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 December 31, 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 incorporation (IRS Employer
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 January 18, 2002, the number of
shares outstanding of the Registrant's common stock was 1,193,671.
Transitional Small Business Disclosure Format. Yes [ ] No [ X ]
PART 1 - FINANCIAL STATEMENTS
Item 1.
RECONDITIONED SYSTEMS, INC.
Unaudited Financial Statements
December 31, 2001
RECONDITIONED SYSTEMS, INC.
BALANCE SHEETS
December 31, 2001 and 2000
(Unaudited)
2001 2000
---- ----
ASSETS
Current Assets:
Cash and cash equivalents $1,369,431 $1,736,617
Accounts receivable - trade, net of allowance for
doubtful accounts of approximately $16,500 and
$26,500, respectively 569,950 1,455,976
Note receivable (Note 2) 150,000 0
Inventory 1,368,017 1,217,922
Prepaid expenses and other current assets 261,436 276,448
------- -------
Total current assets 3,718,834 4,686,963
--------- ---------
Property and Equipment, net: 342,748 264,754
------- -------
Other Assets:
Note receivable - officer (Note 3) 0 75,000
Refundable deposits 27,356 12,896
Other 22,963 52,020
------ ------
50,319 139,916
------ -------
Total Assets $4,111,901 $5,091,633
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $265,998 $577,078
Customer deposits 88,404 89,528
Accrued expenses and other current liabilities 217,582 370,405
------- -------
Total current liabilities 571,984 1,037,011
------- ---------
Stockholders' Equity:
Common stock, no par value; 20,000,000 shares
authorized, 1,548,394 and 1,473,834
issued, $4,805,410 $4,588,746
respectively, 1,193,671 and 1,227,395
outstanding, respectively
Retained earnings/(Accumulated deficit) (396,495) 82,562
--------- ------
4,408,915 4,671,308
Less: treasury stock, 354,724 and 246,408 shares
respectively, at cost (Note 3) (868,998) (616,686)
--------- ---------
3,539,917 4,054,622
--------- ---------
Total Liabilities and Stockholders' Equity $4,111,901 $5,091,633
========== ==========
RECONDITIONED SYSTEMS, INC.
STATEMENTS OF INCOME
For the Three and Nine Month Periods Ended December 31, 2001 and 2000
(Unaudited)
Three Months Ended Nine Months Ended
December 31, December 31,
2001 2000 2001 2000
---- ---- ---- ----
Sales $1,536,958 $3,767,538 $6,351,425 $11,175,532
Cost of sales 1,502,687 2,922,065 5,341,825 8,747,960
--------- --------- --------- ---------
Gross profit 34,271 845,473 1,009,600 2,427,572
Selling & administrative expenses 462,105 522,159 1,366,648 1,504,633
Lawsuit and legal disputes (Note 5) 35,404 0 76,530 0
Severance charges (Note 6) 42,708 0 42,708 0
------ - ------ -
Income (loss) from operations (505,946) 323,314 (476,286) 922,939
Other income (expense):
Interest income 10,326 22,383 46,286 56,808
Other 20 (269) (20,343) 5,858
-- ----- -------- -----
Net income (loss) before provision for income taxes
(495,600) 345,428 (450,343) 985,605
Income tax expense 0 86,132 0 283,477
- ------ - -------
Net income (loss) $(495,600) $259,296 $(450,343) $702,128
========== ======== ========== ========
Basic earnings (loss) per share (Notes 1 and 4) $(0.42) $0.21 $(0.38) $0.55
======= ===== ======= =====
Basic weighted average number
of shares outstanding 1,191,972 1,227,440 1,181,435 1,282,755
========= ========= ========= =========
Diluted earnings (loss) per common
and common equivalent share
(Notes 1 and 4) $(0.42) $0.19 $(0.38) $0.49
======= ===== ======= =====
Diluted weighted average number
of shares outstanding 1,191,972 1,362,707 1,181,435 1,418,550
========= ========= ========= =========
RECONDITIONED SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
For the Year Ended March 31, 2001 and the Nine Month Period
Ended December 31, 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 (40,500) - - (112,025) (112,025)
Stock
Transfer of shares to 2,337 394 - 5,559 5,953
ESP Plan
Retirement of shares from
ESP Plan (841) - - (2,103) (2,103)
Stock Dividend 58,425 216,172 (213,612) (2,560) -
Net loss - - (450,343) - (450,343)
------------- ------------------ ---------------- -------------- --------------
Balance at December 31, 2001 1,193,671 $4,805,410 (396,495) (868,998) 3,539,917
============= ================== ================ ============== ==============
RECONDITIONED SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
For the Three and Nine Month Periods Ended December 31, 2001 and 2000
(Unaudited)
Three Months Ended Nine Months Ended
December 31, December 31,
2001 2000 2001 2000
---- ---- ---- ----
Cash and cash equivalents provided/(used) by operating
activities $(78,196) $576,246 $(158,984) $1,179,962
Cash and cash equivalents used by investing
Activities (38,245) (34,170) (282,794) (107,820)
Cash and cash equivalents provided/(used) by financing
activities 2,128 (535) (28,075) (256,303)
----- ----- -------- ---------
Increase/(decrease) in cash and cash equivalents (114,313) 541,541 (469,853) 815,839
Cash and cash equivalents at beginning of period 1,483,744 1,195,076 1,839,284 920,778
--------- --------- --------- -------
Cash and cash equivalents at end of period $1,369,431 $1,736,617 $1,369,431 $1,736,617
========== ========== ========== ==========
Non-cash transactions
During the quarter ended December 31, 2001, the Company purchased 30,000 shares
of treasury stock in exchange for a $75,000 note receivable from an officer and
$5,100 in unpaid accrued interest on said note.
During the nine months ended December 31, 2001, the Company issued a 5% stock
dividend to shareholders of record on August 13, 2001.
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 nine months ended
December 31, 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 for the three and nine month periods
ended December 31, 2000 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. Diluted
earnings per share for the three and nine month periods ended December
31, 2001 include no dilation, as inclusion of stock options would have
been anti-dilutive.
RECONDITIONED SYSTEMS, INC.
Notes to Financial Statements
(Unaudited)
- --------------------------------------------------------------------------------
Note 2.
Note Receivable
- --------------------------------------------------------------------------------
As of December 4, 2001, the Company held a note receivable from American
Business Financial Services, Inc. in the amount of $150,000 which matures on
December 4, 2002. The note is uncollateralized, is held for investment purposes
and accrues interest quarterly at a rate of 8.25%.
- --------------------------------------------------------------------------------
Note 3.
Related Party Transactions
- --------------------------------------------------------------------------------
On November 27, 2001, the Company purchased 30,000 shares of the Company's
Common Stock to be held as Treasury Shares in a private transaction from Dirk
Anderson, the Company's President and CEO. The Company purchased the shares in
exchange for a $75,000 note receivable from Mr. Anderson and $5,100 in unpaid
accrued interest on the note.
On December 7, 2001, the Company entered into an agreement with Scott W. Ryan,
the Company's Chairman of the Board in which the Company transferred all of its
interests held in a $50,000 note receivable from Regent Energy Corporation along
with any and all unpaid accrued interest on the note for $50,000. Furthermore,
the agreement relieved the Company of any and all risk and uncertainty
associated with said note, including, but not limited to attorney fees in
connection with the collection of said note.
RECONDITIONED SYSTEMS, INC.
Notes to Financial Statements
(Unaudited)
- --------------------------------------------------------------------------------
Note 4.
Earnings Per Share
- --------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
December 31, December 31,
2001 2000 2001 2000
---- ---- ---- ----
Basic EPS
Net income $(495,600) $259,296 $(450,343) $702,128
========== ======== ========== ========
Weighted average number of shares outstanding 1,191,972 1,227,440 1,181,435 1,282,755
Basic earnings per share $(0.42) $0.21 $(0.38) $0.55
======= ===== ======= =====
Diluted EPS
Net income $(495,600) $259,296 $(450,343) $702,128
========== ======== ========== ========
Weighted average number of shares outstanding 1,191,972 1,227,440 1,181,435 1,282,755
Effect of dilutive securities:
Stock options 0 135,267 0 135,795
- ------- - -------
Total common shares + assumed conversions 1, 191,972 1,362,707 1,181,435 1,418,550
========== ========= ========= =========
Per Share Amount $(0.42) $0.19 $(0.38) $0.49
======= ===== ======= =====
RECONDITIONED SYSTEMS, INC.
Notes to Financial Statements
(Unaudited)
- --------------------------------------------------------------------------------
Note 5.
Lawsuit and Legal Disputes
- --------------------------------------------------------------------------------
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. 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
injunction requiring the Company to retract alleged defamatory statements the
Company made against Semple & Cooper, LLP.
As of December 31, 2001, the Company had incurred $76,530 in legal fees and
additional audit fees to re-audit the financial statements for the fiscal years
ended March 31, 1999 and 2000. As the lawsuit is still pending, the Company
anticipates it will incur additional legal fees, however, those fees cannot be
estimated at this time.
- --------------------------------------------------------------------------------
Note 6.
Severance Charges
- --------------------------------------------------------------------------------
In response to decreased sales volume and the Company's reported losses, the
Company made personnel cuts during the three month period ended December 31,
2001. In connection with the lay-offs, the Company incurred $42,708 in severance
charges.
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 increase sales revenues, reduce fixed costs to restore
profitability and the risk that the Company's Atlanta and /or Los Angeles
offices 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 current economic downturn has seriously impacted the Company's sales
revenues. The Company reported sales revenues of $1.5 million for the three
month period ended December 31, 2001 (hereinafter the "reporting quarter") as
compared to $3.7 million for the quarter ended December 31, 2000 (hereinafter
the "comparable quarter"), resulting in a decrease of $2.2 million or 59%. This
decrease, coupled with the 35% fall in sales revenue for the first two quarters,
lead to an overall 43% decrease in sales revenues for the nine month period
ended December 31, 2001 (hereinafter the "reporting period") as compared to the
nine month period ended December 31, 2000 (hereinafter the "comparable period").
These declines are worse than the office furniture industry on average.
Management believes this is due to the Company's heavy concentration of sales in
the Northern California and Phoenix markets, whose local economies have been
particularly adversely affected by the current economic slowdown.
Wholesale sales totaled $583 thousand for the reporting quarter and $1.7 million
for the comparable quarter, a 65% decrease. Wholesale sales for the reporting
period totaled $2.5 million, as compared to $5.6 million during the comparable
period, a decrease of 55.6%. Historically, a large percentage of the Company's
wholesale sales have been to dealers in the Northern California region, whose
high-technology businesses have experienced greater corporate lay-offs and
economic hardships.
Retail sales in the Phoenix market totaled $905 thousand during the reporting
quarter and $3.7 million during the reporting period, down from $2.1 million and
$5.6 million or 56% and 33% over the comparable quarter and comparable period,
respectively.
The Company launched its Atlanta retail operation during the reporting period.
The Atlanta retail sales office reported approximately $47 thousand and $147
thousand in sales for the reporting quarter and reporting period, respectively.
GROSS MARGIN
Sales levels for the reporting quarter and period were not sufficient to cover
the Company's fixed manufacturing costs. As a result, the Company's gross
margins decreased from 22% in the comparable quarter and 21.7% in the comparable
period to 2.2% and 16% in the reporting quarter and reporting period,
respectively.
SELLING AND ADMINISTRATIVE EXPENSES
As a result of sales volumes during the reporting quarter and period, the
Company's selling and administrative expenses increased from 13.86% of sales in
the comparable quarter and 13.46% of sales in the comparable period to 30% of
sales for the reporting quarter and 21.5% of sales for the reporting period.
NON-RECURING OPERATING EXPENSES
In response to the lower sales volumes, management made personnel cuts in an
effort to reduce future fixed expenditures. Due to these lay-offs, the Company
incurred approximately $43 thousand in severance charges during the reporting
quarter. In addition to these severance charges, the Company incurred legal fees
and other non-recurring expenses in connection with the Company's lawsuit
against its former independent auditors, Semple & Cooper, LLC (See "Legal
Proceedings" below). These expenditures totaled approximately $35 thousand for
the reporting quarter and $77 thousand for the reporting period.
OTHER INCOME AND EXPENSES
The Company's other income and expenses, which consists primarily of interest
income, decreased from approximately $22 thousand and $63 thousand in the
comparable quarter and period, respectively to approximately $10 thousand and
$26 thousand in the reporting quarter and period, respectively. These decreases
were primarily due to lower effective interest rates.
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 nine month period ended December 31,
2001, 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. Due to the current losses, the Company anticipates it will have
little or no income tax expense for the year ended March 31, 2002.
Financial Condition and Liquidity
- ---------------------------------
As of December 31, 2001, the Company's held approximately $1.4 million in cash
and cash equivalents. In addition, the Company's net worth and working capital
were approximately $3.56 million and $3.2 million, respectively. The Company has
no long-term debt and has not used its available line of credit through M&I
Thunderbird Bank.
Cash Flows from Operating Activities. Net cash used by operating activities
totaled approximately $159 thousand during the reporting period. Reduced sales
volumes and improved collections, resulted in reducing the Company's accounts
receivable by approximately $650 thousand. The Company's average days receivable
improved from 39 days as of March 31, 2001 to 24 days as of December 31, 2001.
Cash Flows from Investing and Financing Activities. During the reporting period,
the Company used approximately $170 thousand for capital expenditures, primarily
related to the purchase of vehicles and equipment for the new retail operation
in Atlanta, Georgia. Additionally, the Company increased its short-term notes
receivable investments by $100 thousand and used approximately $30 thousand to
finance the purchase of treasury stock.
Expected Future Cash Flows. Cash provided by operations in the near future
should closely follow operating income. 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 current economic downturn significantly impacted the Company's sales
revenues and profitability, as well as the revenues of the office furniture
industry as a whole. 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. As a result of the significant
reduction in sales volume and corporate losses, the Company was forced to layoff
personnel in order to reduce fixed costs. Furthermore, management has set new
sales quotas, which if not met, will result in further layoffs and reduction in
salaries.
Although third quarter revenues were down over 50%, the Company's January, 2002
bookings were over $750,000. While this is a significant improvement and the
Company has made efforts to reduce fixed expenditures, there can be no guarantee
that the Company will report profits for the final quarter of the current fiscal
year. Although the reduced sales volume, decreased cash reserves and corporate
losses are 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 that 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 period, the Company was able to
purchase the inventory and equipment of one such competitor in the Atlanta,
Georgia area. The new location is now operational and despite the economic
downturn, generated approximately $147 thousand in sales during the reporting
period and approximately $86 thousand for the month of January 2002. The office
now employs nine 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 to the new office in Atlanta, the Company is opening a satellite
sales office in the Los Angeles, California area scheduled to begin operations
on February 1, 2002. The Company hired Ron Ziegler, a successful former CEO with
many years of industry experience, to head this office. Management believes the
Los Angeles market offers a tremendous opportunity for growth and will help to
further diversify the Company's retail operation.
While there can be no guarantee that the new locations will be profitable,
management remains optimistic about their potential for growth. Management
believes that the platform for growth is built during the lean times rather than
paying the higher valuations required when business is good.
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. 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
injunction requiring the Company to retract alleged defamatory statements the
Company made against Semple & Cooper, LLP.
Item 2. Changes in Securities
- ------------------------------
On August 14, 2001, the Company issued a 5% stock dividend to shareholders of
record on August 13, 2001. This stock dividend was issued in order to satisfy
the Company's public float requirement for continued listing on the Nasdaq Small
Cap Market.
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
- --- ----------- ---------
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
10.36 Lease agreement between Arden Realty Finance III, LLC and Registrant 3
(1) Filed with 10-QSB on August 28, 2001
(2) Filed with 10-QSB on November 9, 2001
(3) 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 December 31, 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: February 5, 2002 _______________________________________
Scott W. Ryan, Chairman
Date: February 5, 2002 _______________________________________
Dirk D. Anderson, CEO
(Principal Accounting Officer)