<PAGE>1
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 September 30, 1997
( ) 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)
Arizona 86-0576290
(State or other jurisdiction of incorporation or organization)
(IRS Employer 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 November 6, 1997, the number of shares outstanding of the
Registrant's common stock was 1,473,950.
<PAGE> 2
PART 1 - FINANCIAL STATEMENTS
Item 1
- ------
RECONDITIONED SYSTEMS, INC.
Unaudited Financial Statements
September 30, 1997
2
<PAGE> 3
<TABLE>
RECONDITIONED SYSTEMS, INC.
_________________________________________________________________
BALANCE SHEETS
September 30, 1997 and 1996
(Unaudited)
_________________________________________________________________
<S> <C> <C>
1997 1996
---- ----
ASSETS
Current Assets:
Cash and cash equivalents $ 370,443 $ 257,829
Accounts receivable - trade, net of allowance
for doubtful accounts of $47,500 and
$24,938, respectively 981,920 592,551
Inventory 1,039,441 1,027,066
Prepaid expenses and other current assets 39,444 200,965
------ -------
Total current assets 2,431,248 2,078,411
Property and Equipment; net of accumulated
depreciation of $366,278 and
$301,731 respectively 162,748 205,231
Other Assets 15,763 42,950
------ ------
$2,609,759 $2,326,592
========== ==========
LIABILITIES AND STOCKHOLDERS EQUITY
Current Liabilities:
Revolving line of credit (Note 2) $ - $ 527,374
Current maturities of long-term debt 45,075 49,049
Accounts payable 443,781 308,900
Customer deposits 198,783 8,291
Accrued expenses and other current liabilities 222,688 130,041
------- -------
Total current liabilities 910,327 1,023,655
Long-Term Debt, less current maturities 13,522 58,298
Stockholders Equity 1,685,910 1,244,639
--------- ---------
$2,609,759 $2,326,592
========== ==========
</TABLE>
3<PAGE>
<PAGE> 4
<TABLE>
RECONDITIONED SYSTEMS, INC.
_________________________________________________________________
STATEMENT OF OPERATIONS
For the Three Month and Six Month Periods Ended September 30, 1997 and 1996
(Unaudited)
__________________________________________________________________
Three Months Ended Six Months Ended
September 30, September 30,
1997 1996 1997 1996
---------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Sales $2,245,816 $1,408,927 $4,513,178 $3,296,414
Cost of sales 1,707,851 1,060,075 3,396,014 2,513,108
--------- --------- --------- ---------
Gross profit 537,965 348,852 1,117,164 783,306
Selling & administrative expenses 371,688 295,327 792,157 600,313
------- ------- ------- -------
Income from operations 166,277 53,525 325,007 182,993
------- ------ ------- -------
Other income (expense):
Interest income 181 3,210 352 4,532
Interest expense (4,565) (29,681) (18,160) (59,659)
Other (815) (28) 2,687 0
------- ------- ------- -------
(5,199) (26,499) (15,121) (55,127)
------- --------- -------- -------
Net income $161,078 $27,026 $309,886 $127,866
======== ======== ======== ========
Primary earnings per common
and common equivalent share $0.09 $0.02 $0.19 $0.08
======== ======== ========= =======
Primary weighted average number
of shares outstanding 1,654,571 1,569,430 1,625,729 1,522,805
========= ========= ========= =========
</TABLE>
4<PAGE>
<PAGE> 5
<TABLE>
RECONDITIONED SYSTEMS, INC.
_____________________________________________________________________________________
STATEMENT OF STOCKHOLDERS EQUITY
For the Year Ended March 31, 1997 and the Six Month Period Ended September 30, 1997
(Unaudited)
_____________________________________________________________________________________
Common Common Preferred Preferred Retained Treasury
Stock Stock Stock Stock Earnings Stock Total
Shares Amount Shares Amount (Deficit) (134 Shares)
------ ------ --------- ---------- --------- ---------- ------
<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
to Common
Stock, net of
costs of $58,878 7,222,215 2,097,839 (555,555) (2,156,717) 0 0 (58,878)
Reverse Split of
Common Stock (7,369,565) 0 0 0 0 0 0
Net income - 0 - 0 258,114 0 258,114
----------- --------- ---------- ---------- -------- ------- ---------
Balance at
March 31, 1997 1,473,950 $4,586,982 - 0 $(3,207,204) $(3,754) $1,376,024
Net income - 0 - 0 309,886 0 309,886
----------- ---------- ---------- --------- ----------- -------- ---------
Balance at
September 30,
1997 1,473,950 $4,586,982 0 0 $(2,897,318) $(3,754) $1,685,910
</TABLE>
5<PAGE>
<PAGE> 6
<TABLE>
RECONDITIONED SYSTEMS, INC.
_____________________________________________________________________________________
STATEMENT OF CASH FLOWS
For the Three Month and Six Month Periods Ended September 30, 1997 and 1996
(Unaudited)
_____________________________________________________________________________________
Three Months Ended Six Months Ended
September 30, September 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cash and cash equivalents
provided (used) by operating
activities 389,566 249,257 710,879 (3,550)
Cash and cash equivalents
used by investing
activities (7,288) (15,838) (13,507) (20,795)
Cash and cash equivalents
provided (used) by financing
activities (141,467) (169,530) (469,053) 181,476
--------- --------- --------- -------
Increase in cash
and cash equivalents 240,811 63,889 228,319 157,131
Cash and cash equivalents,
beginning of period 129,632 193,940 142,124 100,698
-------- -------- ------- --------
Cash and cash equivalents,
end of period 370,443 257,829 370,443 257,829
======== ======== ======= =======
</TABLE>
6<PAGE>
<PAGE> 7
RECONDITIONED SYSTEMS, INC.
Notes to Financial Statements
(Unaudited)
_________________________________________________________________
Note 1.
Summary of Significant Accounting Policies
_________________________________________________________________
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 six months ended September 30, 1997, are not
necessarily indicative of the results that may be expected
for the entire year ending March 31, 1998. 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 year ended March 31, 1997.
Earnings Per Common and Common Equivalent Share:
The computation of earnings per share is based on the net
income and the weighted average number shares of common
stock and common stock equivalents outstanding for each
period. Certain stock options outstanding are considered
common stock equivalents during the quarters and periods
ended September 30, 1997 and 1996, and were accounted for
under the Treasury Stock method. In addition, certain
warrants which were outstanding during the periods ended
September 30, 1997 and 1996 are not included in the
computation of earnings per share for those quarters because
their effect would be antidilutive. Fully diluted earnings
per share were not materially different from primary
earnings per share. The earnings per share and the weighted
average number of shares outstanding for the quarter ended
and period ended September 30, 1996 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.
_________________________________________________________________
Note 2.
Revolving Line of Credit
_________________________________________________________________
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 2%. 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.
7<PAGE>
<PAGE> 8
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 risk that the Company may not
be able to continue to increase sales, maximize its production
capacity and maintain adequate inventory levels at an acceptable
cost. 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, 1997.
Results of Operations
- ---------------------
For the Quarter Ended September 30, 1997 and 1996
- -------------------------------------------------
<TABLE>
Summary Statement of Operations (Unaudited)
For the Three Months Ended
September 30, September 30,
1997 1996 Change
------------- ------------- ------
<S> <C> <C> <C>
Sales $2,245,816 $1,408,927 $836,889
Cost of sales 1,707,851 1,060,075 647,776
Gross profit 537,965 348,852 189,113
Selling & administrative
expenses 371,688 295,327 76,361
Income from operations 166,277 53,525 112,752
Other income (expense) (5,199) (26,499) 21,300
Net income $161,078 $27,026 $134,052
</TABLE>
Reconditioned Systems, Inc. ("RSI" or the "Company") reported
sales of $2,245,816 for the three month period ended September
30, 1997 (hereinafter the "reporting quarter"). This represents
a 59.4% increase over sales for the three month period ended
September 30, 1996 (hereinafter the "comparable quarter").
This improvement was primarily attributable to additions to the
wholesale sales staff and increased marketing efforts focusing on
the development of wholesale markets within the Western United
States. Wholesale sales increased by $1,058,060 or 297% over the
comparable quarter. Retail sales in the Phoenix and Tucson
markets were down $221,172 or 21% from the comparable period.
Historically, sales were approximately 50% wholesale
and 50% retail. In an effort to improve retail sales, management
is currently seeking to hire and train additional salespeople.
In addition, the Company decided to close the Tucson sales office and is
considering opening retail storefronts in various markets, offering both new
and remanufactured modular furniture lines.
The Company's gross profit margin for the reporting and
comparable quarters remained fairly consistent at 24% and 24.8%,
respectively. Although the Company's wholesale sales prices are
lower than those offered to retail customers, the Company was
able to maintain a consistent gross profit margin. This was
accomplished through gains in economies of scale and increased
operating efficiency as a result of a significant increase in the
Company's average order size. The Company's average wholesale
order is larger than the average retail sale. In addition, the
Company was closer to meeting its optimum production capacity.
Selling and administrative expenses for the reporting quarter
were 16.6%, compared to 21.0% for the comparable quarter. The
4.4% improvement primarily resulted from a lower overall
percentage of fixed expenses and the wholesale/retail mix of
those sales. The Company's retail and wholesale departments
operate independently and under different compensation
agreements. Current wholesale sales compensation approximates
3.5% of wholesale sales revenues. By comparison, retail sales
compensation approximates 11% of retail sales revenues.
8<PAGE>
<PAGE> 9
Other income and expenses, which primarily consisted of interest
expense, improved by 80.4% over the comparable quarter. The
Company's increased sales and improved financial stability
enabled management to acquire new financing with lower borrowing
rates on its revolving line or credit. In addition, the Company
paid off its line of credit during the reporting quarter through
improved cash flows, thereby eliminating its interest expense
associated with the revolving credit line.
The Company's 496% increase in net income over the comparable
quarter is primarily a result of increased sales revenues and
lower borrowing rates as discussed above.
For the Six Month Period Ended September 30, 1997 and 1996
----------------------------------------------------------
<TABLE>
Summary Statement of Operations (Unaudited)
For the Six Months Ended
September 30, September 30,
1997 1996 Change
------------- ------------- ----------
<S> <C> <C> <C>
Sales $4,513,178 $3,296,414 $1,216,764
Cost of sales 3,396,014 2,513,108 882,906
Gross profit 1,117,164 783,306 333,858
Selling & administrative
expenses 792,157 600,313 191,844
Income from operations 325,007 182,993 142,014
Other income (expense) (15,121) (55,127) 40,006
Net income $309,886 $127,866 $182,020
</TABLE>
The Company's operating results for the six month period ended
September 30, 1997 (hereinafter the "reporting period") were
influenced by the same factors affecting the results for the
reporting quarter, as were discussed in the narrative above.
Wholesale sales represented 56% of the sales revenues earned
during the reporting period, an increase of $1,254,946 or 95%
compared to the wholesale sales during the six month period ended
September 30, 1996 (hereinafter the "comparable period"). Retail
sales decreased by $38,183 or 2% during the reporting period in
comparison to the comparable period.
Income Taxes
- ------------
As of March 31, 1997, the Company had federal loss carryforwards
of approximately $2,990,000 and state loss carryforwards of
approximately $2,790,000. The federal loss carryforwards expire
through March 31, 2011 and the state loss carryforwards expire
through March 31, 2001. If the Company is profitable before
these loss carryforwards expire, it will benefit from them at
statutory rates. During the quarters ended September 30, 1997
and 1996, the Company benefited in the approximate amount of
$120,000 and $40,000 from these loss carryforwards.
9
<PAGE> 10
Financial Condition and Liquidity
- ---------------------------------
The primary factors affecting the Company's financial condition
and liquidity are the results of operations, collection period
and rate of inventory turns. The Company's operations during the
reporting period generated cash from operating activities of
$710,879 to finance the Company's 36% sales growth and reduce the
Company's revolving credit and long-term debt balances by
$469,053. As of the date of this report, the Company had no
outstanding balance and $1,000,000 of availability on its
operating line of credit. In addition, the Company was in
compliance with all loan covenants associated with this revolving
line of credit. The Company's average days sales in accounts
receivable increased from 32 days in the comparable period to 40
in the reporting period. This compares to 38 days as of December
31, 1996, 51 days as of March 31, 1997 and 41 days as of June 30,
1997. Since the Company hopes to maintain an average collection
period of 30 to 40 days, the current collection period of 40 days
is consistant with managment's goals. The increase in the
collection period was offset by improved inventory turns from 4.2
in the comparable period to 6.1 in the reporting period and the
Company's strong operating results. Management believes cash flow
from current operations and the availability on the Company's
$1,000,000 credit line will provide adequate funds to sustain the
Company's growth in sales without the need for additional outside
capital.
Management's Plans
- ------------------
This reporting quarter marks the eighth consecutive profitable
quarter following the Company's restructuring and downsizing.
During the month of October, 1997, the Company had monthly sales
in excess of $1 million for the first time. Management hopes to
continue to maintain and build on its recent successes by
continuing to pursue the further development of its wholesale
customer base within the Western region of the United States and
opening retail storefronts in various markets within the same region. In
addition, now that the Company has strengthened its financial
condition and liquidity, management believes a conservative
acquisition program is a viable alternative for additional growth
and increased share value.
10<PAGE>
<PAGE> 11
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
- ------------------------------
Effective June 30, 1997, the Company's Class B Warrants expired.
Item 3. Defaults Upon Senior Securities
- ----------------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
All three proposals were passed at the meeting and the following
table provides the voting results:
<TABLE>
Proposal Shares Eligible Voted For Voted Against Abstentions Broker Non-Votes
- -------- --------------- --------- ------------- ---------- --------------
<S> <C> <C> <C> <C> <C>
1 - Election of
directors 1,473,950 1,100,477 0 784 0
2 - Stock
option plan 1,473,950 934,723 1,816 200 164,522
3-Appointment
of auditors 1,473,950 1,101,261 0 0 0
</TABLE>
Item 5. Other Information
- --------------------------
None.
11<PAGE>
<PAGE> 12
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) The following exhibits are filed herewith pursuant to Regulation S-B:
<TABLE>
No. Description Reference
--- ----------- ---------
<S> <C> <C>
3.1 Amended and Restated Articles of Incorporation (2)
3.2 Amended and Restated Bylaws (2)
4.1 Form of Stock Certificate (1)
4.5 Registration Rights Agreements (3)
*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 (6)
*4.12 Amendment to Options issued to Dirk 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)
*10.21 Employment Agreement between Registrant and Wayne Collignon (4)
*10.22 Employment Agreement between Registrant and Dirk Anderson (4)
10.23 Third amendment to the Lease between Registrant, as Lessee,
and Newhew Associates, as Lessor (4)
*10.25 Amendment to Employment Agreement between Registrant and
Wayne Collignon (5)
*10.26 Amendment to Employment Agreement between Registrant and
Dirk Anderson (5)
10.29 Loan documents between Registrant and M&I Thunderbird Bank (7)
(1) Filed with Registration Statement on Form S-18, No. 33-51980-LA, under Securities Act of 1933, as
declared effective on December 17, 1992.
(2) Filed with the Company s definitive proxy statement on July 10, 1996
(3) Filed with Form 10-KSB on July 13, 1995
(4) Filed with Form 10-KSB on July 2, 1996
(5) Filed with Form 10-QSB on November 14, 1996
(6) Filed with Form 10-KSB on June 26, 1997
(7) Filed herewith
</TABLE>
(b) Reports on Form 8-K:
No reports were filed on Form 8-K during the quarter ended September 30, 1997.
12<PAGE>
<PAGE> 13
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Reconditioned Systems, Inc.
Date: November 14, 1997 /S/ Wayne R. Collignon
________________________________
Wayne R. Collignon, President and CEO
Date: November 14, 1997 /S/ Dirk D. Anderson
_________________________________
Dirk D. Anderson, CFO
13
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> MAR-31-1998 MAR-31-1998
<PERIOD-END> SEP-30-1997 SEP-30-1997
<CASH> 370,443 370,443
<SECURITIES> 0 0
<RECEIVABLES> 1,029,420 1,029,420
<ALLOWANCES> 47,500 47,500
<INVENTORY> 1,039,441 1,039,441
<CURRENT-ASSETS> 2,431,248 2,431,248
<PP&E> 529,026 529,026
<DEPRECIATION> 366,278 366,278
<TOTAL-ASSETS> 2,609,759 2,609,759
<CURRENT-LIABILITIES> 910,327 910,327
<BONDS> 0 0
0 0
0 0
<COMMON> 4,586,982 4,586,982
<OTHER-SE> (3,210,958) (3,210,958)
<TOTAL-LIABILITY-AND-EQUITY> 2,609,759 2,609,759
<SALES> 2,245,816 4,513,178
<TOTAL-REVENUES> 2,245,816 4,513,178
<CGS> 1,707,851 3,396,014
<TOTAL-COSTS> 2,079,539 4,188,171
<OTHER-EXPENSES> 634 (3,039)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 4,565 18,160
<INCOME-PRETAX> 161,078 309,886
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 161,078 309,886
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 161,078 309,886
<EPS-PRIMARY> .09 .19
<EPS-DILUTED> .09 .19
</TABLE>
