14
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 June 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)
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[ ] No[X].
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: as of July 26, 2001, the number of
shares outstanding of the Registrant's common stock was 1,163,676.
Transitional Small Business Disclosure Format. Yes [ ]No[X]
Item 1
PART 1 - FINANCIAL STATEMENTS
RECONDITIONED SYSTEMS, INC.
Unaudited Financial Statements
June 30, 2001
RECONDITIONED SYSTEMS, INC.
BALANCE SHEETS
June 30, 2001 and 2000
(Unaudited)
2001 2000
---- ----
ASSETS
Current Assets:
Cash and cash equivalents $1,642,597 $1,048,649
Accounts receivable - trade, net of allowance for
doubtful accounts of approximately $28,000 and
$79,000, respectively 1,149,158 2,059,297
Note receivable 50,000 0
Inventory 1,306,763 1,691,647
Prepaid expenses and other current assets 251,075 194,092
------- -------
Total current assets 4,399,593 4,993,685
--------- ---------
Property and Equipment, net: 243,419 273,160
------- -------
Other Assets:
Notes receivable - officer 75,000 75,000
Refundable deposits 12,896 13,036
Other 21,785 31,813
------ ------
109,681 119,849
------- -------
Total Assets $4,752,693 $5,386,694
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $375,827 $1,152,997
Customer deposits 49,568 29,167
Accrued expenses and other current liabilities 242,939 400,998
------- -------
Total current liabilities 668,334 1,583,162
------- ---------
Stockholders' Equity:
Common stock, no par value; 20,000,000 shares
authorized, 1,473,834 issued and 1,163,676 and $4,589,239 $4,588,259
1,328,617 outstanding, respectively
Retained earnings/(Accumulated deficit) 285,193 (427,690)
---------
4,874,432 4,160,569
Less: treasury stock, 310,158 and 145,217 shares
respectively, at cost (790,073) (357,037)
--------- ---------
4,084,359 3,803,532
--------- ---------
Total Liabilities and Stockholders' Equity $4,752,693 $5,386,694
========== ==========
RECONDITIONED SYSTEMS, INC.
STATEMENTS OF OPERATIONS
For the Three Month Periods Ended June 30, 2001 and 2000
(Unaudited)
Three Months Ended
June 30,
2001 2000
---- ----
Sales $2,238,969 $3,564,905
Cost of sales 1,758,703 2,824,829
--------- ---------
Gross profit 480,266 740,076
Selling & administrative expenses 477,518 480,048
------- -------
Income from operations 2,748 260,028
Other income (expense):
Interest income 19,988 15,643
Other (60) 5,746
---- -----
Net income before provision for income taxes 22,676 281,417
Income tax expense 4,943 89,541
----- ------
Net income $17,733 $191,876
------- --------
Basic earnings per share (Notes 1 and 2) $ 0.02 $ 0.14
======== =======
Basic weighted average number
of shares outstanding 1,170,123 1,327,694
========= =========
Diluted earnings per common
and common equivalent share
(Notes 1 and 2) $ 0.01 $ 0.13
======= =======
Diluted weighted average number
of shares outstanding 1,309,657 1,469,750
========== =========
RECONDITIONED SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
For the Year Ended March 31, 2001 and the Three Month Period Ended June 30, 2001
(Unaudited)
Common Stock Common Stock Retained
Shares Amount Earnings Treasury
(Deficit) Stock Total
- ---------------------------------- -------------- ----------------- ---------------- -------------- --------------
Balance at March 31, 2000 1,327,684 $4,587,576 $(619,566) $(359,213) $3,608,797
Purchase of Treasury
Shares (150,000) - - (401,522) (401,522)
Transfer of shares to
ESPP 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
Shares (10,500) - - (31,925) (31,925)
Transfer of shares to
ESPP Plan 635 395 - 1,511 1,906
Retirement of shares from
ESPP Plan (709) - - (1,790) (1,790)
Net income - - 17,733 - 17,733
-------------- ----------------- ------------------ ------------ --------------
Balance at June 30, 2001 1,163,676 $4,589,239 $285,193 $(790,073) $4,084,359
-------------- ----------------- ------------------ ------------ --------------
RECONDITIONED SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
For the Three Month Periods Ended June 30, 2001 and 2000
(Unaudited)
Three Months Ended
June 30,
2001 2000
---- ----
Cash and cash equivalents provided/(used) by operating activities $(149,085) $160,223
Cash and cash equivalents used by investing activities (15,793) (35,211)
Cash and cash equivalents provided / (used) by financing activities (31,809) 2,859
-------- -----
Increase/decrease in cash and cash equivalents (196,687) 127,871
Cash and cash equivalents at beginning of period 1,839,284 920,778
--------- -------
Cash and cash equivalents at end of period $1,642,597 $1,048,649
========== ==========
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 three months ended
June 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 that 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
June 30,
2001 2000
---- ----
Basic EPS
Net Income $17,733 $191,876
======= ========
Weighted average number of shares outstanding 1,170,123 1,327,694
Basic earnings per share $0.02 $0.14
===== =====
Diluted EPS
Net Income $17,733 $191,876
======= ========
Weighted average number of shares outstanding 1,170,123 1,327,694
Effect of dilutive securities:
Stock options 139,534 142,056
------- -------
Total common shares + assumed conversions 1,309,657 1,469,750
========= =========
Per Share Amount $0.01 $0.13
===== =====
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 its increase sales volumes, the risk that the U.S. economy may
not recover in the short-term and the risk that the Company's Atlanta, Georgia
facility 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 approximately $2.24 million for the
quarter ended June 30, 2001 (hereinafter the "reporting period") as compared to
approximately $3.56 million for the quarter ended June 30, 2000 (hereinafter the
"comparable period"), resulting in a decrease of $1.3 million or 37%. Management
believes the decreased sales are a result of the downturn in the United States
economy. The weak economy, coupled with increased corporate layoffs has resulted
in a fewer office furniture sales industry-wide.
Retail sales totaled approximately $1.4 million during the reporting period,
down 22.6% over the comparable period. The decreased retail sales were primarily
due to a general market slowdown and a downturn in the Phoenix economy.
Wholesale sales were approximately $820 thousand for the reporting period and
approximately $1.7 million for the comparable period, down 52.6%. Historically,
a large percentage of the Company's wholesale sales have been to dealers in the
Northern California area. As a result of the downturn in the United States
economy, particularly in the high-tech industries prevalent in the Northern
California region, the Company's wholesale operations experienced a greater
percentage decline than the Company's retail operations.
GROSS MARGIN
The Company's gross profit margin for the reporting period improved slightly
from 20.76% for the comparable period to 21.45% for the reporting period. This
improvement was primarily attributable to lower product costs as a result of
increased supply of used Haworth inventories available on the aftermarket. In
addition, the Company's retail to wholesale sales-mix changed from 51% retail /
49% wholesale in the comparable period to 63% retail / 37% wholesale in the
reporting period. As the gross margins on retail sales are typically higher than
on wholesale sales, this helped to offset the effect of the Company's fixed
costs at lower sales volumes.
OPERATING EXPENSES
The Company's selling expenses increased from 9% of sales in the comparable
period to 12% of sales for the reporting period. This change is primarily a
result of the effect of fixed costs at lower sales volumes and the increased
percentage of retail to wholesale sales-mix. The Company's retail sales
commissions generally are higher than those for wholesale sales.
The Company's administrative expenses increased from 4.7% of sales in the
comparable period to 9% of sales in the reporting period. This increase was
primarily a result of the expenses related to the Company's re-audit of its
financial statements for the fiscal years ended March 31, 1999 and 2000 (see
"Issues Related to Nasdaq" 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 $21,389 and $19,928, 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 quarter ended June 30, 2000, the
Company's income tax expense net of the remaining net operating loss
carryforwards equated to an effective tax rate of approximately 32%. The Company
fully exhausted its federal loss carryforwards during the fiscal year ended
March 31, 2001. As a result of the lower income levels, the Company's income tax
expense for the reporting quarter equated to an effective tax rate of
approximately 22%. If the Company's earnings return to levels compatible with
those reported for the year ended March 31, 2001, the Company's effective income
tax rate will be approximately 45%.
Financial Condition and Liquidity
As of June 30, 2001, the Company's cash and cash equivalents totaled $1,642,597.
In addition, the Company's net worth and working capital totaled $3,731,259 and
$4,289,912, 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. The Company used approximately $149,000
for operating activities during the reporting period. The Company's accounts
payable and accrued expenses decreased by approximately $339,000, primarily a
result of lower sales and purchases. However, the Company's accounts receivable
and inventory were reduced during the reporting period by only approximately
$206,000, and were partially offset by increased prepaid expenses of
approximately $62,000. Slow first quarter collection of the Company's accounts
receivable increased the average days receivables from 39 days for the quarter
ended March 31, 2001 to 48 days for the reporting period. Management believes
the Company's slow collections during the reporting period are temporary. The
average days receivable as of July 31, 2001 were 42 and management expects the
rate to continue to improve during August 2001.
Cash Flows from Investing and Financing Activities. During the reporting period,
the Company used approximately $16,000 for capital expenditures and
approximately $32,000 for treasury stock purchases.
Expected Future Cash Flows. Cash provided by operations in the near future
should closely follow operating income net of expenditures for any potential
mergers or acquisitions. As of July 31, 2001, the Company's accounts receivable
balances decreased nearly $279 thousand, bringing the Company's cash flows more
in line with operating income.
Management believes current cash reserves and cash flows from operations will be
adequate to fund the needs of the Company through the end of the next fiscal
year without the need for outside financing.
Issues Related to Nasdaq
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.
Forward Looking Statements
Although the reporting period's sales revenues were well below budgeted
forecasts, the Company was able to maintain profitability at the lower sales
volumes. The Company is poised for a turnaround in the economy and has begun to
see improvement in its sales levels. In July 2001, the Company booked orders of
just over $1 million. Although this indicates the Company will see improved
results for the second quarter, it is doubtful second quarter revenues will
return to the level reported for the comparable quarter. Management is
concentrating on cost controlling measures to continue to maintain profitability
until revenues return to prior levels.
In an effort to see continued growth and counter the results of the slow
economy, in July 2001, the Company launched a new sales office in Atlanta,
Georgia. The Company secured a lease on 18,000 square feet of office and
warehouse space and hired a seasoned Sales Manager familiar with the Atlanta
market. Initially the Atlanta facility will serve as a satellite sales office
with the majority of production completed in the Company's Tempe, Arizona
location. As the economy improves and the Atlanta facility begins generating
higher sales volume, production for Atlanta's orders will be shifted to the new
facility. Management believes Atlanta is a strong market and offers an excellent
opportunity for potential growth.
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 and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
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 Articles of Incorporation of the Registrant, as amended and restated 3
3.2 Bylaws of Registrant, as amended and restated 3
4.1 Form of Common Stock Certificate 1
4.5 Registration Rights Agreements 2
*4.9 Options issued to Wayne R. Collignon 4
*4.10 Options issued to Dirk D. Anderson 4
*4.11 Amendment to Options issued to Wayne Collignon 5
*4.12 Amendment to Options issued to Dirk D. Anderson 5
*4.13 Options issued to Wayne R. Collignon 5
*4.14 Options issued to Dirk D. Anderson 5
*4.15 Options issued to Scott W. Ryan 5
*4.16 Options issued to Scott W. Ryan 5
*4.17 Options issued to Scott W. Ryan 7
*4.18 Options issued to Dirk D. Anderson 7
*4.19 Options issued to Scott W. Ryan 7
*4.20 Options issued to Dirk D. Anderson 7
10.1 Lease Agreement, dated April 12, 1990 between Boston Safe Deposit
and Trust Company, as Lessor, and Registrant as Lessee 1
10.33 Loan document between M&I Thunderbird Bank and the Registrant 6
(1) Filed with Registration Statement on Form S-18, No. 33-51980-LA, under the
Securities Act of 1933, as declared effective on December 17, 1992
(2) Filed with Form 10-KSB on July 13, 1995
(3) Filed with Form 10-KSB on July 2, 1996
(4) Filed with Form 10-QSB on November 14, 1996
(5) Filed with 10-KSB on September 26, 1997
(6) Filed with 10-QSB on August 11, 2001
(7) Filed with 10-KSB on July 18, 2001
(*) Indicates a compensatory plan or arrangement
(b) Reports on Form 8-K:
On June 15, 2001, subsequently amended on July 23, 2001, the Company filed a
Current Report on Form 8-K that announced by reference under Item 4 that the
Company's former principal independent accountant, Semple & Cooper, LLP,
resigned on June 8, 2001.
On June 28, 2001, subsequently amended on July 23, 2001, the Company filed a
Current Report on Form 8-K that announced by reference under Item 4 that the
Company had engaged Moffitt & Company, PC to serve as the Company's principal
independent accountant.
On June 29, 2001, the Company filed a Current Report on Form 8-K that
incorporated by reference under Item 4 a copy of Semple & Cooper, LLP's response
letter to the U.S. Securities and Exchange Commission regarding the Company's
announcement of their resignation as reported in the Company's Form 8-K
originally filed on June 15, 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: August 14, 2001 /S/ Scott W. Ryan
-----------------
Scott W. Ryan, CEO
Date: August 14, 2001 /S/ Dirk D. Anderson
--------------------
Dirk D. Anderson, COO
(Principal Accounting Officer)