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 September 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 (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)
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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 November 12, 2002, the number
of shares outstanding of the Registrant's common stock was 1,254,637.
Transitional Small Business Disclosure Format. Yes ___No X .
------
Item 1
PART 1 - FINANCIAL STATEMENTS
RECONDITIONED SYSTEMS, INC.
Unaudited Financial Statements
September 30, 2002
RECONDITIONED SYSTEMS, INC.
BALANCE SHEETS
September 30, 2002 and 2001
(Unaudited)
2002 2001
---- ----
ASSETS
Current Assets:
Cash and cash equivalents $1,107,305 $1,483,744
Accounts receivable - trade, net of allowance for
doubtful accounts of approximately $18,000 and
$15,000, respectively 1,202,774 1,220,966
Note receivable 150,000 50,000
Inventory 1,400,180 1,415,340
Prepaid expenses and other current assets 357,931 260,538
------- -------
Total current assets 4,218,190 4,430,588
--------- ---------
Property and Equipment, net: 399,192 432,976
------- -------
Other Assets:
Notes receivable - officer 0 75,000
Refundable deposits 31,903 26,156
Other 107,589 26,353
------- ------
139,492 127,509
------- -------
Total Assets $4,756,874 $4,991,073
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $777,353 $614,254
Customer deposits 145,037 36,092
Accrued expenses and other current liabilities 242,422 227,233
------- -------
Total current liabilities 1,164,812 877,589
--------- -------
Stockholders' Equity:
Common stock, no par value; 100,000,000 shares
Authorized, 1,254,637 and 1,222,793
outstanding, $4,979,314 $4,805,371
respectively
Retained earnings/(Accumulated deficit) (521,823) 99,105
--------- ------
4,457,491 4,904,476
Less: treasury stock, 352,594 and 246,225 shares
respectively, at cost (865,429) (790,987)
--------- ---------
3,592,062 4,113,489
--------- ---------
Total Liabilities and Stockholders' Equity $4,756,874 $4,991,073
========== ==========
RECONDITIONED SYSTEMS, INC.
STATEMENTS OF INCOME
For the Three and Six Month Periods Ended September 30, 2002 and 2001
(Unaudited)
Three Months Ended Six Months Ended
September 30, September 30,
2002 2001 2002 2001
---- ---- ---- ----
Sales $2,457,707 $2,575,498 $4,987,505 $4,814,467
Cost of sales 1,989,937 2,080,435 4,029,910 3,839,138
--------- --------- --------- ---------
Gross profit 467,770 495,063 957,595 975,359
Selling & administrative expenses 595,126 427,025 1,146,048 904,543
Legal dispute 5,723 41,126 14,313 41,126
----- ------ ------ ------
Income (loss) from operations (133,079) 26,912 (202,766) 29,660
Other income (expense):
Interest income 6,604 15,972 13,067 35,960
Other 118 40 (303) (20)
--- -- ----- ----
Net income (loss) before provision for income taxes
(126,357) 42,924 (190,002) 65,600
Income tax benefit (expense) 49,600 (15,400) 72,500 (20,343)
------ -------- ------ --------
Net income (loss) $(76,747) $27,524 $(117,502) $45,257
--------- ------- ---------- -------
Basic earnings (loss) per share (Notes 1 and 2) $(0.06) $0.02 $(0.10) $0.04
======= ===== ======= =====
Basic weighted average number
of shares outstanding 1,224,985 1,182,210 1,209,879 1,176,167
========= ========= ========= =========
Diluted earnings (loss) per common
and common equivalent share
(Notes 1 and 2) $(0.06) $0.02 $(0.10) $0.03
======= ===== ======= =====
Diluted weighted average number
of shares outstanding 1,224,985 1,300,832 1,209,879 1,305,245
========= ========= ========= =========
RECONDITIONED SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
For the Year Ended March 31, 2002
and the Six Month Period Ended September 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 1,313 (146) - 3,123 2,977
Retirement of shares from
ESPP Plan (998) 128 - (2,374) (2,246)
Stock Dividend 59,714 174,074 (174,074) -
Net income (loss) - - (117,502) - (117,502)
-------------- ----------------- ------------------ ------------ --------------
Balance at September 30, 2002 1,254,637 $4,979,314 $(521,823) $(865,429) $3,592,062
-------------- ----------------- ------------------ ------------ --------------
RECONDITIONED SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
For the Three and Six Month Periods Ended September 30, 2002 and 2001
(Unaudited)
Three Months Ended Six Months Ended
September 30, September 30,
2002 2001 2002 2001
---- ---- ---- ----
Cash and cash equivalents provided/(used) by operating
activities $(49,504) $68,297 $(159,103) $(80,788)
--------- ------- ---------- ---------
Cash and cash equivalents used by investing activities:
Purchase of property and equipment (77,720) (213,889) (111,182) (229,682)
Other 0 (14,867) (375) (14,867)
- -------- ----- --------
(77,720) (228,756) (111,557) (244,549)
-------- --------- --------- ---------
Cash and cash equivalents provided/(used) by financing
activities 1,033 1,606 731 (30,203)
----- ----- --- --------
Decrease in cash and cash equivalents (126,191) (158,853) (269,929) (355,540)
Cash and cash equivalents at beginning of period 1,233,496 1,642,597 1,377,234 1,839,284
--------- --------- --------- ---------
Cash and cash equivalents at end of period $1,107,305 $1,483,744 $1,107,305 $1,483,744
========== ========== ========== ==========
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
September 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 in the United
States. 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 and six month periods
ended September 30, 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 Six Months Ended
September 30, September 30,
2202 2001 2002 2001
---- ---- ---- ----
Basic EPS
Net Income $(76,747) $27,524 $(117,502) $45,257
========= ======= ========== =======
Weighted average number of shares outstanding 1,224,985 1,182,210 1,209,879 1,176,167
Basic earnings per share $(0.06) $0.02 $(0.10) $0.04
======= ===== ======= =====
Diluted EPS
Net Income $(76,747) $27,524 $(117,502) $45,257
========= ======= ========== =======
Weighted average number of shares outstanding 1,224,985 1,182,210 1,209,879 1,176,167
Effect of dilutive securities:
Stock options 0 118,622 0 129,078
- ------- - -------
Total common shares + assumed conversions 1,224,985 1,300,832 1,209,879 1,305,245
=========
Per Share Amount $(0.06) $0.02 $(0.10) $0.03
======= ===== ======= =====
RECONDITIONED SYSTEMS, INC.
Notes to Financial Statements
(Unaudited)
- --------------------------------------------------------------------------------
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 & 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.
For the six month period ended September 30, 2002, the Company incurred $14,313
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. The Company has elected to charge these expenses to
operating expenses, as incurred.
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 sale 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 September 30, 2002 and 2001, the Company
established an allowance for doubtful accounts in the amount of $18,000 and
$15,000, 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 September 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 Three Months % Change Six Months Six Months % Change
Division Ended September Ended in Sales Ended Ended in Sales
30, 2002 September 30, September 30, September 30,
2001 2002 2001
- ----------------- ------------------ ---------------- ------------ ---------------- ---------------- ------------
Wholesale $741,555 $1,088,860 (31.90)% $2,070,210 $1,909,652 8.41%
Arizona Retail $1,031,928 $1,386,725 (25.59)% $1,857,975 $2,804,902 (33.76)%
Georgia Retail $318,956 $99,913 219.23% $524,106 $99,913 424.56%
California
Retail $365,268 $0 - $535,214 $0 -
Total Retail
Sales $1,716,152 $1,486,638 15.44% $2,917,295 $2,904,815 .43%
Total Sales $2,457,707 $2,575,498 (4.57)% $4,987,505 $4,814,467 3.59%
Sales revenues reported the three month period ended September 30, 2002
(hereinafter the "reporting quarter") for the Company's Wholesale and Arizona
Retail divisions declined sharply over those reported for the three month period
ended September 30, 2001 (hereinafter the "comparable quarter"). These declines
were primarily due to the economic downturn and the volatile conditions within
the industry. The sales generated by the new divisions for the reporting quarter
helped to partially offset the declining sales generated by the Arizona and
Wholesale divisions.
GROSS MARGIN
The Company's gross profit margins remained relatively constant from the
comparable quarter to the reporting quarter at 19.22% and 19.03%, respectively.
Gross margin percentages for the reporting period fell from 20.26% in the
comparable period to 19.20%. The 1.06% decline was primarily due to strong
industry-wide competitive pricing pressures and a slight change in the Company's
retail to wholesale sales-mix. The Company's sales-mix changed from
approximately 60% retail / 40% wholesale in the comparable period to 58% retail
/42% wholesale in the reporting period.
OPERATING EXPENSES
The Company's selling and administrative expenses, net of legal disputes,
increased from 16.5% of sales in the comparable quarter and 18.8% of sales in
the comparable period to 24.2% and 23.0% of sales for the reporting quarter and
period, respectively. This increase is a primarily 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 $16 thousand in the comparable quarter and
$36 thousand in the comparable period to approximately $7 thousand and $13
thousand in the reporting quarter and period, respectively. This decrease was
primarily as a result of lower returns on excess capital investments and
declining cash reserves.
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 September 30, 2002,
the Company accrued an additional income benefits, both current and deferred, of
$49,600 and 72,500 for the reporting quarter and period, respectively. As of
March 31, 2002, the Company had a remaining net operating loss carryforward of
approximately $99,942.
Financial Condition and Liquidity
As of September 30, 2002, the Company's cash and cash equivalents totaled
$1,107,305. In addition, the Company's net worth and working capital totaled for
the reporting period were $3,592,062 and $3,053,378, respectively. This compares
to net worth of $4,113,489 and working capital of $3,552,999 for the comparable
period. 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 $159,000
for operating activities during the reporting period. The Company's pre-tax net
loss, net of depreciation and amortization, for the reporting period was
approximately $80,000. The Company received approximately $288,000 in income tax
refunds. In addition, the Company generated positive cashflows by reducing
inventory approximately $8,000 and increasing accounts payable and accrued
expenses by approximately $305,000. These increases were primarily a result of
increased sales, purchases and customer deposits. These positive cashflows were
offset by increased accounts receivable and prepaid expenses during the
reporting period of approximately $680,000. Increased first and second 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 $27,000 per day
for the reporting quarter.
Net cash used by operating activities for the comparable period totaled
approximately $81,000. These funds were primarily used to reduce current
liabilities and for the payment of estimated income tax payments.
Cash Flows from Investing and Financing Activities. During the reporting period,
the Company used approximately $112,000 for capital expenditures and
approximately $700 for employee stock purchase transactions. During the
comparable period, the Company used approximately $230,000 for capital
expenditures, primarily related to the purchase of vehicles and equipment for
the Georgia location. Additionally, the Company used approximately $13,000 for
refundable deposits related to the Georgia facility and $30,000 to finance the
purchase of treasury stock.
Expected Future Cash Flows. The Company expects to receive additional Income Tax
refunds of approximately $50,000. 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, has 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. As a result of the
continued losses, management implemented another round of cost reduction
actions, including job cuts, salary and commission restructuring and a salary
cut for the Company's CEO effective October 1, 2002. Although the Company
reported significant losses for the reporting period, management is very
optimistic about the Company's short-term outlook and hopes to return to
profitability next quarter.
LONG TERM OUTLOOK
During this difficult economic environment for the industry, 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. Due to the Company's expansion and strong financial position, management
believes that when the economy recovers, the Company will be in an excellent
position to expand market share.
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
The Company's Annual Meeting was held on July 31, 2002. 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 1,159,623 1,302,889 0 612 0
Dirk D. Anderson 1,159,623 1,302,889 0 612 0
Frank E. Hart 1,159,623 1,302,889 0 612 0
David A. Rapaport 1,159,623 1,302,889 0 612 0
Ronald Ziegler 1,159,623 1,302,889 0 612 0
2 - Appointment of
auditors 1,159,623 1,302,906 70 525 0
3 - Increase authorized
common stock
shares 1,159,623 879,269 6,087 385 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
- --- ----------- ---------
99.1 Certification of September 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: November 14, 2002 /S/ Scott W. Ryan
_______________________________________
Scott W. Ryan, Chairman
Date: November 14, 2002 /S/ Dirk D. Anderson
_______________________________________
Dirk D. Anderson, CEO
(Principal Accounting Officer)