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, 2002
( ) 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)
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(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 July 26, 2002, the number of
shares outstanding of the Registrant's common stock was 1,194,474.
Transitional Small Business Disclosure Format. Yes [ ] No [X] .
Item 1
PART 1 - FINANCIAL STATEMENTS
RECONDITIONED SYSTEMS, INC.
Unaudited Financial Statements
June 30, 2002
RECONDITIONED SYSTEMS, INC.
BALANCE SHEETS
June 30, 2002 and 2001
(Unaudited)
2002 2001
---- ----
ASSETS
Current Assets:
Cash and cash equivalents $1,233,496 $1,642,597
Accounts receivable - trade, net of allowance for
doubtful accounts of approximately $10,500 and
$28,000, respectively 1,053,267 1,149,158
Note receivable 150,000 50,000
Corporate income tax receivable 356,249 44,741
Deferred tax asset, net 67,882 -
Inventory 1,337,970 1,306,763
Prepaid expenses and other current assets 314,823 206,334
------- -------
Total current assets 4,513,687 4,399,593
--------- ---------
Property and Equipment, net: 377,284 243,419
------- -------
Other Assets:
Notes receivable - officer 0 75,000
Refundable deposits 31,903 12,896
Other 31,441 21,785
------ ------
63,344 109,681
------ -------
Total Assets $4,954,315 $4,752,693
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $779,620 $375,827
Customer deposits 217,531 49,568
Accrued expenses and other current liabilities 289,378 242,939
------- -------
Total current liabilities 1,286,529 668,334
--------- -------
Stockholders' Equity:
Common stock, no par value; 20,000,000 shares
authorized, 1,547,517 and 1,473,834 issued, 4,805,275 4,589,239
respectively and 1,194,474 and
1,163,676 outstanding, respectively
Retained earnings/(Accumulated deficit) (270,992) 285,193
--------- -------
4,534,283 4,874,432
Less: treasury stock, 353,043 and 310,158 shares
respectively, at cost (866,497) (790,073)
--------- ---------
3,667,786 4,084,359
--------- ---------
Total Liabilities and Stockholders' Equity $4,954,315 $4,752,693
========== ==========
RECONDITIONED SYSTEMS, INC.
STATEMENTS OF OPERATIONS
For the Three Month Periods Ended June 30, 2002 and 2001
(Unaudited)
Three Months Ended
June 30,
2002 2001
---- ----
Sales $2,529,798 $2,238,969
Cost of sales 2,039,973 1,758,703
--------- ---------
Gross profit 489,825 480,266
Selling & administrative expenses 550,922 477,518
Legal dispute 8,590
-----
-
Income (loss) from operations (69,687) 2,748
Other income (expense):
Interest income 6,463 19,988
Other (421) (60)
------ ----
Net income (loss) before provision for income taxes (63,645) 22,676
Income tax expense (benefit) (22,900) 4,943
-------- -----
Net income (loss) (40,745) $17,733
-------- -------
Basic earnings (loss) per share $ ( 0.03) $ 0.02
========== ========
Basic weighted average number
of shares outstanding 1,194,607 1,170,123
========= =========
Diluted earnings (loss) per common
and common equivalent share $ ( 0.03) $ 0.01
========== =======
Diluted weighted average number
of shares outstanding 1,194,607 1,309,657
========= =========
RECONDITIONED SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
For the Year Ended March 31, 2002 and the Three Month Period Ended June 30, 2002
(Unaudited)
Common Stock Common Stock Retained
Shares Amount Earnings Treasury
(Deficit) Stock Total
- ---------------------------------- -------------- ----------------- ---------------- -------------- --------------
Balance at March 31, 2001 1,174,250 $4,588,844 $267,460 $(757,869) $4,098,435
Purchase of Treasury
Shares (40,500) - - (112,025) (112,025)
Transfer of shares to
ESPP Plan 3,522 242 - 8,379 8,621
Retirement of shares from
ESPP Plan (841) - - (2,103) (2,103)
Stock Dividend 58,177 216,172 (213,612) (2,560) -
Net income (loss) - - (284,095) - (284,095)
-------------- ----------------- ------------------ ------------ --------------
Balance at March 31, 2002 1,194,608 $4,805,258 $(230,247) $(866,178) $3,708,833
Transfer of shares to
ESPP Plan 864 (111) - 2,055 1,944
Retirement of shares from
ESPP Plan (998) 128 - (2,374) (2,246)
Net income (loss) - - (40,745) - (40,745)
-------------- ----------------- ------------------ ------------ --------------
Balance at June 30, 2002 1,194,474 $4,805,275 $(270,992) $(866,497) $3,637,786
-------------- ----------------- ------------------ ------------ --------------
RECONDITIONED SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
For the Three Month Periods Ended June 30, 2002 and 2001
(Unaudited)
Three Months Ended
June 30,
2002 2001
---- ----
Cash and cash equivalents used by operating activities $(109,599) $(149,085)
Cash and cash equivalents used by investing activities (33,837) (15,793)
Cash and cash equivalents used by financing activities (302) (31,809)
----- --------
Decrease in cash and cash equivalents (143,738) (196,687)
Cash and cash equivalents at beginning of period 1,377,234 1,839,284
--------- ---------
Cash and cash equivalents at end of period $1,233,496 $1,642,597
========== ==========
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, 2002 are not necessarily indicative of the results that may be
expected for the entire year ending March 31, 2003. 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,
2002.
Earnings (Loss) Per Common and Common Equivalent Share:
Basic earnings (loss) 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.
Diluted earnings (loss) per share for the three month period ended June
20, 2002 include no dilution, as inclusion of stock options would have
been anti-dilutive.
RECONDITIONED SYSTEMS, INC.
Notes to Financial Statements
(Unaudited)
- --------------------------------------------------------------------------------
Note 2.
Earnings Per Share
- --------------------------------------------------------------------------------
Three Months Ended
June 30,
2002 2001
---- ----
Basic EPS
Net Income $(40,745) $17,733
========= =======
Weighted average number of shares outstanding 1,194,607 1,170,123
Basic earnings per share $(0.03) $0.02
======= =====
Diluted EPS
Net Income $(40,745) $17,733
========= =======
Weighted average number of shares outstanding 1,194,607 1,170,123
Effect of dilutive securities:
Stock options 0 139,534
- -------
Total common shares + assumed conversions 1,194,607 1,309,657
========= =========
Per Share Amount $(0.03) $0.01
======= =====
RECONDITIONED SYSTEMS, INC.
Notes to Financial Statements
(Unaudited)
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Note 3.
Legal Dispute
- --------------------------------------------------------------------------------
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 & Coooper, 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.
For the three month period ended June 30, 2002, the Company incurred $8,590 in
costs associated with this dispute. As the lawsuit is still pending, the
Company anticipates it will incur additional costs, however, those costs
cannot be estimated at this time.
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 may not achieve
profitability. 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, 2002.
Critical Accounting Policies
- ----------------------------
Our discussion and analysis of our financial condition and results of operations
are based upon our financial statements which have been prepared in accordance
with accounting principles generally accepted in the United States. The
preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses. In consultation with our Board of Directors and Audit Committee, we
have identified four accounting principles that we believe are key to an
understanding of our financial statements. These important accounting policies
require management's most difficult, subjective judgments.
Revenue Recognition:
The Company recognizes a sale when its earnings process is complete. In
connection with projects that are to be installed by a customer or an agent of
the customer, the sales is recognized when the product is shipped to or picked
up by the customer. In connection with projects delivered and/or installed by
the Company the sale is recognized upon delivery.
Accounts Receivable:
Accounts receivable are reported at the customers' outstanding balances
less any allowance for doubtful accounts. The allowance is based upon a review
of the individual accounts outstanding and the Company's prior history of
uncollectible receivables. At June 30, 2002 and 2001, the Company established an
allowance for doubtful accounts in the amount of $10,500 and $28,000,
respectively.
Inventory:
Inventory, which is primarily composed of used office workstations and
remanufacturing supplies, is stated at the lower of average cost or market. The
Company reviews its inventory monthly and makes provisions for damaged and
obsolete inventory. The Company contemplates its ability to alter the size of
panels and other workstation components and designs projects so that the
workstations are comprised of products currently in inventory in establishing a
reserve for damaged and obsolete inventory. At June 30, 2002, the Company
established a reserve in the amount of $50,000.
Stock-Based Compensation:
The Company has elected to follow Accounting Principles Board Opinion
No. 25 Accounting for Stock Issued to Employees (APB 25) and the related
interpretations in accounting for its employee stock options. Under APB 25,
because the exercise price of employee stock options equals the market price of
the underlying stock on the date of grant, no compensation expense is recorded.
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation"
(Statement No. 123.)
Results of Operations
- ---------------------
SALES REVENUE
- -------------
Sales for the reporting and comparable periods by Division were as follows:
Three Months Ended Three Months Ended $ Change % Change
Division June 30, 2002 June 30, 2001 in Sales in Sales
- ------------------------ ----------------------- ----------------------- --------------- ----------------
Wholesale $1,328,654 $820,792 $507,662 61.87%
Arizona Retail $826,048 $1,418,177 $(592,129) (41.75)%
Georgia Retail $205,150 $- $205,150 -
California Retail $169,946 $- $169,946 -
- ------------------------ ----------------------- ----------------------- --------------- ----------------
Total Retail Sales $1,201,144 $1,418,177 $(217,033) (15.30)%
- ------------------------ ----------------------- ----------------------- --------------- ----------------
Total Sales $2, 529,798 $2,238,969 $290,829 12.98%
- ------------------------ ----------------------- ----------------------- --------------- ----------------
Historically, the Company's Wholesale division has had a large concentration of
dealers in the Northern California region. As a result of that concentration and
the Northern California region's sharp economic decline, wholesale sales for the
comparable quarter were particularly low. Management responded to the declining
market by implementing a new wholesale marketing plan designed to expand its
wholesale markets into other states and diversify its wholesale customer base.
In addition, the opening of the Georgia production facility allowed the Company
to begin developing dealer relationships in the Southern region of the United
States. As a result of these efforts, Wholesale sales reported during the
reporting period are more in line with historical quarterly revenues for the
division.
Retail sales totaled approximately $1.2 million during the reporting period.
Retail sales generated by the Arizona sales office were down approximately 42%
over the comparable period. The decreased retail sales in Arizona were primarily
due to a general market slowdown and a downturn in the Phoenix economy. These
decreases were partially offset by the sales generated by the Company's new
Georgia and California sales offices.
Due to the economic downturn, the conditions within the industry in which the
Company operates are highly volatile. This volatility has caused significant
fluctuation in sales over the past year. Although the Company's revenues for the
reporting period were predominately generated by the Company's Wholesale
division, sales for that division have dropped off for the quarter ending
September 30, 2002. The Company's retail sales are showing an improvement for
that same period.
(Refer to the Short-Term Outlook section below.)
GROSS MARGIN
- ------------
The Company's gross profit margins fell from approximately 21.5% for the
comparable period to approximately 19.4% for the reporting period. This was
primarily due to changes in the Company's retail to wholesale sales-mix. The
Company's sales-mix changed from approximately 63% retail / 37% wholesale in the
comparable period to 47% retail / 53% wholesale in the reporting period. The
Company's gross margins on wholesale sales are typically lower than those of its
retail sales. In addition, continued competitive pressures due to the weak
economy have also driven the Company's retail gross profit margins down.
OPERATING EXPENSES
- ------------------
The Company's selling and administrative expenses increased from 21.3% of sales
in the comparable period to 22.1% of sales for the reporting period. This
increase is a result of increased fixed costs associated with the Company's new
Georgia and California sales office facilities.
OTHER INCOME AND EXPENSES
- -------------------------
The Company's other income and expenses, which consists primarily of interest
income decreased from approximately $20 thousand in the comparable period to
approximately $6,500 in the reporting period. This decrease was primarily as a
result of lower returns on excess capital investments.
Income Taxes
- ------------
If the Company reports a net operating loss for the fiscal year ending March 31,
2003, management will elect to carryback as much of those losses as possible,
resulting in an income tax receivable. As a result, as of June 30, 2002, the
Company accrued an additional income tax receivable of approximately $18,000.
As of March 31, 2002, the Company had a remaining net operating loss
carryforward of approximately $99,942. The Company also accrued an additional
net deferred tax asset of approximately $5,000 for the reporting period. This
deferred tax asset is a result of temporary taxable timing differences.
Financial Condition and Liquidity
- ---------------------------------
As of June 30, 2002, the Company's cash and cash equivalents totaled $1,233,496.
In addition, the Company's net worth and working capital totaled $3,667,786 and
$3,227,158, 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 $109,500
for operating activities during the reporting period. The Company reported a
pre-tax net loss, net of depreciation and amortization, of approximately
$12,500. The Company experienced positive cashflows resulting from increased
accounts payable and accrued expenses of approximately $427,000. These increases
were primarily a result of increased sales and purchases over the prior quarter.
The Company was also able to decrease its inventory levels by approximately
$70,000. These positive cashflows were offset by from increased accounts
receivable and prepaid expenses during the reporting period of approximately
$594,000. Increased first quarter sales resulted in increasing the average day's
sales from approximately $22,000 per day for the quarter ended March 31, 2002 to
approximately $28,000 per day for the reporting period.
Cash Flows from Investing and Financing Activities. During the reporting period,
the Company used approximately $34,000 for capital expenditures and
approximately $300 for employee stock purchase transactions.
Expected Future Cash Flows. The Company expects to receive Income Tax refunds of
approximately $338,000. Additional 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 needs of
the Company through the end of the next fiscal year without the need for outside
financing.
Forward Looking Statements
- --------------------------
SHORT TERM OUTLOOK
- ------------------
The Company, and the entire Office Furniture industry, have been hard hit by the
economic downturn. Due to significant losses in the December 2001 quarter,
management instituted a wage freeze and reduced staff by approximately 10%.
Although the Company has seen continued improvement in all divisions since first
reporting losses in December 2001, the Company has yet to return to
profitability. The Company's wholesale division was able to achieve
profitability during the reporting period; however those profits were more than
offset by losses reported in the Company's retail divisions. If the Company does
not return to profitability within the September 2002 quarter, it is likely
management will implement further cost reduction actions.
The following schedule details the management's projected quarterly revenue
requirements by division needed to achieve modest net income for the quarter
ending September 30, 2002. In addition, the schedule indicates the percentage of
these budgeted sales revenues invoiced and booked as of the date of this report:
Wholesale Arizona Georgia California Total
- ---------------------------- -------------- ---------------- --------------- ---------------- --------------------
Required Sales Revenue $1,200,000 $1,200,000 $400,000 $400,000 $3,200,000
- ---------------------------- -------------- ---------------- --------------- ---------------- --------------------
% of Goal Meet
as of August 14, 2002 33.6% 60.82% 68.25% 48.96% 50.05%
- ---------------------------- -------------- ---------------- --------------- ---------------- --------------------
As of the date of this report, management is unable to project total sales
revenues for the quarter ending September 30, 2002. There can be no assurance
that the Company will achieve these sales revenues or that the Company will be
profitable for the quarter ending September 30, 2002 if the Company meets these
sales revenue goals.
LONG TERM OUTLOOK
- -----------------
The Company's strong cash position puts the Company in a better position than
many of its competitors during this difficult economic climate. Although the
Company has reported losses during the past three quarters, it has been able to
draw from its excess cash reserves to cover these losses without adversely
affecting operations and still maintains sufficient cash reserves to supplement
income/loss from operations in the short-term. Assuming the Company can
withstand the current downturn in the economy and return to profitability in the
short-term, management believes the Company will be in an excellent position to
compete in the renewed economy.
There have been a number of the Company's competitors who have been forced to go
out of business and many more remain financial unstable which may result in
their failure, as well. This should improve the competitive climate once the
economy recovers. Additionally, management believes the Company will be in an
excellent position to expand market share now that the Company has established
multiple manufacturing and sales facilities. The Company's Georgia and
California offices are continuing to progress and are expected to reach
break-even by the end of fiscal 2003.
Finally, management continues to create long-term opportunities for growth and
increased gross margins through product and market development projects. The
Company is currently finalizing registration of its products with the GSA, which
will allow the Company to market directly to the U.S. government on open and
closed bid projects. The Company is also partnering with one of its suppliers to
develop a line of clone replacement parts, which will reduce the Company's
product costs on new replacement component parts and allow the Company to market
these items to other remanufacturers in the industry.
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings
- --------------------------
The Company is not party to any pending legal proceeding except for the
litigation with Semple & Cooper, LLC as described in the Company's 10-KSB dated
June 28, 2002.
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
- --- ----------- ---------
99.1 Certification of June 30, 2002 10-QSB 1
(1) Filed herein
(b) Reports on Form 8-K:
None.
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, 2002
/s/ Scott W. Ryan
--------------------------------------
Scott W. Ryan, Chairman
Date: August 14, 2002 /s/ Dirk D. Anderson
--------------------------------------
Dirk D. Anderson, CEO
(Principal Accounting Officer)