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STATEMENTS OF CASH FLOWS
For the Three and Nine Month Periods Ended December 31, 1998 and 1997
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Cash and cash equivalents
provided (used) by operating
activities $ 270,085 $ (168,068) $ 438,686 $ 542,811
Cash and cash equivalents
used by investing activities (3,874) (150,324) (49,451) (163,831)
Cash and cash equivalents
used by financing activities (11,008) (13,605) (30,652) (482,658)
----------- ----------- ----------- -----------
Increase (decrease) in cash and
cash equivalents 255,203 (331,997) 358,583 (103,678)
Cash and cash equivalents,
beginning of period 836,411 370,443 733,031 142,124
----------- ----------- ----------- -----------
Cash and cash equivalents,
end of period $ 1,091,614 $ 38,446 $ 1,091,614 $ 38,446
=========== =========== =========== ===========
</TABLE>
6
<PAGE>
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, 1998
are not necessarily indicative of the results that may be expected for the
entire year ending March 31, 1999. These financial statements have been
prepared in accordance with the instructions to Form 10-QSB and do not
contain certain information required by generally accepted accounting
principles. These statements should be read in conjunction with the
financial statements and notes thereto included in the Company's Form
10-KSB for the year ended March 31, 1998.
EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE:
Basic earnings per share include no dilution and are computed by dividing
income available to common stockholders by the weighted average number of
shares outstanding for the period.
Diluted earnings per share amounts are computed based on the weighted
average number of shares actually outstanding plus the shares that would be
outstanding assuming the exercise of dilutive stock options, all of which
are considered to be common stock equivalents. The number of shares that
would be issued from the exercise of stock options has been reduced by the
number of shares that could have been purchased from the proceeds at the
average market price of the Company's stock.
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NOTE 2.
REVOLVING LINE OF CREDIT
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Effective July 31, 1998, the Company renegotiated and renewed its $1,000,000
line of credit agreement with M&I Thunderbird Bank. Under this new agreement,
interest is payable at the bank's base rate. Borrowings on the line of credit
may not exceed 75% of eligible accounts receivable and 30% of eligible inventory
up to $300,000. The line of credit is collateralized by accounts receivable,
inventory, property and equipment, and intangibles. The agreement contains
various covenants by the Company, including covenants that the Company will
maintain certain net worth thresholds and ratios, will meet certain debt service
coverage ratios, and will not enter into or engage in various types of
agreements or business activities without approval from M&I Thunderbird Bank. As
of December 31, 1998, there was $1,000,000 available and no outstanding
borrowings on the line of credit.
7
<PAGE>
RECONDITIONED SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 3.
EARNINGS PER SHARE
- --------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1998 1997 1998 1997
---------- ---------- ---------- ----------
Basic EPS
Net Income $ 277,610 $ 319,912 $ 766,387 $ 629,798
========== ========== ========== ==========
Weighted average number
of shares outstanding 1,473,950 1,473,950 1,473,950 1,473,950
========== ========== ========== ==========
Basic earnings per share $ 0.19 $ 0.22 $ 0.52 $ 0.43
========== ========== ========== ==========
Diluted EPS
Net Income $ 277,610 $ 319,912 $ 766,387 $ 629,798
========== ========== ========== ==========
Weighted average number
of shares outstanding 1,473,950 1,473,950 1,473,950 1,473,950
Effect of dilutive securities:
Stock options 228,741 194,155 224,541 187,795
---------- ---------- ---------- ----------
Total common shares + assumed
conversions 1,702,691 1,668,105 1,698,491 1,661,745
========== ========== ========== ==========
Per-Share Amount $ 0.16 $ 0.19 $ 0.45 $ 0.38
========== ========== ========== ==========
8
<PAGE>
RECONDITIONED SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 4.
INCOME TAXES
- --------------------------------------------------------------------------------
The Company has determined that the entire net operating loss for the year ended
March 31, 1996 in the approximate amount of $2.9 million could potentially be
deemed invalid by the Internal Revenue Service (IRS) due to the omission of an
election in the filing and that this same net operating loss may be overstated
by an amount not to exceed $500,000. The Company has engaged experts to file
with the IRS for a private letter ruling to validate the loss. Due to the fact
that the IRS has repeatedly granted relief to taxpayers in similar
circumstances, the experts believe it is very likely that the IRS will approve
the private letter ruling, thereby assuring the net operating loss deductions
taken to date. Even if the loss is validated, a reduction of the net operating
loss carryforward not to exceed $500,000 may be required. Since this reduction
would not relate to loss carryforwards already used and since the Company has
previously established a valuation allowance against the entire deferred tax
asset resulting from the remaining loss carryforwards, no adjustments have been
made to the accompanying financial statements as a result of this finding.
- --------------------------------------------------------------------------------
NOTE 5.
PROPOSED MERGER AND SUBSEQUENT EVENT
- --------------------------------------------------------------------------------
On October 30, 1998, the Company signed a definitive Merger Agreement (the
"Merger Agreement") with Cort Investment Group, Inc., a privately-owned Texas
corporation d/b/a Contract Network ("CNI"). Under the terms of the agreement,
CNI would acquire RSI through a merger in which the RSI shareholders would
receive approximately $8,575,000 in cash.
On February 5, 1999, the Company's shareholders approved the proposed Merger
Agreement between the Company and CNI. However, on February 4, 1999, CNI
informed the Company that CNI believes the Company may be in breach of certain
representations and warranties set forth in the Merger Agreement as related to
the income tax issues discussed in Note 4 above. As a result, the merger did not
close into escrow on February 5, 1999 as planned. Although no assurance can be
given that the merger will be consummated, CNI has expressed a desire to
continue to work with the Company to resolve the situation.
As of December 31, 1998, the Company has incurred and capitalized costs in the
amount of $29,738 in connection with the proposed merger.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
The statements contained in this report that are not historical facts may
constitute "forward-looking statements" within the meaning of Section 27A of the
Securities 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 the proposed merger with Cort Investment
Group, Inc. (CNI) may not be consummated, the risk that the Company will not
obtain a favorable IRS private letter ruling regarding its net operating losses,
the risk that the Company may not be able to geographically diversify its
operations on a profitable basis, and the risk that the Company may not be able
to bring its computer systems into year 2000 compliance before Janauary 1, 2000.
In addition, the Company's business, operations and financial condition are
subject to substantial risks that are described in the Company's reports and
statements filed from time to time with the Securities and Exchange Commission.
These reports and statements include the Company's Annual Report on Form 10-KSB
for the fiscal year ended March 31, 1998 and Quarterly Reports on Form 10-Q for
the quarters ended June 30, 1998 and September 30, 1998.
RESULTS OF OPERATIONS
FOR THE QUARTERS ENDED DECEMBER 31, 1998 AND 1997
Reconditioned Systems, Inc. (the "Company") reported net income for the three
month period ended December 31, 1998 (hereinafter the "reporting quarter") of
$277,610 as compared to $319,912 for the three month period ended December 31,
1997 (hereinafter the "comparable quarter"). This $42,302 or 13.2% decrease is
primarily a result of decreased sales volume.
The Company reported sales for the reporting quarter of $2,543,315 as compared
to $2,827,429 for the comparable quarter, resulting in a decrease of $284,114 or
10%.
Wholesale sales totaled $1,560,331 for the reporting quarter, a decrease of
$107,527 or 6.5% over the comparable quarter. This decrease was primarily due to
shifts in the OEM lead times. During the comparable quarter, the Company
benefited from a temporary competitive advantage created by extended Haworth,
Inc. lead times. Haworth's lead times during the reporting quarter were more
consistent with what they have been historically.
Retail sales in the Phoenix and Tucson markets totaled $982,984 during the
reporting quarter, a decrease of $176,587 or 15.2% over the comparable quarter.
This decrease was primarily attributed to the OEM lead times returning to
historical levels and attrition within the retail sales department. The
Company's retail sales manager position has been vacant since October, 1998, and
the number of retail salespeople decreased from 6 to 5 during the reporting
quarter.
The Company's gross profit margin for the reporting quarter was 24.5%, as
compared to a gross profit margin of 26.9% for the comparable quarter. This 2.4%
decrease in the gross margin was primarily attributable to decreased
efficiencies resulting from a 10% decrease in sales.
The Company's selling and administrative expenses were reduced from 15.5% of
sales in the comparable quarter to 14.1% for the reporting quarter. The 1.4%
decrease was primarily a result of a lower estimated percentage of bad debts to
sales. The allowance for potential bad debts is determined using an analysis of
collection rates and historical bad debts. As collection rates and bad debt
losses have improved over the last two years, the estimate of potential bad debt
losses has decreased. Actual bad debt losses for the reporting and comparable
quarters were approximately .5% of sales.
The Company's other income and expenses, which consists primarily of interest
income and expense, improved by $17,252 from the comparable quarter to the
reporting quarter. This improvement was primarily due to increased interest
income generated from the Company's current cash reserves.
10
<PAGE>
FOR THE NINE MONTH PERIOD ENDED DECEMBER 31, 1998 AND 1997
The Company reported net income of $766,387 for the nine month period ended
December 31, 1998 (hereinafter the "reporting period") as compared to $629,798
for the nine month period ended December 31, 1997 (hereinafter the "comparable
period"), an increase of $136,589 or 21.7%.
Sales revenues for the reporting period totaled $8,317,781, a $977,174 or 13.3%
increase over the comparable period. This increase was attributed to increased
wholesale sales revenues.
Wholesale sales for the reporting period totaled $5,220,940, a $982,607 or 23.2%
increase over the comparable period. The wholesale division continues to
actively pursue sales growth by targeting the western region of the United
States and has been successful in developing new and expanding existing dealer
relationships in some of these markets.
The Company generated $3,096,841 in retail sales during the reporting period.
This is consistent with the comparable period during which retail sales were
$3,102,274.
Despite the increased revenues, the Company's gross profit margin fell from
25.6% in the comparable period to 23.1% in the reporting period. This 2.5%
decrease was primarily due to the change in the wholesale/retail mix and the
difference in wholesale pricing as compared to retail pricing. The Company also
experienced higher product costs and lower profits margins as a result of
increased competition, changes to the product-mix and greater demand for newer
Haworth product-lines. Recent tougher competition with newly manufacturered
"bargain" product-lines has driven profit margins down. The Company's gross
margin was also negatively impacted by customer demand for newer versions of
Haworth product lines not yet readily available in the aftermarket. This shift
in demand required the Company to supplement its used inventory with new and
clone parts at a higher cost.
Selling and administrative expenses as a percentage of sales improved by 2.5%,
from 16.8% in the comparable period to 14.3% during the reporting period. This
was primarily a result of the overall lower percentage of fixed expenses to
increased sales revenues.
The Company generated an additional $55,363 over the comparable period in other
income by eliminating interest expense associated with the Company's line of
credit and increasing interest income.
INCOME TAXES
During the periods ended December 31, 1998 and 1997, 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.
The Company has determined that the entire net operating loss for the year ended
March 31, 1996 in the approximate amount of $2.9 million could potentially be
deemed invalid by the Internal Revenue Service (IRS) due to the omission of an
election in the filing and that this same net operating loss may be overstated
by an amount not to exceed $500,000. The Company has engaged experts to file
with the IRS for a private letter ruling to validate the loss. Due to the fact
that the IRS has repeatedly granted relief to taxpayers in similar
circumstances, the experts believe it is very likely that the IRS will approve
the private letter ruling, thereby assuring the net operating loss deductions
taken to date. Even if the loss is validated, a reduction of the net operating
loss carryforward not to exceed $500,000 may be required. Since this reduction
would not relate to loss carryforwards already used and since the Company has
previously established a valuation allowance against the entire deferred tax
asset resulting from the remaining loss carryforwards, no adjustments have been
made to the accompanying financial statements as a result of this finding.
11
<PAGE>
FINANCIAL CONDITION AND LIQUIDITY
As of December 31, 1998, the Company's cash and cash equivalents totaled
$1,091,614. In addition, the Company's net worth and working capital totaled
$2,981,941 and $2,648,655, respectively. The Company has no material long-term
debt and $1,000,000 available on its line of credit through M&I Thunderbird
Bank.
The Company reported cash flows from operations of $438,686 during the reporting
period. This was primarily a result of operating income and increased inventory
turns which more than offset the increase in the Company's accounts receivable.
The Company used $80,103 of these funds for financing and investing activities
with the remainder going to cash reserves.
The Company's sales growth resulted in increasing the Company's accounts
receivable balances by $263,668 at December 31, 1998 as compared to March 31,
1998. The Company's collection rate improved from 43 days in the comparable
period to 36 days in the reporting period. The Company's long-term goal is to
maintain a collection rate at or near 30 days.
Annualized inventory turns for the reporting period were 9.2, as compared to 6.4
for the year ended March 31, 1998. This improvement was primarily a result of
the Company's ability to increase sales without increasing inventory levels.
However, management believes any additional sales increases may require the
Company to increase current inventory levels and thereby reduce turns.
PROPOSED MERGER
On October 30, 1998, the Company signed a definitive Merger Agreement (the
"Merger Agreement") with Cort Investment Group, Inc., a privately-owned Texas
corporation d/b/a Contract Network ("CNI"). Under the terms of the agreement,
CNI would acquire RSI through a merger in which the RSI shareholders would
receive approximately $8,575,000 in cash.
On February 5, 1999, the Company's shareholders approved the proposed Merger
Agreement between the Company and CNI. However, on February 4, 1999, CNI
informed the Company that CNI believes the Company may be in breach of certain
representations and warranties set forth in the Merger Agreement as related to
the income tax issues discussed above. As a result, the merger did not close
into escrow on February 5, 1999 as planned. Although no assurance can be given
that the merger will be consummated, CNI has expressed a desire to continue to
work with the Company to resolve the situation.
As of December 31, 1998, the Company has incurred and capitalized costs in the
amount of $29,738 in connection with the proposed merger.
YEAR 2000 COMPLIANCE
The "Year 2000 problem" arose because many existing 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.
RSI has implemented a program to access and monitor the progress of its material
customers, suppliers and other significant third parties in resolving Year 2000
compliance issues. Questionnaires have been sent to all significant third
parties to evaluate their Year 2000 readiness. All responses are due to be
returned to RSI no later than January 31, 1999, at which time second requests
will be delivered to any parties who did not respond on a timely basis. In
addition, all new suppliers and customers will be required to complete the
questionnaires. The initial evaluation is scheduled to be completed by February
28, 1999; however, new third parties will be evaluated as needed. All material
third parties with potential unresolved Year 2000 compliance issues which become
evident through this assessment program will be monitored on an individual basis
depending on the significance of the relationship to RSI and the severity of the
unresolved issues.
12
<PAGE>
The Company has evaluated its existing systems, including information technology
and non-information technology systems, for Year 2000 compliance. Following this
evaluation, the Company believes all of its non-information technology systems
are in compliance at this time.
The Company's computer hardware and accounting software are not Year 2000
compliant. The Company has developed two plans to bring these systems into
compliance based upon the outcome of the proposed Merger with CNI. They are as
follows:
PLAN 1 - THE MERGER IS CONSUMMATED. If the proposed Merger with CNI is
consummated, RSI will upgrade its current accounting and network software
programs to Year 2000 compliance. The estimated cost of the upgrade is
approximately $500 and is scheduled for completion by April 30, 1999. RSI will
also contract with a third party vendor to analyze the existing computer
hardware for Year 2000 compliance and will upgrade all necessary hardware. The
cost of the analysis and hardware upgrades is estimated at between $3,000 and
$5,000 and is expected to be completed no later than June 30, 1999. The cost of
both the software and hardware upgrades will be funded from current cash
reserves and is not expected to have a material effect on RSI's operating
results. These upgrades would bring RSI's computer systems into Year 2000
compliance. RSI and CNI would then begin a search for a new
accounting/manufacturing software program to replace those used by both CNI and
RSI. The cost of this replacement software and any necessary hardware is unknown
at this time and is expected to be implemented within 18 to 24 months.
PLAN 2 - THE MERGER IS NOT CONSUMMATED. If the proposed Merger with CNI is not
consummated, RSI intends to replace its existing computer hardware with new Year
2000 compliant equipment. RSI estimates the replacement cost to be approximately
$50,000 and would be scheduled for completion by April 30, 1999. RSI would also
replace the existing accounting software program with a new
accounting/manufacturing software program. The estimated cost of this program
including implementation and training is approximately $60,000. Implementation
would be scheduled to begin May 1, 1999 with an estimated completion date of
August 31, 1999. The cost of the hardware and software replacement would be
funded from current cash reserves and is not expected to have a material effect
on RSI's operating results. These capital expenditures will bring RSI into Year
2000 compliance and are expected to improve RSI's administrative efficiency.
The most likely worse case scenario regarding RSI's Year 2000 compliance would
be that RSI would be unable to implement the new accounting/manufacturing
package before December 31, 1999 or that the cost will exceed the estimated
costs. If for any reason the conversion process cannot be completed before
January, 2000, RSI will resort to its backup plan (See Plan 1). Should the
implementation of Plan 2 fail, Plan 1 can easily be completed within 30 to 60
days. If the cost of the conversion exceeds the estimated costs, RSI believes
any additional expense can be funded from cash reserves without a material
effect on operations.
RSI's reconditioning and sale of workstations is not dependent upon computer
operations. Accordingly, RSI does not believe there is a risk of interruption in
its supply of workstations to its customers or lost revenues with any potential
Year 2000 compliance issues. Further, RSI does not believe that it faces any
potential liability to third parties for breach of contract or other harm if its
systems are not Year 2000 compliant. No costs associated with RSI's Year 2000
compliance have been incurred to date.
13
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not party to any pending legal proceeding other than routine
litigation incidental to the business.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
14
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed herewith pursuant to Regulation S-B:
NO. DESCRIPTION REFERENCE
2.1 Definitive merger agreement between Cort Investment Group,
Inc. and Reconditioned Systems, Inc. 9
3.1 Articles of Incorporation of the Registrant, as amended
and restated 3
3.2 Bylaws of Registrant, as amended and restated 3
4.1 Form of Common Stock Certificate 1
4.5 Registration Rights Agreements 2
*4.9 Options issued to Wayne R. Collignon 4
*4.10 Options issued to Dirk D. Anderson 4
*4.11 Amendment to Options issued to Wayne Collignon 5
*4.12 Amendment to Options issued to Dirk D. Anderson 5
*4.13 Options issued to Wayne R. Collignon 5
*4.14 Options issued to Dirk D. Anderson 5
*4.15 Options issued to Scott W. Ryan 5
*4.16 Options issued to Scott W. Ryan 5
4.17 Common stock purchase warrant issued to Cort Investment
Group, Inc. 10
10.1 Lease Agreement, dated April 12, 1990 between Boston Safe
Deposit and Trust Company, as Lessor, and Registrant as Lessee 1
*10.21 Employment Agreement between the Registrant and Wayne R.
Collignon 3
*10.22 Employment Agreement between the Registrant and Dirk D.
Anderson 3
10.23 Third amendment to the Lease between the Registrant, as
Lessee, and Newhew Associates, as Lessor 3
10.24 Loan documents between the Registrant and Norwest Business
Credit, Inc. 3
*10.25 Amendment to Employment Agreement between Registrant and
Wayne Collignon 4
*10.26 Amendment to Employment Agreement between Registrant and
Dirk Anderson 4
10.27 Amendments to Loan document between Norwest Business Credit
and Registrant 4
10.28 Amendment to Loan document between Norwest Business Credit
and Registrant 5
10.29 Loan document between Registrant and M&I Thunderbird Bank 6
*10.30 Loan document between Registrant and Wayne R. Collignon 7
*10.31 Loan document between Registrant and Dirk D. Anderson 7
10.32 Loan document between M&I Thunderbird Bank and the Registrant 8
(1) Filed with Registration Statement on Form S-18, No. 33-51980-LA,
under the Securities Act of 1933, as declared effective on
December 17, 1992
(2) Filed with Form 10-KSB on July 13, 1995
(3) Filed with Form 10-KSB on July 2, 1996
(4) Filed with Form 10-QSB on November 14, 1996
(5) Filed with 10-KSB on June 26, 1997
(6) Filed with 10-QSB on November 14, 1997
(7) Filed with 10-QSB on February 10, 1998
(8) Filed with 10-QSB on August 14, 1998
(9) Filed with 10-QSB on November 13, 1998
(10) Filed in conjunction with Exhibit 2.1 on November 13, 1998
(*) Indicates a compensatory plan or arrangement
(b) Reports on Form 8-K:
On November 16, 1998, the Company filed a report on Form 8-K announcing that on
October 30, 1998 the Company entered into an Agreement and Plan of Merger with
Cort Investment Group, Inc.
15
<PAGE>
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 12, 1999 /s/ Wayne R. Collignon
-------------------------------------
Wayne R. Collignon, President and CEO
Date: February 12, 1999 /s/ Dirk D. Anderson
-------------------------------------
Dirk D. Anderson, CFO
16
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<NAME> RECONDITIONED SYSTEMS, INC.
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