14
UNITED STATES
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, 2001
( ) 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 (IRS Employer
incorporation or organization) Identification No.)
444 West Fairmont, Tempe, Arizona 85282
(Address of principal executive offices)
480-968-1772
(Issuer's telephone number)
-------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed
since last report)
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 7, 2001, the number of
shares outstanding of the Registrant's common stock was 1,222,793.
Transitional Small Business Disclosure Format. Yes [ ] No [ X ]
PART 1 - FINANCIAL STATEMENTS
Item 1
RECONDITIONED SYSTEMS, INC.
Unaudited Financial Statements
September 30, 2001
RECONDITIONED SYSTEMS, INC.
BALANCE SHEETS
September 30, 2001 and 2000
(Unaudited)
2001 2000
---- ----
ASSETS
Current Assets:
Cash and cash equivalents $1,483,744 $1,195,076
Accounts receivable - trade, net of allowance for
doubtful accounts of approximately $15,000 and
$19,000, respectively 1,220,966 1,911,221
Note receivable 50,000 0
Inventory 1,415,340 1,427,316
Prepaid expenses and other current assets 260,538 207,838
------- -------
Total current assets 4,430,588 4,741,451
--------- ---------
Property and Equipment, net: 432,976 259,590
------- -------
Other Assets:
Notes receivable - officer 75,000 75,000
Refundable deposits 26,156 12,896
Other 26,353 55,354
------ ------
127,509 143,250
------- -------
Total Assets $4,991,073 $5,144,291
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $614,254 $819,989
Customer deposits 36,092 216,336
Accrued expenses and other current liabilities 227,238 312,105
------- -------
Total current liabilities 877,584 1,348,430
------- ---------
Stockholders' Equity:
Common stock, no par value; 20,000,000 shares
Authorized, 1,222,793 and 1,348,249
outstanding, $4,805,371 $4,588,381
respectively
Retained earnings/(Accumulated deficit) 99,105 (176,734)
------ ---------
4,904,476 4,411,647
Less: treasury stock, 324,724 and 246,225 shares
respectively, at cost (790,987) (615,786)
--------- ---------
4,113,489 3,795,861
--------- ---------
Total Liabilities and Stockholders' Equity $4,991,073 $5,144.291
========== ==========
RECONDITIONED SYSTEMS, INC.
STATEMENTS OF INCOME
For the Three and Six Month Periods Ended September 30, 2001 and 2000
(Unaudited)
Three Months Ended Six Months Ended
September 30, September 30,
2001 2000 2001 2000
---- ---- ---- ----
Sales $2,575,498 $3,843,089 $4,814,467 $7,407,994
Cost of sales 2,080,435 3,001,066 3,839,138 5,825,895
--------- --------- --------- ---------
Gross profit 495,063 842,023 975,329 1,582,099
Selling & administrative expenses 468,151 502,426 945,669 982,474
------- ------- ------- -------
Income from operations 26,912 339,597 29,660 599,625
Other income (expense):
Interest income 15,972 18,782 35,960 34,425
Other 40 381 (20) 6,127
-- --- ---- -----
Net income before provision for income taxes
42,924 358,760 65,600 640,177
Income tax expense 15,400 107,804 20,343 197,345
------ ------- ------ -------
Net income $27,524 $250,956 $45,257 $442,832
------- -------- ------- --------
Basic earnings per share (Notes 1 and 2) $0.02 $0.19 $0.04 $0.34
===== ===== ===== =====
Basic weighted average number
of shares outstanding 1,182,210 1,293,132 1,176,167 1,310,413
========= ========= ========= =========
Diluted earnings per common
and common equivalent share
(Notes 1 and 2) $0.02 $0.18 $0.03 $0.31
===== ===== ===== =====
Diluted weighted average number
of shares outstanding 1,300,832 1,423,193 1,305,245 1,446,472
========= ========= ========= =========
RECONDITIONED SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
For the Year Ended March 31, 2001 and the Six Month Period
Ended September 30, 2001
(Unaudited)
Common Stock Common Retained
Shares Stock Earnings Treasury
Amount (Deficit) Stock Total
---------------------------------- ------------- ------------------ ---------------- -------------- --------------
Balance at March 31, 2000 1,327,684 $4,587,576 $(619,566) $(359,213) $3,608,797
Purchase of Treasury
Stock (154,634) - - (401,522) (401,522)
Transfer of shares to ESP
Plan 1,200 1,268 - 2,866 4,134
Net Income - - 887,026 - 887,026
------------- ------------------ ---------------- -------------- --------------
Balance at March 31, 2001 1,174,250 $4,588,844 $267,460 $(757,869) $4,098,435
Purchase of Treasury (10,500) - - (31,925) (31,925)
Stock
Transfer of shares to 1,327 355 - 3,157 3,512
ESP Plan
Retirement of shares from
ESPP Plan (709) - - (1,790) (1,790)
Stock Dividend 58,425 216,172 (213,612) (2,560) -
Net income - - 45,257 - 45,257
------------- ------------------ ---------------- -------------- --------------
Balance at September 30, 2001 1,222,793 $4,805,371 99,105 (790,987) 4,113,489
============= ================== ================ ============== ==============
RECONDITIONED SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
For the Three and Six Month Periods Ended September 30, 2001 and 2000
(Unaudited)
Three Months Ended Six Months Ended
September 30, September 30,
2001 2000 2001 2000
---- ---- ---- ----
Cash and cash equivalents provided/(used) by operating
activities $68,297 $443,493 $(80,788) $603,716
------- -------- --------- --------
Cash and cash equivalents used by investing activities:
Purchase of property and equipment (213,889) (30,538) (229,682) (46,730)
Other (14,867) (7,901) (14,867) (26,920)
-------- ------- -------- --------
(228,756) (38,439) (244,549) (73,650)
--------- -------- --------- --------
Cash and cash equivalents provided/(used) by financing
activities 1,606 (258,627) (30,203) (255,768)
----- --------- -------- ---------
Increase/(decrease) in cash and cash equivalents (158,853) 146,427 (355,540) 274,298
Cash and cash equivalents at beginning of period 1,642,597 1,048,649 1,839,284 920,778
--------- --------- --------- -------
Cash and cash equivalents at end of period $1,483,744 $1,195,076 $1,483,744 $1,195,076
========== ========== ========== ==========
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. Operating results for the six months ended
September 30, 2001 are not necessarily indicative of the results that
may be expected for the entire year ending March 31, 2002. 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, 2001.
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.
RECONDITIONED SYSTEMS, INC.
Notes to Financial Statements
(Unaudited)
--------------------------------------------------------------------------------
Note 2.
Earnings Per Share
--------------------------------------------------------------------------------
Three Months Ended Six Months Ended
September 30, September 30,
2001 2000 2001 2000
---- ---- ---- ----
Basic EPS
Net income $27,524 $250,956 $45,257 $442,832
======= ======== ======= ========
Weighted average number of shares outstanding 1,182,210 1,293,132 1,176,167 1,310,413
Basic earnings per share $0.02 $0.19 $0.04 $0.34
===== ===== ===== =====
Diluted EPS
Net income $27,524 $250,956 $45,257 $442,832
======= ======== ======= ========
Weighted average number of shares outstanding 1,182,210 1,293,132 1,176,167 1,310,413
Effect of dilutive securities:
Stock options 118,622 130,061 129,078 136,059
------- ------- ------- -------
Total common shares + assumed conversions 1,300,832 1,423,193 1,305,245 1,446,472
========= ========= ========= =========
Per Share Amount $0.02 $0.18 $0.03 $0.31
===== ===== ===== =====
Item 2. Management's Discussion and Analysis of Financial Condition and
--------------------------------------------------------------------------
Results of Operations
---------------------
The statements contained in this report that are not historical facts may
constitute "forward-looking statements" within the meaning of Section 27A of the
Securities 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 Reconditioned Systems, Inc. (the "Company") may
not be able to maintain profitability and the risk that the Company's Atlanta
office may not be profitable. In addition, the Company's business, operations
and financial condition are subject to substantial risks that are described in
the Company's reports and statements filed from time to time with the Securities
and Exchange Commission, including the Company's Annual Report on Form 10-KSB
for the fiscal year ended March 31, 2001.
Results of Operations
SALES REVENUE
The Company reported sales revenue of $2.57 million for the three month period
ended September 30, 2001 (hereinafter the "reporting quarter") as compared to
$3.84 million for the quarter ended September 30, 2000 (hereinafter the
"comparable quarter"), resulting in an decrease of $1.27 million or 33%. Sales
revenue for the six month period ended September 30, 2001 (hereinafter the
"reporting period") totaled $4.8 million as compared to $7.4 million for the six
month period ended September 30, 2000 (hereinafter the "comparable period"), a
$2.6 million or 35% decrease. Management believes these decreases are a result
of the economic downturn and increased corporate lay-offs nationwide. These
decreased sales levels are consistent with decreased revenues industry-wide.
Wholesale sales totaled $1.09 million for the reporting quarter and $2.2 million
for the comparable quarter, a 50.4% decrease. Wholesale sales for the reporting
period totaled $1.9 million, as compared to $3.9 million during the comparable
period, a decrease of 51.4%. Historically, a large percentage of the Company's
wholesale sales have been to dealers in the Northern California region. The
economic downturn, particularly in the high-technology industries prevalent in
the Northern California region, resulted in a significant decline in the
Company's wholesale revenues.
Retail sales in the Phoenix market totaled $1.39 million during the reporting
quarter and $2.8 million during the reporting period, down from $1.65 million
and $3.5 million or 16% and 19% over the comparable quarter and comparable
period, respectively. Management believes these decreases are a result of a
general market decline and downturn in the Phoenix economy. The Company launched
its Atlanta retail operation during the reporting quarter. The Atlanta retail
sales office reported approximately $100,000 in sales for the reporting quarter.
GROSS MARGIN
The Company's gross margins decreased from 22% in the comparable quarter and
21.4% in the comparable period to 19.2% and 20.3% in the reporting quarter and
reporting period, respectively. While the effect of fixed costs on lower sales
volumes resulted in lower gross profit margins, their effect was partially
offset by lower product costs and the change in the Company's sales mix to a
higher percentage of retail sales, which have a higher gross margin.
OPERATING EXPENSES
The Company's selling and administrative expenses increased from 13.07% of sales
in the comparable quarter and 13.26% of sales in the comparable period to 18.2%
of sales for the reporting quarter and 19.64% of sales for the reporting period.
This increase was primarily due to the effect of fixed costs on lower sales
volumes and the change in the retail/wholesale sales mix. The Company's
percentage of retail to wholesale sales increased from 47% retail in the
comparable period to 58% in the reporting period. The Company's retail selling
expenses are higher than those for wholesale sales. In addition, the Company
incurred additional auditing and legal fees as a result of the dispute with its
former independent public accountants (see "Legal Proceedings" below).
OTHER INCOME AND EXPENSES
The Company's other income and expenses, which consists primarily of interest
income, remained relatively consistent from the comparable period to the
reporting period at $40,552 and $35,940, respectively.
Income Taxes
As of March 31, 2000, the Company had federal loss carryforwards of
approximately $299,000 and state loss carryforwards of approximately $99,000.
Based on annualizing the earnings for the quarters ended June 30, 2000 and
September 30, 2000, the Company's income tax expense net of the remaining net
operating loss carryforwards equated to an effective tax rate of approximately
31%. The Company fully exhausted its federal loss carryforwards during the
fiscal year ended March 31, 2001. The Company's income tax expense for the
reporting period also equated to an effective tax rate of approximately 31%.
Financial Condition and Liquidity
As of September 30, 2001, the Company's cash and cash equivalents totaled
$1,483,744. In addition, the Company's net worth and working capital totaled
$4,113,498 and $3,553,004, respectively. The Company has no long-term debt and
$1,000,000 available on its line of credit through M&I Thunderbird Bank.
Cash Flows from Operating Activities. Net cash used by operating activities
totaled $80,788 during the reporting period. These funds were primarily used to
reduce current liabilities and for the payment of estimated income tax payments.
The Company reported slow first quarter 2002 accounts receivable collections.
Collections during the reporting quarter improved from 48 days for the quarter
ended June 30, 2001 to 39 days for the quarter ended September 30, 2001.
Cash Flows from Investing and Financing Activities. During the reporting period,
the Company used approximately $232,000 for capital expenditures, primarily
related to the purchase of vehicles and equipment for the new retail operation
in Atlanta, Georgia. Additionally, the Company used approximately $13,000 for
refundable deposits related to the Company's Atlanta facility and approximately
$30,000 to finance the purchase of treasury stock.
Expected Future Cash Flows. Cash provided by operations in the near future
should closely follow operating income net of income tax expense. Management
believes current cash reserves and cash flows from operations will be adequate
to fund the projected needs of the Company for the foreseeable future without
the need for outside financing.
Forward Looking Statements
The downturn in the economy has significantly impacted the Company's sales
revenues and profitability, as well as the revenues of the contract furniture
industry. The Company began to experience a decline in sales orders during the
first quarter of the 2002 fiscal year. This decline worsened following the
events of September 11, 2001. Furthermore, management estimates that orders for
the third quarter could be down as much as 45 - 50% over the comparable quarter.
While the Company's financial strength and ability to quickly adapt to the
ever-changing market has allowed the Company to remain profitable, there can be
no guarantee that the Company will report profits for the final two quarters of
the current fiscal year. Although the reduced sales volume is of concern,
management remains confident that the Company is in an excellent position to
withstand the current economic slowdown and views this as an opportunity to
expand into other geographic markets.
As a result of the economic slowdown in the industry, many of the smaller office
furniture refurbishers which the Company competes with have not had the
financial stability to withstand the tight economy and have been forced to close
operations. This in turn has created business opportunities which the Company
hopes to capitalize on. During the reporting quarter, the Company was able to
purchase the inventory and equipment of one such competitor in the Atlanta,
Georgia area. Additionally, the Company hired a key employee of that former
business to launch a new retail operation in that market. The new location is
now operational and despite the significant task of setting up the new office,
generated approximately $100,000 in sales during the reporting quarter prior to
any advertising efforts. The office now employs seven full-time employees and is
set up to begin production of small to mid-sized orders, complete product
delivery and installations and provide design and project management services.
In addition, beginning in November, management implemented its new marketing
campaign to advertise the opening of the new sales office. While there can be no
guarantee that the new location will be profitable, management remains
optimistic about the potential for growth.
Management continues to seek other investment and growth opportunities and is
confident the Company is well positioned for growth when the economy improves.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In June 2001, the Company's former independent accountant, Semple & Cooper, LLP
("Semple"), resigned as a result of a fee dispute. In addition, Semple indicated
they were not independent with respect to their audits of the Company's
financial statements for the fiscal years ended March 31, 1999 and 2000, and
therefore, were withdrawing their opinions related to those audits. As a result
of Semple's withdrawal of their audit opinions, the Company was no longer in
compliance with Nasdaq Marketplace Rules. In addition, as a result of the
Company's stock buy-back program, the Company's public float was below the
required level to meet Nasdaq requirements. On July 6, 2001, Nasdaq changed the
Company's trading symbol to RESYE. To avoid delisting of the Company's stock,
management requested a written hearing and agreed to re-audit the 1999 and 2000
financial statements. The Company has completed the re-audit of its financial
statements for the fiscal year ended March 31, 2000 and has engaged its new
accountants to complete the re-audit of the March 31, 1999 financial statements.
In order to satisfy the public float requirement, the Company has approved a 5%
stock dividend to shareholders of record on August 13, 2001. Upon completion of
the March 31, 1999 re-audit and amendment of the Company's 10-KSB's for the
years ended March 31, 1999 and March 31, 2000, management believes it will have
satisfied all of the Nasdaq Marketplace Rules and the Company's listing should
be secure. As of June 30, 2001, the Company had incurred or accrued
approximately $45,000 in expenses related to the re-audits and Nasdaq's fee for
the hearing.
On August 9, 2001, the Company commenced a lawsuit against Semple & Cooper, LLP
in the Superior Court of Arizona, Maricopa County (Case No. CV2001-013810) for
breach of contract, malpractice, injurious falsehood and defamation. The
complaint seeks monetary damages, including punitive damages, and an injunction
requiring Semple & Cooper, LLP to retract and withdraw its injurious falsehoods
and defamatory statements against the Company.
On September 19, 2001, Semple & Cooper, LLP filed an answer and counterclaim for
breach of contract and defamation in response to the above mentioned lawsuit.
The counterclaim seeks monetary damages, including punitive damages and an
injuction requiring the Company to retract alleged defamatory statements the
Company made against Semple & Cooper, LLP.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting was held on August 11, 2001. Shareholders voted on
the appointment of the Company's auditors and the election of the Company's
Board of Directors.
Shares Broker
Proposal Eligible Voted For Voted Against Abstentions Non-Votes
------------------------ --------- ---------- -------------- ------------ -----------
1- Election of
directors:
Scott W. Ryan 1,168,750 723,429 0 830 0
Dirk D. Anderson 1,168,750 723,429 0 830 0
Frank E. Hart 1,168,750 723,429 0 830 0
2 - Appointment of
auditors 1,168,750 724,258 0 1 0
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed herewith pursuant to Regulation S-B:
No. Description Reference
--- ----------- ---------
10.33 Loan document between M&I Thunderbird Bank and the Registrant 1
10.34 Agreement for Conveyance and Assignment between First Capital Bank
and Registrant 2
10.35 Sublease between Iron Mountain Records Management, Inc. and Registrant 2
(1) Filed with 10-QSB on August 28, 2001
(2) Filed herein
(*) Indicates a compensatory plan or arrangement
(b) Reports on Form 8-K:
No reports were filed on Form 8-K during the quarter ended September 30, 2001.
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 9, 2001 /S/ Scott W. Ryan
-----------------------
Scott W. Ryan, Chairman
Date: November 9, 2001 /S/ Dirk D. Anderson
---------------------
Dirk D. Anderson, CEO