<PAGE> 1
FORM 10-QSB
U.S. Securities and Exchange Commission
Washington D. C., 20549
(MARK ONE)
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT
For the transition period from__________ to ___________.
Commission file number 0-20924
RECONDITIONED SYSTEMS, INC.
(Exact name of small business issuer as specified in its charter)
<TABLE>
<CAPTION>
ARIZONA 86-0576290
<S> <C>
(State or other jurisdiction of incorporation or organization) (IRS Employer Identification No.)
</TABLE>
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 August 12, 1996, the number of
shares outstanding of the Registrant's common stock and Class B Warrants were
1,473,788 and 250,000, respectively.
<PAGE> 2
PART 1 - FINANCIAL STATEMENTS
ITEM 1
RECONDITIONED SYSTEMS, INC.
FINANCIAL STATEMENTS
JUNE 30, 1996
<PAGE> 3
2
RECONDITIONED SYSTEMS, INC.
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BALANCE SHEET
JUNE 30, 1996
(UNAUDITED)
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ASSETS
<TABLE>
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents 193,940
Accounts receivable - trade, net of allowance
for doubtful accounts of $16,556 899,237
Inventory 1,181,439
Prepaid expenses and other current assets 60,982
---------
TOTAL CURRENT ASSETS 2,335,598
PROPERTY AND EQUIPMENT:
Machinery and equipment 216,310
Office furniture and equipment 224,311
Leasehold improvements 35,620
Vehicles 13,632
-------
489,873
Accumulated depreciation 285,916 203,957
-------
OTHER ASSETS:
Refundable deposits & other 46,159
---------
2,585,714
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable 680,070
Current maturities of long-term debt 47,615
Accounts payable 429,797
Accrued expenses and other current liabilities 125,727
---------
TOTAL CURRENT LIABILITIES 1,283,209
LONG-TERM DEBT, LESS CURRENT MATURITIES 71,282
STOCKHOLDERS' EQUITY 1,231,223
---------
2,585,714
=========
</TABLE>
<PAGE> 4
3
RECONDITIONED SYSTEMS, INC.
------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
FOR THE THREE MONTH PERIODS ENDED JUNE 30, 1995 AND 1996
(UNAUDITED)
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<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
1995 1996
---------------------------
<S> <C> <C>
Sales 2,851,415 1,887,487
Cost of sales 2,289,284 1,453,033
--------- ---------
Gross profit 562,131 434,454
Selling & administrative expenses 591,185 304,986
--------- ---------
Income (loss) from operations (29,054) 129,468
--------- ---------
Other income (expense):
Interest income 56 1,322
Interest expense (26,129) (29,978)
Other 3,728 28
--------- ---------
(22,345) (28,628)
--------- ---------
Income (loss) before provision
for income taxes (51,399) 100,840
Provision for income taxes 0 0
--------- ---------
Net income (loss) (51,399) 100,840
========= =========
Income (loss) per common share (Notes 1 and 2) (.04) .07
========= =========
Weighted average number
of shares outstanding (Notes 1 and 2) 1,461,069 1,473,788
========= =========
</TABLE>
<PAGE> 5
4
RECONDITIONED SYSTEMS, INC.
------------------------------------------------------------------------------
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED MARCH 31, 1996 AND THE THREE MONTHS ENDED JUNE 30, 1996
(UNAUDITED)
------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON COMMON PREFERRED PREFERRED RETAINED TREASURY
STOCK STOCK STOCK STOCK EARNINGS STOCK (134 TOTAL
SHARES AMOUNT SHARES AMOUNT (DEFICIT) SHARES)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT
MARCH 31, 1995 1,533,000 2,445,618 555,555 2,156,717 (1,737,266) (3,754) 2,861,315
CONVERSION OF
REDEEMABLE 12,000 43,525 43,525
COMMON STOCK
PURCHASE OF
CORPORATE 76,300 0
UPHOLSTERY, INC.
NET LOSS (1,728,052) (1,728,052)
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 7,222,228 2,110,312 (555,555) (2,156,717) (46,405)
TO COMMON STOCK
, NET OF COSTS
OF $46,405
(NOTE 2)
REVERSE SPLIT
OF COMMON STOCK (7,369,606) 0
(NOTE 2)
NET INCOME 100,840 100,840
- ------------------------------------------------------------------------------------------------------------
BALANCE AT JUNE
30, 1996 1,473,922 4,599,455 0 0 (3,364,478) (3,754) 1,231,223
</TABLE>
- 35 -
<PAGE> 6
5
RECONDITIONED SYSTEMS, INC.
------------------------------------------------------------------------------
STATEMENT OF CASH FLOWS
FOR THE THREE MONTH PERIODS ENDED JUNE 30, 1995 AND 1996
(UNAUDITED)
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<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
1995 1996
---- ----
<S> <C> <C>
Cash and cash equivalents
provided (used) by operating
activities 5,404 (252,807)
Cash and cash equivalents
provided (used) by investing
activities 0 (4,957)
Cash and cash equivalents
provided (used) by financing
activities 9,223 351,006
------ -------
Increase (decrease) in cash
and cash equivalents 14,627 93,242
Cash and cash equivalents,
beginning of period 89,558 100,698
------- -------
Cash and cash equivalents,
end of period 104,185 193,940
======= =======
</TABLE>
<PAGE> 7
6
RECONDITIONED SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
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NOTE 1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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BASIS OF PRESENTATION:
The accompanying Statement of Operations for the three months ended
June 30, 1995, Statement of Stockholders's Equity for the year ended
March 31, 1996, and Statement of Cash Flows for the three months ended
June 30, 1995, are consolidated statements and include all of the
accounts of the Company and its wholly-owned subsidiaries: RSI
Integrated Parts, Inc., RSI Acquisitions, Inc., Corporate Upholstery,
Inc., and Facility Options Group, Inc. All intercompany accounts and
transactions were eliminated in the consolidation of these statements.
All of the aforementioned subsidiaries were closed as of March 31,
1996, and, as such, the accompanying Balance Sheet as of June 30, 1996,
Statement of Operations for the three months ended June 30, 1996,
Statement of Stockholders' Equity for the three months ended June 30,
1996, and Statement of Cash Flows for the three months ended June 30,
1996, 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 three months ended June 30, 1996,
are not necessarily indicative of the results that may be expected for
the entire fiscal year ending March 31, 1997. These financial
statements have been prepared in accordance with the instructions to
Form 10-QSB and do not contain certain information required by
generally accepted accounting principles. These statements should be
read in conjunction with financial statements and notes thereto
included in the Company's Form 10-KSB for the fiscal year ended March
31, 1996.
INCOME (LOSS) PER SHARE:
The computation of income (loss) per share is based on the net income
(loss) and the weighted average number of common shares outstanding for
each period. Outstanding warrants are not included in the computation
of income (loss) per share because their effect would be antidilutive.
The income (loss) per share and the weighted average number of shares
outstanding for the periods presented 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 2).
NOTE 2.
SUBSEQUENT EVENT
- --------------------------------------------------------------------------------
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). The accompanying financial statements give retroactive effect to
these transactions.
<PAGE> 8
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
The statements contained herein which 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 Company's ability to maintain and increase current sales levels,
maintain a collection rate at or near its standard terms, and maintain annual
inventory turns of at least 4. In addition, the Company's business, operations
and financial condition are subject to substantial risks which 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, 1996.
RESULTS OF OPERATIONS
Reconditioned Systems, Inc. ("RSI" or the "Company") reported net income of
$100,840 for the three month period ended June 30, 1996 (the "reporting
quarter") compared to a net loss of $51,399 for the quarter ended June 30, 1995
(the "comparable quarter"). The improvement to the Company's net income is
primarily attributable to RSI's restructuring program which was completed during
the quarter ended September 30, 1995. The restructuring program downsized the
Company to its original form by closing all of its subsidiaries. RSI, not
including the losses of subsidiaries closed as part of its restructuring
program, had net income of $99,369 for the comparable period.
The Company's sales for the reporting quarter were $1,887,487 which represents a
$963,928 or 34% decrease over the comparable quarter. This decrease was
attributable to the downsizing that was done in conjunction with the Company's
restructuring program. Sales at RSI, excluding sales by the subsidiaries which
were closed as part of the restructuring, were $1,880,608 for the comparable
quarter.
The Company's gross profit margin during the reporting quarter was 23.0% which
represents a 3.3% improvement over the comparable period's gross profit
percentage of 19.7%. Again, this margin improvement was due to the restructuring
since RSI's gross profit margin, not including the subsidiaries closed as part
of the restructuring, was 22.8% for the comparable period.
The Company's selling and administrative expenses for the reporting quarter were
16.2% of sales as compared with 20.7% during the comparable quarter. The
improvement in the reporting quarter was again achieved as a result of the
downsizing that was done as part of the Company's restructuring program. RSI's
selling and administrative expenses, not including the subsidiaries closed as
part of the restructuring, were 16.4% of sales for the comparable quarter.
The Company's other income and expenses, which consists primarily of interest
expense, was $28,628 and $22,345 during the reporting and comparable periods,
respectively. The slight increase in this amount is primarily attributable to
the fact that the Company's new lender, Norwest Business Credit, Inc., is
charging the Company a higher borrowing rate than the Company's former lender.
As is evidenced by the above discussion, excluding the results of the
subsidiaries closed as part of the Company's restructuring, RSI's operating
results for the reporting and comparable quarters were substantially similar.
The Company's management believes that the key to maintaining and improving upon
the operating results achieved during the reporting and comparable periods is to
maintain or improve upon the sales levels attained during these quarters. During
the year ended March 31, 1996, the Company was unable to maintain the sales
levels. Following its sales of $1,880,608 during the comparable quarter, the
Company reported sales (excluding subsidiaries) of $1,152,454 for the quarter
ended September 30, 1995, $1,493,557 for the quarter ended December 31, 1995,
and $1,503,104 for the quarter ended March 31, 1996. As a result, net income
levels also dropped significantly during these periods.
<PAGE> 9
8
RESULTS OF OPERATIONS (CONTINUED)
During the reporting period and during the period from June 30, 1996, to the
date of this report, management has taken action in an attempt to achieve the
Company's desired goal of maintaining or improving upon the $1,887,487 of sales
during the reporting period. As of the beginning of the reporting period, April
1, 1996, the Company had four salespeople focusing on the local retail market
and two salespeople focusing on non-local wholesale sales. Currently, the
Company has six salespeople focusing on the local retail market in Phoenix, one
salesperson focusing on the local retail market in Tucson, two salespeople
focusing on non-local wholesale sales, and it has created a sales manager
position to train new salespeople as well as monitor the activities of existing
salespeople. Management believes that all individual salespeople have variations
in their sales from month-to-month and, as such, the key to maintaining or
improving upon the reporting period's sales is to have enough salespeople in
enough different markets so that the Company is not relying upon each
salesperson to maximize his or her potential each and every month for the
Company to simply reach its sales goals. Because training time varies from
individual to individual and the success rate of new salespeople is not 100%,
there can be no assurance that the actions taken by management to maintain or
improve on the reporting period's sales levels will be effective for the quarter
ended September 30, 1996 or any subsequent period. The Company intends to
continue to selectively add to its sales staff both locally and in other nearby
markets.
FINANCIAL CONDITION AND LIQUIDITY
As a result of the net income for the reporting period and the reorganization of
the Company's capital structure that was approved at the annual shareholders
meeting on August 5, 1996, the Company's financial condition and liquidity has
improved dramatically since March 31, 1996. The automatic conversion of each
outstanding share of Series A Convertible Preferred Stock and accrued dividends
into 13 shares of common stock relieved the Company of accrued but unpaid
dividends of approximately $337,500 and the burden of the $56,250 per quarter
dividend going forward.
As of June 30, 1996, the Company's financial condition and liquidity is
sufficient to sustain current operating levels and pursue gradual and focused
growth. The Company has net worth of $1,231,223 and working capital of
$1,052,389. In addition, as of the date of this report, the Company has a
balance of approximately $500,000 and total availability of approximately
$400,000 on its line of credit with Norwest Business Credit, Inc. Since the
total availability under this line of credit agreement is based upon accounts
receivable and inventory up to a maximum amount of $1.2 million, this
arrangement should provide the Company with the short-term working capital
required for gradual growth. As of June 30, 1996, the Company was in compliance
with all of the financial covenants required by this financing agreement.
With the elimination of the preferred stock dividend, the three items which now
primarily control the Company's financial condition and liquidity are its
results of operations, its collection of accounts receivable, and its ability to
turn inventory. The results of operations during the reporting period were
discussed above. The second item, the number of days sales in accounts
receivable as of June 30, 1996, was 44 as compared to 25 as of March 31, 1996.
This slow-down in collections was the primary reason that the Company's
operations used $252,807 of cash during the reporting period. Because the
Company's standard terms are net 30 days from existing customers and 50% down
and 50% net 30 days from new customers, the Company views the 25 days at March
31, 1996 as an anomaly and does not expect to maintain a collection rate under
30 days in the future. In addition, as of June 30, 1996, there was a large
receivable due from one customer that was paid after the quarter ended. Not
including this customer, the number of days sales in accounts receivable as of
June 30, 1996, would have been 36 days and the amount of cash used by the
Company's operations would have been reduced by nearly 60%. For the reporting
period the Company turned its inventory at an annualized rate of approximately
4.5 times as compared to 4.7 times for the year ended March 31, 1996. As such,
the current inventory turnover level is consistent with what was achieved during
last fiscal year and with management's expectation that is should turn
inventories a minimum of 4 times annually.
<PAGE> 10
9
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
During February, 1994, the Company issued 555,555 shares of 9% Series A
Convertible Preferred Stock. The dividend requirement on this preferred stock
was $56,282 per quarter and the last dividend paid was during February, 1995,
resulting in an arrearage in the amount of $337,692 as of August 1, 1996.
Effective August 12, 1996, the 9% Series A Convertible Preferred Stock and the
accrued dividends were converted to Common Stock (see below under Item 4).
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On August 5, 1996, the Company held its annual shareholders meeting. The
following six proposals were presented at the meeting:
1. To consider and act upon a proposal (the "Preferred Stock Proposal") to amend
the Company's Articles of Incorporation to provide for the automatic conversion,
on August 12, 1996, of each outstanding share of the Company's Series A
Convertible Preferred Stock, no par value ( the "Preferred Stock"), together
with any and all accrued but unpaid dividends through the conversion date, into
13 shares of the Company's Common Stock, no par value (the "Common Stock").
2. If the Preferred Stock Proposal is approved by the Stockholders, to consider
and act upon a proposal to amend the Company's Articles of Incorporation to
effect a six-to-one reverse stock split of the Company's presently issued shares
of Common Stock (including the shares of Common Stock into which the Preferred
Stock will be converted pursuant to the Preferred Stock Proposal).
3. Whether or not the Preferred Stock Proposal is approved by the Stockholders,
to consider and act upon a proposal to amend the Company's Articles of
Incorporation to make certain technical corrections and to eliminate, in certain
circumstances, the liability of directors to the Company and the Stockholders.
4. Whether or not the Preferred Stock Proposal is approved by the Stockholders,
to consider and act upon a proposal to amend and restate the Company's Bylaws.
5. To elect as directors to the Board of Directors Wayne Collignon, Dirk
Anderson, and Scott Ryan.
6. To consider and act upon a proposal to ratify the appointment of Semple &
Cooper, PLC as the Company's independent public accountants for the fiscal year
ending March 31, 1997.
All six proposals were passed at the meeting and the following table provides
the results of the voting:
<TABLE>
<CAPTION>
==========================================================================================================================
Proposal Shares Eligible Voted For Voted Against Abstentions
- --------------------------------------------------------------------------------------------------------------------------
Preferred Common Preferred Common Preferred Common Preferred Common
==========================================================================================================================
==========================================================================================================================
<C> <C> <C> <C> <C> <C> <C> <C> <C>
1 555,555 1,620,500 364,443 1,160,136 5,555 1,600 0 0
- --------------------------------------------------------------------------------------------------------------------------
2 555,555 1,620,500 364,443 1,160,136 0 1,600 5,555 0
- --------------------------------------------------------------------------------------------------------------------------
3 555,555 1,620,500 364,443 1,160,136 5,555 1,600 0 0
- --------------------------------------------------------------------------------------------------------------------------
4 555,555 1,620,500 364,443 1,159,936 0 1,500 5,555 300
- --------------------------------------------------------------------------------------------------------------------------
5 (1) 555,555 1,620,500 369,998 1,160,336 0 0 0 1,400
- --------------------------------------------------------------------------------------------------------------------------
6 555,555 1,620,500 364,443 1,161,736 0 0 5,555 0
==========================================================================================================================
</TABLE>
(1) The votes listed in this row were identical for Wayne Collignon, Dirk
Anderson, and Scott Ryan
<PAGE> 11
10
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The following exhibits are filed herewith pursuant to Regulation S-B:
<TABLE>
<CAPTION>
NO. DESCRIPTION REFERENCE
- --- ----------- ---------
<C> <C>
3.1 Amended and Restated Articles of Incorporation (3)
3.2 Amended and Restated Bylaws (3)
4.1 Form of Stock Certificate (1)
4.2 Form of Class A and Class B Warrant (1)
4.3 Form of Series A Preferred Stock Agreement (2)
10.1 Lease Agreement, dated April 12, 1990 between Boston
Safe Deposit and Trust Company, as Lessor, and Registrant
as Lessee (1)
10.11 Purchase Agreement between Registrant and Corporate
Upholstery, Inc. (4)
10.16 Purchase Agreement between Registrant and Facility Options
Group, Inc. (5)
10.17 Loan document between National Bank of Arizona and Registrant (6)
10.18 Agreement for Surrender and Cancellation of Redemption Right
between Larry Henry and Registrant (7)
10.21* Employment Agreement between Registrant and Wayne Collignon (8)
10.22* Employment Agreement between Registrant and Dirk Anderson (8)
10.23 Third amendment to the Lease between Registrant, as Lessee,
and Newhew Associates, as Lessor (8)
10.24 Loan documents between Registrant and Norwest Business Credit (8)
27 Financial Data Schedule (9)
</TABLE>
(1) Filed with Registration Statement on Form S-18, No. 33-51980-L:A, under
Securities Act of 1933, as declared effective on December 17, 1992.
(2) Filed with Form 10-KSB on June 29, 1994.
(3) Filed with the Company's definitive proxy statement on July 10, 1996
(4) Filed with Form 8 amendment on May 17, 1993, amending 8-K filed on April 30,
1993
(5) Filed with Form 8-K on August 17, 1993
(6) Filed with Form 10-KSB on July 13, 1995
(7) Filed with Form 10-KSB on June 20, 1994
(8) Filed with Form 10-KSB on July 10, 1996
(9) Filed herewith
REPORTS ON FORM 8-K
No reports were filed on Form 8-K during the quarter ended June 30, 1996.
<PAGE> 12
11
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: August 14, 1996 /S/ Wayne R. Collignon
--------------------------- -----------------------
Wayne R. Collignon, President and CEO
Date: August 14, 1996 /S/ Dirk D. Anderson
--------------------------- ---------------------
Dirk D. Anderson, CFO
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 193,940
<SECURITIES> 0
<RECEIVABLES> 915,793
<ALLOWANCES> 16,556
<INVENTORY> 1,181,439
<CURRENT-ASSETS> 2,335,598
<PP&E> 489,873
<DEPRECIATION> 285,916
<TOTAL-ASSETS> 2,585,714
<CURRENT-LIABILITIES> 1,283,209
<BONDS> 0
0
0
<COMMON> 4,599,455
<OTHER-SE> (3,368,232)
<TOTAL-LIABILITY-AND-EQUITY> 2,585,714
<SALES> 1,887,487
<TOTAL-REVENUES> 1,888,837
<CGS> 1,453,033
<TOTAL-COSTS> 1,758,019
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 29,978
<INCOME-PRETAX> 100,840
<INCOME-TAX> 0
<INCOME-CONTINUING> 100,840
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 100,840
<EPS-PRIMARY> .07
<EPS-DILUTED> .07
</TABLE>
