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, 2003
( ) 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 August 12, 2003, the number of
shares outstanding of the Registrant's common stock was 1,365,461.
Transitional Small Business Disclosure Format. Yes [ ] No[X]
Item 1
PART 1 - CONSOLIDATED FINANCIAL STATEMENTS
RECONDITIONED SYSTEMS, INC.
Unaudited Consolidated Financial Statements
June 30, 2003
RECONDITIONED SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
June 30, 2003 and 2002
(Unaudited)
2003 2002*
---- -----
ASSETS
Current Assets:
Cash and cash equivalents $1,222,686 $1,233,496
Accounts receivable - trade, net of allowance for
doubtful accounts of approximately $47,000 and
$10,500, respectively 1,483,092 1,053,267
Note receivable 150,000 150,000
Corporate income tax receivable 0 356,249
Deferred tax asset, net 89,881 67,882
Inventory 1,984,857 1,337,970
Prepaid expenses and other current assets 250,310 314,823
------- -------
Total current assets 5,180,826 4,513,687
--------- ---------
Property and Equipment, net: 873,564 377,284
------- -------
Other Assets:
Refundable deposits 37,492 31,903
Other 30,142 31,441
------ ------
67,634 63,344
------ ------
Total Assets $6,122,024 $4,954,315
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $924,121 $779,620
Current maturities on note payable 350,000 -
Customer deposits 534,513 217,531
Accrued expenses and other current liabilities 464,391 289,378
------- -------
Total current liabilities 2,273,025 1,286,529
--------- ---------
Stockholders' Equity:
Common stock, no par value; 100,000,000 shares authorized, 1,718,231 and
1,547,517 issued, respectively and 1,365,461 and 1,194,474
outstanding, respectively $5,159,606 $4,805,275
Retained earnings/(Accumulated deficit) (445,302) (270,992)
--------- ---------
4,714,304 4,534,283
Less: treasury stock, 352,700 and 353,043 shares
respectively, at cost (865,305) (866,497)
--------- ---------
3,848,999 3,667,786
--------- ---------
Total Liabilities and Stockholders' Equity $6,122,024 $4,954,315
========== ==========
* Does note include the assets, liabilities and stockholders' equity of Beck
Office Systems, Inc., which was acquired on May 1, 2003
RECONDITIONED SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
For the Three Month Periods Ended June 30, 2003 and 2002
(Unaudited)
Three Months Ended
June 30,
2003 2002*
---- -----
Sales $3,338,281 $2,529,798
Cost of sales 2,733,322 2,039,973
--------- ---------
Gross profit 604,959 489,825
Selling & administrative expenses 774,700 559,512
------- -------
Income (loss) from operations (169,741) (69,687)
Other income (expense):
Interest income 4,697 6,463
Interest expense (5,549) 0
Other (4,041) (421)
------- -----
Net income (loss) before provision for income taxes (174,634) (63,645)
Income tax benefit/(expense) 43,659 22,900
------ ------
Net income (loss) $(130,975) $(40,745)
========== =========
Basic earnings (loss) per share (Notes 1 and 2) $(0.10) $(0.03)
======= =======
Basic weighted average number
of shares outstanding 1,329,428 1,194,607
========= =========
Diluted earnings (loss) per common
and common equivalent share
(Notes 1 and 2) $(0.10) $(0.03)
======= =======
Diluted weighted average number
of shares outstanding 1,329,428 1,191,607
========= =========
* Does not include the results of operations of Beck Office Sysetems, Inc.,
which was acquired on May 1, 2003.
RECONDITIONED SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Year Ended March 31, 2003 and
the Three Month Period Ended June 30, 2003
(Unaudited)
Common Stock Common Stock Retained
Shares Amount Earnings Treasury
(Deficit) Stock Total
- ---------------------------------- -------------- ----------------- ---------------- -------------- --------------
Balance at March 31, 2002 1,194,608 $4,805,258 $(230,247) $(866,178) $3,708,833
Purchase of Treasury
Shares (1,435) - - (2,904) (2,904)
Transfer of shares to
ESP Plan 3,317 (1,806) - 7,888 6,082
Retirement of shares from
ESP Plan (2,149) 64 - (5,110) (5,046)
Stock Dividend 59,714 134,357 (134,357) - -
Net income - - 50,277 - 50,277
-------------- ----------------- ----------------- ------------- --------------
Balance at March 31, 2003 1,254,055 $4,937,873 $(314,327) $(866,304) $3,757,242
Shares issued in relation to
acquisition of Beck Office
Systems, Inc. 111,000 222,000 - - 222,000
Purchase of Treasury
Shares (300) - - (680) (680)
Transfer of shares to
ESP Plan 706 (267) - 1,679 1,412
Net loss - - (130,975) - (130,975)
-------------- ----------------- ------------------ ------------ --------------
Balance at June 30, 2003 1,365,461 $5,159,606 $(445,302) $(865,305) $3,848,999
============== ================= ================== ============ ==============
RECONDITIONED SYSTEMS, INC.
CONSOLDIATED STATEMENTS OF CASH FLOWS
For the Three Month Periods Ended June 30, 2003 and 2002
(Unaudited)
Three Months Ended
June 30,
2003 2002*
---- -----
Cash and cash equivalents provided/(used) by operating activities $448,413 $(109,599)
Cash and cash equivalents used by investing activities (266,730) (33,837)
Cash and cash equivalents used by financing activities (233,129) (302)
--------- -----
Decrease in cash and cash equivalents (51,446) (143,738)
Cash and cash equivalents at beginning of period 1,274,132 1,377,234
--------- ---------
Cash and cash equivalents at end of period $1,222,686 $1,233,496
========== ==========
* Does not include the cash flows of Beck Office Systems, Inc., which was
acquired on May 1, 2003.
Non-cash transactions
During the quarter ended June 30, 2003, the Company had the following non-cash
transactions:
On May 1, 2003, the Company issued 111,000 shares of the Company's
Common Stock in partial consideration for the acquisition of Beck
Office Systems, Inc.
During the quarter ended June 30, 2002 the Company had no non-cash transactions.
RECONDITIONED SYSTEMS, INC.
Notes to Consolidated Financial Statements
(Unaudited)
- --------------------------------------------------------------------------------
Note 1.
Summary of Significant Accounting Policies
- --------------------------------------------------------------------------------
Basis of Consolidation:
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary, Beck Office Systems, Inc. All
significant intercompany accounts and transactions have been eliminated
in consolidation.
Interim Consolidated Financial Statements:
The unaudited interim consolidated financial statements include all
adjustments (consisting of normal recurring accruals), which, in the
opinion of management, are necessary. Consolidated operating results
for the three months ended June 30, 2003 are not necessarily indicative
of the results that may be expected for the entire year ending March
31, 2004. These consolidated 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, 2003 and
the Company's Form 8-K/A incorporated by reference under Item 7 as
filed on July 14, 2003.
Earnings (Loss) Per Common and Common Equivalent Share:
Basic earnings (loss) per share include no dilution and are computed by
dividing income (loss) 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 periods ended
June 30, 2003 and 2002 include no dilution, as inclusion of stock
options would have been anti-dilutive.
RECONDITIONED SYSTEMS, INC.
Notes to Consolidated Financial Statements
(Unaudited)
- --------------------------------------------------------------------------------
Note 2.
Earnings (Loss) Per Share
-------------------------------------------------------------------------------
Three Months Ended
June 30,
2003 2002
---- ----
Basic EPS
Net Income (Loss) $(130,975) $(40,745)
========== =========
Weighted average number of shares outstanding 1,329,428 1,194,607
========= =========
Basic earnings (loss) per share $(0.10) $(0.03)
======= =======
Diluted EPS
Net Income (Loss) $(130,975) $(40,745)
========== =========
Weighted average number of shares outstanding 1,329,428 1,194,607
Effect of dilutive securities:
Stock options 0 0
- -
Total common shares + assumed conversions 1,329,428 1,194,607
========= =========
Per Share Amount $(0.10) $(0.03)
======= =======
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 de-register its common stock under section 12(g) of the
Securities Exchange Act of 1934, as amended, the risk that the Company may not
be able to maintain consistent sales volumes, the risk that the Company's newer
divisions/subsidiary will not achieve profitability, the risk that the Company
may not be able to develop operating synergies from the integration of Beck
Office Systems, and the risk that the Company may not be successful in
developing its GSA marketing program. 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, 2003.
Critical Accounting Policies
- ----------------------------
Our discussion and analysis of our financial condition and results of operations
are based upon our consolidated 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
possession is taken by the customer. In connection with projects delivered
and/or installed by the Company, the sale is recognized upon completion of the
delivery when possession is taken by the customer.
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, 2003 and 2002, the Company established an
allowance for doubtful accounts in the amount of $47,000 and $10,500,
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, 2003 and 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/Subsidiary were as
follows:
Three Months Ended June Three Months Ended % Change
Division/Subsidiary 30, 2003 June 30, 2002 in Sales
- ------------------------------------------ -------------------------- ------------------------ ------------------
Wholesale $1,102,422 $1,328,654 (17.0)%
Arizona Retail $812,065 $826,048 (0.2)%
Georgia Retail $478,087 $205,150 133.0%
California Retail $286,271 $169,946 68.4%
Beck Office Systems $659,436 N/A -
- ----------------------------------------- -------------------------- ------------------------ ------------------
Total Sales $3,338,281 $2,529,798 32.0%
- ------------------------------------------ -------------------------- ------------------------ ------------------
Sales revenues the three month period ended June 30, 2003 (hereinafter the
"reporting period") increased approximately 32% over the three month period
ended June 30, 2002 (hereinafter the "comparable period"). This increase was a
result of the increased sales generated by the Company's newer
divisions/subsidiary. The Company acquired Beck Office Systems on May 1, 2003.
Sales generated by this new subsidiary represent approximately 26% of the total
increase in sales over the comparable quarter. Sales revenues not including Beck
Office Systems' revenues increased 5.8% over the comparable quarter.
Sales for the reporting period consisted of approximately 67% remanufactured
furniture sales, approximately 23% new furniture sales and 10% installation
revenue. This compares to 79% remanufactured, 15% new furniture and 6%
installation for the comparable period.
GROSS MARGIN
- ------------
The Company's gross profit margins decreased from approximately 19.4% for the
comparable period to approximately 18.1% for reporting period. The gross profit
margin, not including gross profits generated by Beck Office Systems, was
approximately 17.5% for the reporting period. Although the company was able to
increase sales over the comparable period, higher new furniture sales adversely
affected the overall gross profit margin because new furniture sales have lower
margins Beck Office Systems reported a gross profit margin of approximately 20%.
OPERATING EXPENSES
- ------------------
The Company's selling and administrative expenses, increased from approximately
22% of sales in the comparable period to approximately 23.2% for the reporting
period. Beck Office Systems' selling and administrative expenses approximated
28.8% of their reported sales.
OTHER INCOME AND EXPENSES
- -------------------------
The Company's other income and expenses, which consists primarily of interest
income and expense decreased from approximately $6 thousand in income for the
comparable period to approximately $5 thousand in expense for the reporting
period. This increased expense was primarily as a result of interest expense on
borrowings in association with the purchase of Beck Office Systems.
Financial Condition and Liquidity
- ----------------------------------
As of June 30, 2003, the Company's cash and cash equivalents totaled $1,222,686.
In addition, the Company's net worth and working capital totaled for the
reporting period were $3,848,999 and $2,907,801, respectively. This compares to
net worth of $3,667,786 and working capital of $3,227,158 for the comparable
period. The Company had no long-term debt and $650,000 available on its line of
credit through M&I Thunderbird Bank.
Cash Flows from Operating Activities. The Company generated approximately $448
thousand from operating activities during the reporting period. The Company's
pre-tax net loss, net of depreciation and amortization, for the reporting
period, was approximately $111 thousand. The Company generated positive
cashflows by reducing accounts receivable by approximately $162 thousand and
increasing accounts payable and accrued expenses by approximately $456 thousand.
These increased cashflows were partially offset by an increase in prepaid assets
of approximately $46 thousand and increased inventory of approximately $13
thousand.
Net cash used by operating activities for the comparable period totaled
approximately $110 thousand. The negative cashflows resulted primarily from
increased accounts receivables.
Cash Flows from Investing Activities. During the reporting period, the Company
used approximately $188 thousand related to the acquisition of Beck Office
Systems. In addition, the Company used approximately $78 thousand for capital
expenditures.
During the comparable period, the Company used approximately $34,000 for capital
expenditures.
Cash Flows from Financing Activities. During the reporting period, the Company
used approximately $233 thousand for financing activities, primarily related to
borrowings used to finance the purchase of Beck Office Systems.
During the comparable period, the Company used approximately $600 for financing
activities related to employee stock purchase transactions.
Expected Future Cash Flows. Additional cash provided by operations in the near
future should closely follow operating income, net of payments on the Company's
$350,000 line of credit balance. 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
Due to the high costs and increasing burden of remaining a small public company
in the wake of the Sarbanes-Oxley Act of 2002, the Board has concluded that
ending the Company's publicly traded status will create the best opportunity for
shareholder value over thenext several years.. The Company plans to file on or
about September 30, 2003 a Form 15 certification terminating the registration of
the Company's common stock under section 12(g) of the Securities Exchange Act of
1934, as amended, and alleviating the obligation of the Company to file its
reports and other disclosures with the SEC. Just prior to such filing, the
Company will notify Nasdaq of its intended filing and Nasdaq will cause the
Company's shares to be de-listed from the Small Cap market on or just prior to
the date of filing. Unless the SEC finds reason to disallow the Company's filing
or the Company withdraws its Form 15 filing for some reason, the Company's stock
will be de-registered 90 days after the Form 15 filing.
While the Form 15 certification has a 90-day pendency prior to effectiveness,
the Company's obligation to file periodic and current reports will cease at the
time of filing. As such this quarterly report on Form 10-QSB for the quarter
ended June 30, 2003 will likely be the Company's last report to be filed with
the SEC for the foreseeable future. Quite irrespective of such relief,
shareholders should expect a steady flow of information to continue to be
communicated by the Company, as the Company's commitment to keeping its
shareholders well informed remains steadfast and of the highest priority. The
Company will continue its practice of posting reports and press releases on its
website, www.resy.net, under the "Investor Relations" link.
Upon filing of the Form 15 and thereafter, once the Company's Form 15
certification becomes effective, no trading market is expected to exist with
respect to the Company's securities and none is expected to develop. As a
result, shareholders will be faced with a drastically more limited set of
options and opportunities to liquidate their investment in the Company. Further
discussion regarding this intended action can be found in the Company's Notice
of Annual Meeting of Stockholders ("Proxy Statement") filed on August 15, 2003.
MIDTERM AND LONG- TERM OUTLOOK
- -------------------------------
Following the filing of the Form 15, the Company hopes to focus its attention on
creation of short-term profitability and long-term opportunities for growth.
With the purchase of Beck Office Systems in May 2003, management will continue
to focus on developing operating synergies, improving inventory control and
turnover, and cost reduction. Particular attention will be focused on building
sales stability within the operating divisions and establishing improved
marketing programs.
The Company finalized the registration of its products with the General Services
Administration ("GSA"), which allows the Company to market directly to the U.S.
government on open and closed bid projects. The Company plans to continue to
develop and implement its GSA marketing plan.
In addition, the Company will continue to seek geographic expansion through
acquisitions, opening new sales offices and developing relationships with
dealerships throughout the United States as opportunities present themselves.
Item 3. Controls and Procedures
Within the 90-day period prior to the filing of this Quarterly Report on 10-QSB,
an evaluation was carried out under the supervision and with the participation
of our management, including our President and Chief Executive Officer (Chief
Finance Officer), as to the effectiveness of our disclosure controls and
procedures. Based on that evaluation, our President and Chief Executive Officer
(Chief Finance Officer) have concluded that our disclosure controls and
procedures are effective to ensure that information required to be disclosed by
us in reports that we file or submit under the Securities Exchange Act of 1934
is recorded, processed, summarized, and reported within the time periods
specified in Securities and Exchange Commission rules and forms. There were no
significant changes in our internal controls or other factors that could
significantly affect these controls subsequent to the date of our management's
evaluation, and there were no corrective actions with regard to significant
deficiencies and material weaknesses.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
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 99.1 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 1
(1) Filed herein
(b) Reports on Form 8-K:
On July 14, 2003, the Company filed a Current Report on Form 8-K/A incorporated
by reference under Item 7 Audited Financial Statements and Pro Forma Financial
Information and Exhibits related to the Merger by and among Reconditioned
Systems, Inc. and all of the outstanding shareholders of Beck Office Systems,
Inc.
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.
/s/ Dirk D. Anderson
Date: August 19, 2003 _______________________________________
Dirk D. Anderson, Chief Executive Officer
(Principal Finance Officer)
/s/ Kerrie A. Leach
Date: August 19, 2003 _______________________________________
Kerrie A. Leach, V.P. of Finance
(Principal Accounting Officer)
Certification
I, Dirk D. Anderson, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Reconditioned
Systems, Inc.:
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. I am responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and have:
a. designed such disclosure controls and procedures to ensure that
material information related to the registrant particularly
during the period in which this report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. I have disclosed, based on my recent evaluation, to the registrant's
auditors and the audit committee of registrant's board of directors (or
persons performing the equivalent functions):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record process, summarize and report financial data
and have identified for the registrant's auditors any
material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and
6. I have indicated in this quarterly report whether there were
significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our
most recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: August 19, 2003
/s/ Dirk D. Anerson
- ------------------------------------
Dirk D. Anderson