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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 December 31, 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)
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 February 3, 1997, the number of
shares outstanding of the Registrant's common stock and Class B Warrants were
1,473,788 and 41,667, respectively.
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PART 1 - FINANCIAL STATEMENTS
ITEM 1
RECONDITIONED SYSTEMS, INC.
UNAUDITED FINANCIAL STATEMENTS
DECEMBER 31, 1996
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RECONDITIONED SYSTEMS, INC.
BALANCE SHEET
DECEMBER 31, 1996
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents 150,071
Accounts receivable - trade, net of allowance
for doubtful accounts of $31,495 828,430
Inventory 1,009,159
Prepaid expenses and other current assets 162,530
---------
TOTAL CURRENT ASSETS 2,150,190
PROPERTY AND EQUIPMENT:
Machinery and equipment 220,533
Office furniture and equipment 245,980
Leasehold improvements 35,620
Vehicles 13,632
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515,765
Accumulated depreciation (318,007) 197,758
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OTHER ASSETS:
Refundable deposits 14,649
Prepaid loan fees 21,624
Other 5,510 41,783
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2,389,731
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable (Note 4) 545,893
Current maturities of long-term debt 49,869
Accounts payable 308,779
Accrued expenses and other current liabilities 160,903
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TOTAL CURRENT LIABILITIES 1,065,444
LONG-TERM DEBT, LESS CURRENT MATURITIES 45,621
STOCKHOLDERS' EQUITY 1,278,666
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2,389,731
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RECONDITIONED SYSTEMS, INC.
STATEMENT OF OPERATIONS
FOR THE THREE MONTH AND NINE MONTH PERIODS ENDED DECEMBER 31, 1995 AND 1996
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1995 1996 1995 1996
---------------------------- ----------------------------
Sales 1,493,557 1,672,569 6,468,593 4,968,983
Cost of sales 1,207,046 1,273,316 5,254,129 3,786,424
---------- ---------- ---------- ----------
Gross profit 286,511 399,253 1,214,464 1,182,559
Selling & administrative expenses 262,840 352,782 1,490,617 953,095
Restructuring charges 0 0 1,434,029 0
---------- ---------- ---------- ----------
Income (loss) from operations 23,671 46,471 (1,710,182) 229,464
---------- ---------- ---------- ----------
Other income (expense):
Interest income 35 3,832 860 8,364
Interest expense (15,253) (19,787) (70,038) (79,446)
Other (764) 2,374 22,164 2,374
---------- ---------- ---------- ----------
(15,982) (13,581) (47,014) (68,708)
---------- ---------- ---------- ----------
Net income (loss) 7,689 32,890 (1,757,196) 160,756
========== ========== ========== ==========
Earnings (loss) per common
and common equivalent share(*) .01 .02 (1.19) .10
========== ========== ========== ==========
Weighted average number
of shares outstanding 1,473,788 1,624,849 1,473,788 1,553,963
========== ========== ========== ==========
* -The 1995 earnings (loss) per share have been restated to give retroactive
effect to the reorganization of the Company's capital structure (See Note
2).
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RECONDITIONED SYSTEMS, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE TWENTY-ONE MONTH PERIOD ENDED DECEMBER 31, 1996
(UNAUDITED)
COMMON COMMON PREFERRED PREFERRED RETAINED TREASURY
STOCK STOCK STOCK STOCK EARNINGS STOCK TOTAL
SHARES AMOUNT SHARES AMOUNT (DEFICIT) (134 SHARES)
- -----------------------------------------------------------------------------------------------------------------------
BALANCE AT
MARCH 31, 1995 1,533,000 2,445,618 555,555 2,156,717 (1,737,266) (3,754) 2,861,315
PURCHASE OF
CORPORATE 76,300 --
UPHOLSTERY,
INC
CONVERSION OF
REDEEMABLE 12,000 43,525 43,525
COMMON STOCK
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 2,097,839 (555,555) (2,156,717) (58,878)
TO COMMON
STOCK, NET OF
COSTS OF $58,878
(NOTE 2)
REVERSE SPLIT OF
COMMON STOCK (7,369,606) 0
(NOTE 2)
NET INCOME 160,756 160,756
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BALANCE AT
DECEMBER 31, 1,473,922 4,586,982 0 0 (3,304,562) (3,754) 1,278,666
1996
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RECONDITIONED SYSTEMS, INC.
STATEMENT OF CASH FLOWS
FOR THE THREE MONTH AND NINE MONTH PERIODS ENDED DECEMBER 31, 1995 AND 1996
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1995 1996 1995 1996
-------- -------- -------- --------
Cash and cash equivalents
provided (used) by operating
activities 2,854 (106,752) 537,894 (110,302)
Cash and cash equivalents
used by investing
activities (11,195) (8,804) (17,272) (29,599)
Cash and cash equivalents
provided (used) by financing
activities (92,984) 7,798 (529,325) 189,274
-------- -------- -------- --------
Increase (decrease) in cash
and cash equivalents (101,325) (107,758) (8,703) 49,373
Cash and cash equivalents,
beginning of period 182,180 257,829 89,558 100,698
-------- -------- -------- --------
Cash and cash equivalents,
end of period 80,855 150,071 80,855 150,071
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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 accompanying Statement of Operations for the nine months ended
December 31, 1995, Statement of Stockholders' Equity for the year ended
March 31, 1996, and Statement of Cash Flows for the nine months ended
December 31, 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 September 30,
1995, and, as such, the accompanying Balance Sheet as of December 31,
1996, Statement of Operations for the three months ended December 31,
1995 and 1996 and nine months ended December 31, 1996, Statement of
Stockholders' Equity for the three and nine months ended December 31,
1996, and Statement of Cash Flows for the three months ended December
31, 1996 and 1995 and the nine months ended December 31, 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 nine months ended December 31,
1996, are not necessarily indicative of the results that may be
expected for the entire 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 year ended March 31,
1996.
EARNINGS (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE:
The computation of earnings (loss) per share is based on the net income
(loss) 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
quarter ended December 31, 1996 and the nine month period ended
December 31, 1996, and were accounted for under the Treasury Stock
method. These stock options were not included in the computation of
earnings (loss) per share during the quarter ended December 31, 1995 or
the nine month period ended December 31, 1995, as their effect would be
antidilutive. In addition, certain outstanding warrants are not
included in the computation of earnings (loss) per share because their
effect would be antidilutive. Fully diluted earnings per share were not
materially different from primary earnings per share. The earnings
(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).
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RECONDITIONED SYSTEMS, INC.
NOTES TO STATEMENTS (CONTINUED)
(UNAUDITED)
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NOTE 2.
REORGANIZATION OF CAPITAL STRUCTURE
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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).
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NOTE 3.
COMMON STOCK OPTIONS
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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; provided, however, that the holders may not sell or
otherwise transfer any shares acquired upon exercise of the options until August
19, 1997. 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.
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NOTE 4.
NOTE PAYABLE
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Norwest Business Credit, Inc. has amended the terms of the Company's revolving
line of credit agreement. As of November 1, 1996 the applicable rate of interest
under the line of credit was reduced to the bank's base rate plus four percent
(4%), and the minimum monthly interest requirement was reduced to $4,000. In
addition, per the terms of the amendment, if the net income of the Company meets
or exceeds $200,000 for the fiscal year ended March 31, 1997, the interest rate
will be further reduced to the bank's base rate plus three percent (3%), with a
minimum monthly interest requirement of $2,500. The amendment also extended the
expiration of the revolving line of credit to February 28, 2000.
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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
THREE MONTH PERIOD ENDED DECEMBER 31, 1996
Reconditioned Systems, Inc. ("RSI" or the "Company") reported net income of
$32,890 for the three month period ended December 31, 1996 (hereinafter the
"reporting quarter") compared to net income of $7,689 for the three month period
ended December 31, 1995 (hereinafter the "comparable quarter"). The improvement
to the Company's net income was primarily attributable to increased sales as a
result of additions to RSI's sales staff and RSI's newly implemented marketing
program.
Sales for the reporting quarter were $1,672,569 which represents a $179,012 or
12% increase from the comparable quarter. Sales at RSI for the past four
quarters since it restructured its operations and closed all of its subsidiaries
have fluctuated significantly, ranging from quarterly totals of $1,408,927 to
$1,887,487. Management believes these fluctuations in sales are due to the
variations in the sales performance of its individual salespeople from
month-to-month and the effectiveness of marketing activities such as
advertising. Based on these beliefs, management created a sales manager position
to train new salespeople and monitor the activities of existing salespeople. The
Company also hired additional sales staff and opened a satellite sales office to
cover the Tucson, Arizona market. In addition, increased advertising and
telemarketing activities have been implemented in order to expand RSI's markets
and provide additional leads for the newly hired sales personnel. 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 quarter's sales levels will
be effective for the quarter ended March 31, 1997 or any subsequent period. The
Company intends to continue to selectively add to its sales staff both locally
and in other nearby markets.
The Company's gross profit margin during the reporting quarter was 24%, compared
with 19% for the comparable quarter. The gross profit margin for the comparable
quarter was adversely affected by RSI's lower sales in the comparable quarter
which caused the Company's plant to utilize less of its operating capacity.
Since the fixed costs associated with the plant were then spread over less
sales, the gross profit margin on these sales was less than it is during a
period in which the plant operates closer to full capacity. The increase in the
gross profit margin during the reporting quarter reflects the better utilization
of production capacity as sales increased.
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MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
The Company's selling and administrative expenses for the reporting quarter were
21% of sales as compared with 18% during the comparable quarter. This increase
in the reporting quarter was primarily a result of recent additions to the sales
staff and additional advertising and other marketing expenditures as part of
management's plan to increase and stabilize sales volume.
The Company's other income and expenses, which consist primarily of interest
expense, remained reasonably consistent during the reporting and comparable
quarters at $13,581 and $15,982, respectively.
NINE MONTH PERIOD ENDED DECEMBER 31, 1996
The Company reported net income of $160,756 for the nine month period ended
December 31, 1996 (hereinafter the "reporting period") compared to a net loss of
$1,757,196 for the nine month period ended December 31, 1995 (hereinafter the
"comparable period"). The loss during the comparable period primarily resulted
from charges incurred in connection with the Company's restructuring program.
RSI, not including the losses of subsidiaries closed as part of its
restructuring program, had net income of $34,080 for the comparable period. The
improvement in RSI's net income was primarily attributable to the shift in
management's focus from the restructuring program, as discussed above, to
improving the operating results of the restructured entity and implementation of
management's sales growth and stabilization program.
The Company's revenues for the reporting period were $4,968,983 which represents
a $1,499,610 or 23% decrease over the comparable period. 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 closed
as part of the restructuring, were $4,526,619 for the comparable period. The 10%
improvement in RSI's revenues from the comparable period to the reporting period
was a result of the change in management's focus from the restructuring program
during the comparable period to sales growth and stabilization during the
reporting period.
The Company's gross profit margin during the reporting period was 24%, compared
with 19% for the comparable period. RSI's gross margin, not including the
subsidiaries closed as part of the restructuring plan for the comparable period
was 19%. The increase in gross profit margins were primarily a result of better
utilization of production capacity as sales increased during the reporting
period.
The Company's selling and administrative expenses for the reporting period were
19% of sales as compared with 23% during the comparable period. This improvement
was also attributable to the downsizing and restructuring of the Company. RSI's
selling and administrative expenses, not including the subsidiaries closed as
part of the restructuring program, were 17% for the comparable period. The 2%
increase in RSI's selling and administrative expenses from the comparable to the
reporting periods resulted from recent additions to the sales staff, as well as
increased advertising and marketing expenditures.
The Company's other income and expenses, which consists primarily of interest
expense, was $68,708 and $47,014 during the reporting and comparable periods,
respectively. This increase is primarily due to the fact that during the first
six months of the reporting period the Company's new lender, Norwest Business
Credit, Inc., charged the Company a higher borrowing rate than the Company's
former lender. Effective November 1, 1996, Norwest lowered the Company's
borrowing rate.
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MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
FINANCIAL CONDITION
As a result of the net income for the reporting quarter and 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 have improved significantly during the reporting period. 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 December 31, 1996, the Company's financial condition and liquidity are
sufficient to sustain current operating levels and pursue gradual and focused
growth. The Company has net worth of $1,278,666 and working capital of
$1,084,746. In addition, as of the date of this report, the Company has a
balance of approximately $400,000 and additional availability of approximately
$500,000 on its line of credit with Norwest Business Credit, Inc. 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. As of December
31, 1996, the Company was in compliance with all of the financial convenants
required by this financing agreement.
With the elimination of the preferred stock dividend, the four items which now
control the Company's financial condition and liquidity are its results of
operations, its collection of accounts receivable, its ability to turn
inventory, and its rate of growth. The results of operations during the
reporting quarter and period were discussed above.
The number of days sales in the Company's accounts receivable as of December 31,
1996, was 38 as compared to 25 as of March 31, 1996, 44 as of June 30, 1996, and
33 as of September 30, 1996. 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. For
the reporting quarter and period, the Company turned its inventory at an
annualized rate of approximately 5.0 and 4.2 times, respectively, as compared to
4.7 times for the year ended March 31, 1996. These turns and collection rates
are consistent with management's goal to maintain collections at or near 30 days
and to have annual inventory turns of at least 4.
The Company reported negative cash flow from operations of $106,752 for the
reporting quarter and $110,302 for the reporting period. The negative cash flow
was a result of the Company's need to finance its modest sales growth.
Management believes that as long as the Company has positive results from its
operations, maintains a collection rate at or near 30 days, and maintains annual
inventory turns of at least four, its current credit facility should provide
sufficient working capital to operate the Company and pursue gradual growth.
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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 August 12, 1996, the Company converted its 9% Series A Convertible
Preferred Stock and accrued but unpaid dividends into Common Stock on the basis
of 13 shares of Common Stock for each share of "Preferred Stock". In addition,
the Company implemented a six-to-one reverse stock split of the Company's Common
Stock, including the shares of Common Stock into which the Preferred Stock was
converted (see below under Item 3 and 4).
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
During February, 1994, the Company issued 555,555 shares of 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
Preferred Stock and the accrued dividends were converted to Common Stock.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed herewith pursuant to Regulation S-B:
NO. DESCRIPTION REFERENCE
--- ----------- ---------
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)
10.25(*) Amendment to Employment Agreement between Registrant and
Wayne Collignon (9)
10.26(*) Amendment to Employment Agreement between Registrant and
Dirk Anderson (9)
10.27 Amendments to Loan document between Norwest Business
Credit and Registrant (9)
(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 with Form 10-QSB on November 14, 1996
(b) Reports on Form 8-K:
No reports were filed on Form 8-K during the quarter ended December 31, 1996.
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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 3, 1997 _________________________________
Wayne R. Collignon, President and CEO
Date: February 3, 1997 _________________________________
Dirk D. Anderson, CFO
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