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, 2000
( ) 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 Identification No.)
incorporation or organization)
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 October 31, 2000, the number of
shares outstanding of the Registrant's common stock was 1,227,591.
Transitional Small Business Disclosure Format. Yes ___No X .
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Page 1
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Item 1
PART 1 - FINANCIAL STATEMENTS
RECONDITIONED SYSTEMS, INC.
Unaudited Financial Statements
September 30, 2000
Page 2
<PAGE>
RECONDITIONED SYSTEMS, INC.
BALANCE SHEETS
September 30, 2000 and 1999
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
---- ----
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents $1,195,076 $1,523,570
Accounts receivable - trade, net of allowance
for doubtful accounts of approximately
$19,000 and $35,000, respectively 1,911,221 1,391,598
Inventory 1,427,316 857,161
Prepaid expenses and other current assets 207,838 79,620
------- ------
Total current assets 4,741,451 3,851,949
--------- ---------
Property and Equipment, net: 259,590 220,661
------- -------
Other Assets:
Notes receivable - officer 75,000 75,000
Refundable deposits 12,896 13,036
Other 55,354 37,190
------ ------
143,250 125,226
------- -------
Total Assets $5,144,291 $4,197,836
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $819,989 $425,516
Customer deposits 216,336 103,411
Accrued expenses and other current
liabilities 312,105 625,177
------- -------
Total current liabilities 1,348,430 1,154,104
--------- ---------
Stockholders' Equity:
Common stock, no par value; 20,000,000
shares authorized $4,588,381 $4,587,586
Accumulated deficit (176,734) (1,224,532)
--------- -----------
4,411,647 3,363,054
Less: treasury stock, 246,225 and
125,785 shares respectively,
at cost (615,786) (319,322)
--------- ---------
3,795,861 3,043,732
--------- ---------
Total Liabilities and Stockholders' Equity $5,144,291 $4,197,836
========== ==========
</TABLE>
Page 3
<PAGE>
RECONDITIONED SYSTEMS, INC.
STATEMENTS OF OPERATIONS
For the Three and Six Month Periods Ended September 30, 2000 and 1999
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales $3,843,089 $2,458,090 $7,407,994 $4,755,886
Cost of sales 3,001,066 1,834,247 5,825,895 3,551,262
--------- --------- --------- ---------
Gross profit 842,023 623,843 1,582,099 1,204,624
Selling & administrative
expenses 502,426 427,823 982,474 850,962
Severance charge 0 292,984 0 292,984
- ------- - -------
Income (loss) from
operations 339,597 (96,964) 599,625 60,678
Other income (expense):
Interest income 18,782 19,078 34,425 35,246
Other 381 156 6,127 156
--- --- ----- ---
Net income (loss) before
provision for income taxes 358,760 (77,730) 640,177 96,080
Income tax expense 107,804 0 197,345 0
------- - ------- -
Net income (loss) $250,956 $(77,730) $442,832 $96,080
-------- --------- -------- -------
Basic earnings (loss) per
share (Notes 1 and 2) $0.19 $(0.06) $0.34 $0.07
===== ======= ===== =====
Basic weighted average number
of shares outstanding 1,293,132 1,399,441 1,310,413 1,428,837
========= ========= ========= =========
Diluted earnings (loss) per common
and common equivalent share
(Notes 1 and 2) $0.18 $(0.06) $0.31 $0.06
===== ======= ===== =====
Diluted weighted average number
of shares outstanding 1,423,193 1,399,441 1,446,472 1,632,524
========= ========= ========= =========
</TABLE>
Page 4
<PAGE>
RECONDITIONED SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
For the Year Ended March 31, 2000 and the Six Month Period Ended
September 30, 2000
(Unaudited)
<TABLE>
<CAPTION>
Common Common Retained
Stock Stock Earnings Treasury
Shares Amount (Deficit) Stock Total
------------------ --------- ---------- ------------ -------- ----------
<S> <C> <C> <C> <C> <C>
Balance at
March 31, 1999 1,473,816 $4,586,982 $(1,320,612) $ - $3,266,370
Purchase of
Treasury Stock (150,000) - - (368,413) (368,413)
Transfer of shares
to ESP Plan 3,868 594 - 9,200 9,794
Net Income - - 701,046 - 701,046
--------- ---------- ---------- ---------- ----------
Balance at
March 31, 2000 1,327,684 $4,587,576 $(619,566) $(359,213) $3,608,797
Purchase of
Treasury Stock (100,800) - - (258,253) ( 258,253)
Transfer of shares
to ESP Plan 707 805 - 1,680 2,485
Net income - - 442,832 - 442,832
--------- ---------- ---------- ---------- ----------
Balance at
September 30, 2000 1,227,591 $4,588,381 $(176,734) $(615,786) $3,795,861
========= ========== ========== ========== ==========
</TABLE>
Page 5
<PAGE>
RECONDITIONED SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
For the Three and Six Month Periods Ended September 30, 2000 and 1999
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cash and cash equivalents provided
by operating activities $443,493 $294,171 $603,716 $665,451
Cash and cash equivalents used by
investing activities (38,439) (39,885) (73,650) (63,988)
Cash and cash equivalents used by
financing activities (258,627) (9,968) (255,768) (181,218)
--------- ------- --------- ---------
Increase in cash and cash
equivalents 146,427 244,318 274,298 420,245
Cash and cash equivalents at
beginning of period 1,048,649 1,279,252 920,778 1,103,325
--------- --------- ------- ---------
Cash and cash equivalents at end
of period $1,195,076 $1,523,570 $1,195,076 $1,523,570
========== ========== ========== ==========
</TABLE>
Page 6
<PAGE>
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 six months ended
September 30, 2000 are not necessarily indicative of the results that
may be expected for the entire year ending March 31, 2001. 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, 2000.
Earnings Per Common and Common Equivalent Share:
Basic earnings per share include no dilution and are computed by
dividing income available to common stockholders by the weighted
average number of shares outstanding for the period.
Diluted earnings per share amounts are computed based on the weighted
average number of shares actually outstanding plus the shares that
would be outstanding assuming the exercise of dilutive stock options,
all of which are considered to be common stock equivalents. The number
of shares that would be issued from the exercise of stock options has
been reduced by the number of shares that could have been purchased
from the proceeds at the average market price of the Company's stock.
Page 7
<PAGE>
RECONDITIONED SYSTEMS, INC.
Notes to Financial Statements
(Unaudited)
-------------------------------------------------------------------------------
Note 2.
Earnings Per Share
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic EPS
Net income (loss) $250,956 $(77,730) $442,832 $96,080
======== ========= ======== =======
Weighted average number of
shares outstanding 1,293,132 1,399,441 1,310,413 1,428,837
Basic earnings (loss) per
share $0.19 $(0.06) $0.34 $0.07
===== ======= ===== =====
Diluted EPS
Net income (loss) $250,956 $(77,730) $442,832 $96,080
======== ========= ======== =======
Weighted average number of
shares outstanding 1,293,132 1,399,441 1,310,413 1,428,837
Effect of dilutive securities:
Stock options 130,061 0 136,059 203,687
------- - ------- -------
Total common shares + assumed
conversions 1,423,193 1,399,441 1,446,472 1,632,524
========= ========= ========= =========
Per Share Amount $0.18 $(0.06) $0.31 $0.06
===== ======= ===== =====
</TABLE>
Page 8
<PAGE>
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 maintain its increased sales volume, the risk that the Company
may not see improved profitability and the risk that the Company will not be
successful in developing clone replacements for significant inventory parts. 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,
2000.
Results of Operations
SALES REVENUE
The Company reported sales revenue of $3.84 million for the three month period
ended September 30, 2000 (hereinafter the "reporting quarter") as compared to
$2.46 million for the quarter ended September 30, 1999 (hereinafter the
"comparable quarter"), resulting in an increase of $1.38 million or 56%. Sales
revenue for the six month period ended September 30, 2000 (hereinafter the
"reporting period") totaled $7.4 million as compared to $4.75 million for the
six month period ended September 30, 1999 (hereinafter the "comparable period"),
a $2.65 million or 56% increase. Although the Company's retail sales saw the
greatest improvement, wholesale sales also improved significantly. Retail sales
accounted for 42% of the total sales for the reporting quarter, up from 39% in
the comparable quarter. Retail sales were 46% of the Company's sales for the
reporting period, as compared to 41% in the comparable period.
Retail sales totaled $1.65 million during the reporting quarter and $3.5 million
during the reporting period, up 71% and 79% over the comparable quarter and
comparable period, respectively. Management believes these increases are a
result of the Company's continued focus on building a stronger retail business
operating as "Total Office Interiors." This was achieved by the addition of the
Company's new sales manager in July 1999, the expansion of new furniture and
accessory product-lines, increased commitment to improving customer service and
sales support, the continued development of qualified sales personnel and the
opening of the Company's retail showroom.
Wholesale sales totaled $2.19 million for the reporting quarter and $1.5 million
for the comparable quarter, up 46.8%. Wholesale sales for the reporting period
totaled $3.9 million, as compared to $2.8 million during the comparable period,
an increase of 39.3%. These increases were primarily due to improved market
demand following a general industry slowdown during the fiscal year ended March
31, 2000.
GROSS MARGIN
Despite the higher percentage of retail to wholesale sales, the Company's gross
profit margin for the reporting quarter declined 3.47%, from 25.38% for the
comparable quarter to 21.91% for the reporting quarter. Gross margins for the
reporting period also declined relative to the comparable period, down 3.97%,
from 25.33% for the comparable period to 21.36% for the reporting period. These
declines were primarily attributable to higher product costs due to increased
demand for used Haworth inventories purchased on the aftermarket and the
Company's demand for a more highly competitive product-mix. This trend of higher
product costs was identified in the prior quarter. The Company has focused on
improving used inventory buying procedures and has seen improvement in the
product costs during the reporting quarter as compared to the prior quarter.
Page 9
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OPERATING EXPENSES
The Company's selling expenses decreased from 11.31% of sales in the comparable
quarter and 11.42% of sales in the comparable period to 8.7% of sales for the
reporting quarter and 8.86% of sales for the reporting period. The Company's
retail sales staff is paid commissions based upon the gross profit of their
sales. As a result, the lower gross margins earned on the Company's sales
revenues during the reporting period also resulted in lower selling expenses as
a percentage of sales for the reporting period.
The Company's administrative expenses, net of severance charges accrued in the
comparable quarter, decreased from 6.09% of sales in the comparable quarter and
6.47% of sales in the comparable period to 4.11% and 4.40% of sales in the
reporting quarter and reporting period, respectively. These improvements were
primarily a result of the elimination of salaries and bonuses payable in the
comparable period to the Company's former President and CEO.
OTHER INCOME AND EXPENSES
The Company's other income and expenses, which consists primarily of interest
income, remained relatively consistent from the comparable period to the
reporting period at $40,552 and $35,402, respectively.
Income Taxes
As of March 31, 2000, the Company had federal loss carryforwards of
approximately $299,000 and state loss carryforwards of approximately $99,000.
Based on annualizing the earnings for the quarters ended June 30, 2000 and
September 30, 2000, the Company's income tax expense net of the remaining net
operating loss carryforwards totals approximately $197,000. This effective
federal income tax rate for the Company is therefore, lower for the period ended
Sept 30, 2000 than it will be for future periods as a result of the use of the
remaining net operating loss carryforwards. During the six month period ended
September 30, 1999, the Company's taxable net income was fully offset by net
operating loss carryforwards. As a result the Company incurred no income tax
expense during such period.
Financial Condition and Liquidity
As of September 30, 2000, the Company's cash and cash equivalents totaled
$1,195,076. In addition, the Company's net worth and working capital totaled
$3,795,861 and $3,393,021, 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. Net cash provided by operating activities
totaled $603,716 during the reporting period. The Company's inventory and
prepaid expenses increased during the reporting period, however they were
partially offset by decreased accounts receivable and increased accounts payable
and accrued expenses. Management was concerned by the high accounts receivable
balance and slow collection rate as of March 31, 2000. In response to these
concerns, new collection procedures and personnel changes were implemented. As a
result of these changes, the average days receivables improved from 62 days as
of March 31, 2000 to 48 days as of September 30, 2000. During the reporting
period, the Company invested approximately $236,000 in additional inventories
and approximately $153,000 in inventory deposits. This increase was a result of
both increasing costs and procurement of more inventories to meet anticipated
upcoming demand. The Company's Management believes the majority of these
increases relate to timing issues, which should be self-correcting during the
next few quarters.
Cash Flows from Investing and Financing Activities. During the reporting period,
the Company used approximately $74,000 for capital expenditures and
approximately $256,000 to finance the purchase of treasury stock.
Expected Future Cash Flows. Cash provided by operations in the near future
should closely follow operating income net of income tax expense and
expenditures to finance the purchase of treasury stock.
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.
Page 10
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Forward Looking Statements
Although the reporting period's sales revenues exceeded management's forecasts,
the gross margins were lower than management's expectations. Management's focus
at this time is to try to maintain the increased sales levels attained during
the reporting period, while bringing product cost percentages back into line
with those reported in the previous fiscal year. As discussed above, a
significant reason for the lower profit margins was a direct result of the
increased competitive pressures, increased internal and external demand for
product and higher prices demanded for used furniture inventories on the
aftermarket. Management believes these pressures are weakening and used
inventory purchase prices should return to normal levels in the near future.
However, there can be no assurance that such pressures will weaken or that used
inventory purchases prices will return to normal levels. Additionally, the
Company is currently contracting with an outside vendor to develop clone
replacement parts for some of the parts which the Company is most frequently
required to purchase new. Upon successful development of these clone parts, the
Company could realize substantial cost savings (up to 70% cost savings on some
parts) which should have a positive impact on the Company's gross margins.
However, there can be no assurance that the clone parts will be successfully
developed or that they will result in a cost savings to the Company.
Page 11
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not party to any pending legal proceeding other than routine
litigation incidental to the business.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting was held on August 11, 2000. Shareholders voted on
the appointment of the Company's auditors and the election of the Company's
Board of Directors.
<TABLE>
<CAPTION>
------------------- -------- --------- ------------- ----------- ---------
Shares Broker
Proposal Eligible Voted For Voted Against Abstentions Non-Votes
------------------- -------- --------- ------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
1- Election of
directors:
------------------- --------- --------- ------------- ----------- ----------
Scott W. Ryan 1,327,684 1,174,078 0 4,466 0
------------------- --------- --------- ------------- ----------- ----------
Dirk D. Anderson 1,327,684 1,148,494 0 30,050 0
------------------- --------- --------- ------------- ----------- ----------
Frank E. Hart 1,327,684 1,148,511 0 30,033 0
------------------- --------- --------- ------------- ----------- ----------
2 - Appointment of
auditors 1,327,684 1,178,444 100 0 0
------------------- --------- --------- ------------- ----------- ----------
</TABLE>
Item 5. Other Information
None.
Page 12
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed herewith pursuant to Regulation S-B:
No. Description Reference
--- ----------- ---------
3.1 Articles of Incorporation of the Registrant, as
amended and restated 3
3.2 Bylaws of Registrant, as amended and restated 3
4.1 Form of Common Stock Certificate 1
4.5 Registration Rights Agreements 2
*4.10 Options issued to Dirk D. Anderson 4
*4.12 Amendment to Options issued to Dirk D. Anderson 5
*4.14 Options issued to Dirk D. Anderson 5
*4.15 Options issued to Scott W. Ryan 5
*4.16 Options issued to Scott W. Ryan 5
10.1 Lease Agreement, dated April 12, 1990 between
Boston Safe Deposit
and Trust Company, as Lessor, and Registrant as Lessee 1
10.33 Loan document between M&I Thunderbird Bank and the
Registrant 6
(1) Filed with Registration Statement on Form S-18,
No. 33-51980-LA, under the
Securities Act of 1933, as declared effective on
December 17, 1992
(2) Filed with Form 10-KSB on July 13, 1995
(3) Filed with Form 10-KSB on July 2, 1996
(4) Filed with Form 10-QSB on November 14, 1996
(5) Filed with 10-KSB on September26, 1997
(6) Filed with 10-QSB on August 11, 2000
(*) Indicates a compensatory plan or arrangement
(b) Reports on Form 8-K:
No reports were filed on Form 8-K during the quarter ended September 30, 2000.
Page 13
<PAGE>
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 13, 2000 /S/ Scott W. Ryan
-----------------
Scott W. Ryan, CEO
Date: November 13, 2000 /S/ Dirk D. Anderson
--------------------
Dirk D. Anderson, COO
Page 14
