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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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For the Fiscal Year Ended Commission File Number
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December 31, 1998 33-11795
RECOM MANAGED SYSTEMS, INC.
(Formerly Mt. Olympus Enterprises, Inc.)
Delaware 87-0441351
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(State of Incorporation) (I.R.S. Employer Identification)
Principal Executive Offices:
2412 Professional Drive
Roseville, CA 95661
Telephone: (916) 774-0953
Securities registered pursuant to Section 12(b) of the Exchange Act: NONE
Securities registered pursuant to Section 12(g) of the Exchange Act: NONE
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 (refer to "Notice of
Deferred Filing" below).
Yes X No
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The issuer's revenues for its most recent fiscal year were $79,292.
As of March 16, 1999, the aggregate value of the voting stock held by
non-affiliates of the Registrant, computed by reference to the average of the
bid and ask price on such date was approximately $11,977,146 based upon the
average sales price of $8.63/share between the bid and ask price of $8.25 Bid --
$9.00 Ask.
As of March 16, 1999, the Registrant had outstanding 3,119,000 shares of common
stock ($.001 par value).
Documents Incorporated By Reference
No documents are incorporated herein by reference.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
History of the Company
On October 30, 1998, pursuant to majority shareholder consent, Mt.
Olympus Enterprises, Inc. ("MOE") completed a "Reverse Acquisition" through
which control of MOE was transferred from its existing shareholders to a group
of private owners of a California limited liability company, J2 Technologies,
LLC ("J2"). J2 was itself a newly organized company having a date of inception
of July 31, 1998. Subsequently, MOE changed its name to RECOM Managed Systems,
Inc. ("RMSI") (hereafter, the "Company" refers to RMSI, previously named MOE).
The details of the Reverse Acquisition are more fully described in the Reverse
Acquisition Agreement denominated as the "Stock-For-Interest Membership Exchange
Agreement" which was filed as an Exhibit to the Company's report on Form 8-K
dated November 12, 1998. The more essential terms of the Reverse Acquisition are
outlined as follows:
1. As of the closing date on October 30, 1998, MOE, an inactive
public Delaware corporation, acquired all of the issued and
outstanding Membership Interest of J2 in exchange for 2,200,000
shares issued to the J2 members, constituting approximately 84.4%
of its reverse split issued and outstanding shares. Thereby, the
prior J2 owners became the controlling shareholders of MOE. No
other consideration was involved in the acquisition.
2. Prior to and as a condition to the Reverse Acquisition, MOE
completed a reverse split of its issued and outstanding shares on
a forty-three to-one ratio (43:1). This resulted in a reduction of
shares outstanding from 4,300,000 to 100,000 prior to the Reverse
Acquisition.
3. On or about November 5, 1998, and pursuant to the Reverse
Acquisition, MOE changed its name of record with the Delaware
Secretary of State to RECOM Managed Systems, Inc.
4. The Reverse Acquisition also provided that all debts and
obligations of MOE were paid and discharged as of the closing date
of the reorganization. The debts and obligations of MOE were
accordingly paid and discharged in exchange for the issuance of
305,000 shares of post-split shares issued to the creditors.
On December 31, 1998, all of the assets and liabilities of J2 were
contributed up to the Company and J2 was dissolved. Thus, the Company currently
has no subsidiaries.
MOE was incorporated under the laws of the State of Delaware on January
19, 1987 and was formed with broad, but unspecified, general business purposes
and without designation of an initial business plan. MOE was formed with the
intent of raising capital to fund the investigation, acquisition, and operation
of one or more investment and business endeavors in any industry subsequently
selected by management, with the ultimate intent of acquiring one or more
business opportunities.
MOE completed a public offering of its shares pursuant to a prior SEC
registration on Form S-18 in November of 1988. The offering raised approximately
$64,500 in gross proceeds, which had been the sole capitalization of MOE to date
prior to the Reverse Acquisition.
In April 1997, MOE entered into a preliminary letter of intent with
Afritel Telecommunications, Inc. to complete a "reverse acquisition" whereby MOE
would be the surviving entity. Afritel intended to provide wireless telephone
services in the African Continent, with an initial target being the Country of
Zaire. After numerous delays to implement the reorganization agreement, both
companies agreed to a mutual rescission of the Agreement in approximately March
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1998. Both Afritel and MOE agreed to a full mutual rescission of rights and
claims. No shares or anything of value had been exchanged pursuant to the
terminated agreement.
Background
Businesses increasingly depend on the ability to access and share
electronic information reliably. Accelerated obsolescence, lack of industry
compatibility and the inability to attract skilled talent have created barriers
for small companies trying to provide these services cost effectively. To enable
effective internal communication companies are relying on e-mail, remote access
by mobile workers and various forms of online information. The proliferation of
the use of the Internet and the emergence of e-commerce are driving the need for
businesses to exchange electronic information externally with customers,
business partners and vendors. Dramatic increase in network traffic has
heightened requirements for network performance and caused security to become a
high priority for many businesses. As a result of these trends, a growing number
of businesses view the availability of secure, reliable networks and desktop
systems as mission-critical to their success.
Today businesses continue to seek to control costs and improve
operating efficiencies. Implementation and management of new desktop, network
and e-commerce systems requires significant expertise in order to maintain
reliability, performance and security. Not only are systems increasing in
complexity, but the tools and hardware required to support them are themselves
complex and require a significant investment of money and expertise.
Many companies have encountered difficulties implementing and
maintaining their systems internally because of the significant shortage of
qualified IT professionals. Industry analysis estimates that between 15% and 30%
of permanent IT positions were unfilled in mid-1998 and that the total volume of
IT work will increase 45% by 2003.
Many companies are turning to third party service providers for
secondary and core business competencies. Full outsource contracts are not
common among the under served mid-tier and small companies, but affordable
out-tasking of a subset of services is a value proposition that is becoming
increasingly selected.
The World Wide Web is an equalizer, enabling companies to make their
products accessible regardless of size, increasing the momentum for mid-tier and
small companies to modernize their systems and web-enable their offerings. There
is a tremendous opportunity to assist these companies as they shift to
e-commerce for a significant source of their revenues.
RMSI Solution
RMSI will provide a modularized set of services that can be used
independently or together to allow customers to web-enable their business, and
to have reliable, available internal systems. RMSI offers an alternative to
managing multiple vendors or acquiring internal expertise, by offering
project-based custom projects and ongoing subscription services in an integrated
fashion, from a single source.
Full Breadth of Services
RMSI services will cover the entire lifecycle of desktops, networks and
business applications from initial design through implementation, ongoing
maintenance, upgrade and retirement. Customers will have the option to choose
which services they will continue to out-task to RMSI and which they prefer to
resume control of themselves.
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Predictable Costs
Because several of the services will be provided on an ongoing basis,
customers will know exactly what their costs will be and will be able to account
accordingly instead of being surprised by necessary IT emergency costs.
Reduced Costs
Substantial costs are incurred in retaining and maintaining an internal
IT staff that is qualified to manage complex networks and business applications.
Because RMSI can amortize the costs over hundreds of users, we can offer better
solutions at a lower cost than if the customer had attempted the work
independently. Furthermore, proprietary processes developed by RMSI utilize
expensive, enterprise products that would not have been a possibility for
smaller clients to obtain.
Reliability, Security and Uptime
E-commerce and remote employees increase a business's dependency on
reliable, full time systems. RMSI's service center provides full time
availability with service level agreements that far exceed the uptime a company
could provide internally.
Systems Maintained and Upgraded Effortlessly
Cost and disruption are the reasons that many businesses fail to
upgrade their systems when necessary. Ongoing desktop and network services
provided by RMSI are standardized to include upgrades at regular intervals,
without disruption or special resource requirements on the part of the customer.
Web-Enabled Networks
Customers can out-task the complex, frustrating and expensive
responsibilities of day-to-day management issues yet still are able to monitor
their systems. Web-enabled management and monitoring tools provide current
up-to-the minute status of network performance and problem logs.
Web-Enabled Systems
Through the use of enterprise tools such as HAHT and Silverstream, RMSI
can convert legacy and client/server applications to the Internet without
vulnerability and business disruption that customers might experience
internally.
Strategy
Service Offerings
RMSI has been endowed with the process designs and metrics for seat
management that were created for NASA by an affiliate, Recom Technologies. As
our service offerings are further developed, these proprietary processes will
increase to form the basis for the repeatable service center model. The
foundation of RMSI's superior services lies in its proprietary, highly optimized
processes.
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<TABLE>
Service Portfolio
<CAPTION>
---------------------------------------------------------- ------------------------------
Desktop Management Service Application Solutions
---------------------------------------------------------- ------------------------------
<S> <C> <C>
Design Help Desk Development and Maintenance
------ --------- ---------------------------
Desktop PC Application Support Legacy
Network Standard Configuration Client/Server
Internet Non-Standard Configuration Web
Messaging Standard Laptop E-Commerce
Non-Standard Laptop
Conversion
----------
Procurement Maintenance Legacy-Web Conversion
----------- -----------
Acquire Warranty Management
Finance Extended Warranty Technologies
Lease Hot Spare Program ------------
C, C++
Java
Network Management Asset Management SQL Server
------------------ ---------------- Oracle
Monitor/Prevent Inventory Sybase
Performance Inventory Maintenance Silverstream
Trouble Shooting Reporting PowerBuilder
Recovery
Security
Web Hosting
-----------
Application Maintenance User Training
----------------------- -------------
Level 1 Support Class Room
Level 2 Support Productivity Seminars
Administration/upgrade Mentoring Programs
---------------------------------------------------------- ------------------------------
</TABLE>
The Desktop Service Suite will be provided as an ongoing subscription
service to be renewed annually. It is highly repeatable from company to company,
and help desk services will be shared among customers. Use of web-enabled remote
management technologies will enable us to resolve 80% of problems over the
telephone, allowing us to move away from the more expensive dispatch model of
service delivery and thereby realize higher margins.
The Application Solution Suite provides development and support for
core business applications with an emphasis on web-enabling critical
applications. In partnership with software companies that provide web
development tools (such as HAHT Software and Silverstream) we will be able to
convert legacy systems to web-based systems with a minimum of effort. Fees for
the development phase of these projects will be based on time and materials, and
may occasionally by offered for a fixed fee.
Commitment to Leading Technologies
To provide cost effective services to our customers we will utilize
only the leading technologies to manage our service center and delivery model.
Acquire Regional Companies
RMSI plans to build its business via acquisition of regional companies
to gain access to the customer base and the technical expertise.
Add Distribution Partners
In addition to direct sales, we believe that we can market our services
to middle market companies most effectively by partnering with resellers that
bundle our services with their own. This would include ISPs, hardware
distributors and applications vendors.
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Market
Dataquest estimates the average compound growth rate (CAGR) of the
desktop management services market to be 30% from 1997 to 2002. The total
outsourcing market is estimated at $87 billion, with the desktop management
market contributing $8 million in 1998. While 66% of outsourcing expenditures
were by companies of at least $1 billion, outsourcing in the mid-tier market is
the fastest growing segment (41% of companies projecting increased budget for IT
services).
The 75 million small and mid-tier companies (with 1000 or fewer
employees) in the US account for 47% of all sales and 50% of the GNP. In the
area of technology, small and midsize business information technology
expenditures are the fastest growing segment, accounting for 45% of the business
PC market.
The biggest growth in the small and mid-tier market is in the area of
web-based commerce. Web-based commerce will reach $330 billion by 2002 and $1
trillion by 2010 (IBM).
Greater Sacramento and Northern California, our first market, is one of
the five fastest growing areas in the United States.
Currently, the service business opportunities are shared by hundreds of
vendors, with just a few market leaders in a large variety of market segments.
As with all emerging industries, there are hundreds of small, locally based
players who will either grow through acquisition, be acquired, or fail to
succeed. Large industry leaders (IBM, Microsoft) are trying to enter this market
and experience barriers to entry because of their image (too big, enterprise
players, too expensive). The "high-touch" nature of this business favors
regional or vertically focused companies.
Customer Profile
RMSI's target market includes companies with 100 to 2000 employees with
revenues of $5 million to $750 million, whose viability depends upon the
availability of contemporary information systems. The typical customer of our
services is someone who is in a vital mid-sized business, who currently uses
desktops and client/server business systems, and who recognizes the need to
develop robust Internet capabilities.
Today the customer is confused about how to accomplish this. They may
depend upon internal departments or independent systems integrators that lack
the expertise to take them to web-based systems. They may have contracted with
larger and very expensive business consulting companies (i.e., Anderson
Consulting) with mixed results, being left without the capability to support the
complex systems left behind. They are aware of a multitude of web content design
companies, web host companies, but they want an effortless, integrated solution
for their web business initiatives. For their infrastructure support (desktop,
networks) they may depend upon hardware providers to install new systems, but
they don't have access to necessary continuous support.
RMSI customers will want to buy from us based on our extensive
experience in completing large, complex projects and effectively supporting a
large number of desktops. Real-time demonstrations of our rapid, remote
resolution capabilities and strong testimonials will be instrumental in
educating the customer in the reasons to partner with RMSI.
Competition
Companies that compete in this market fall into several categories characterized
as:
1. Outsourcing companies (IBM, EDS, CSC)
2. Resellers (GE, Entex, Vanstar, MicroAge)
3. Independent service providers (BancTec, Decision One, Wang)
4. System vendors (HP, Compaq)
5. Local systems integrators (Quest, Eskel-Porter)
6. Regional application services companies (Cohesive, Catapult)
Unsuccessful long-term contracts, perceptions of size, and cost have
prevented acceptance of larger providers in the small and mid-tier market. The
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advantage of our competitors - their age, size, reputation - is also their
disadvantage in the sense that they do not the ability to "turn on a dime" in
response to their customers, and may be having to overcome negative aspects of
their reputation.
RMSI's unique combination of the tactical Desktop Management Services
and the strategic Application Solution Suite will offer smaller companies the
opportunity to work with a single partner who has a complete understanding of
their IT requirements. Furthermore, RMSI's service offering will be built in
such a way that through economies of scale, small companies will be able to have
ongoing, enterprise-quality service for an affordable, predictable price.
Repeatable, predictable, high-quality service for a small fixed fee is
a capability unique to RMSI's Desktop Service Suite.
Our strategy for dominating the competition is to provide better
services at a lower price, and to offer a unique, complementary and high-demand
combination of services.
Pricing
Today market pricing falls into three ranges:
$60 - 90 /seat/month lowball range, negative margins
$100 - 170 30 - 35% margins
$225 - 500 older contracts, full service
RMSI's services will be priced menu-style on a per service basis.
Flexible pricing will allow us to create entry prices with high growth
potential.
Sales Strategy
To minimize channel conflict and to maximize productivity of the sales
force, we will structure sales positions following a franchise model in which
sales executives will own the responsibility for managing direct sales and
channel sales in their respective territories. A separate business development
staff will manage strategic business partnerships.
Sales executives will have the advantage that they can lead with either
service suite. Because the Application Solution Suite is targeted to more
strategic business initiatives, sales staff will have better access to
decision-makers. The Infrastructure Suite will be a logical follow-on sale.
We learn from historic outsourcing/tasking engagements that the key to
success will depend upon the ability of the sales team to correctly manage the
customer's expectations. Margins will be realized through efficient execution of
structured, proactive processes for integrating the sales effort with the
delivery staff (project management).
Distribution Channels
RMSI's marketing strategy incorporates plans to sell our services
through several channels, including providers who service the same market sector
(vertical applications providers, interconnect companies), through strategic
partners (Cisco, HP, Oracle) and through local hardware providers and
complementary industries including telecom providers and industrial
developers/building owners.
The determining factors in choosing these channels are their ability to
generate business for us, to improve our business offerings and to build our
credibility in the eyes of our customers.
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Marketing Plan
Responses from test marketing suggest that there is considerable demand
for both our infrastructure and our business services. RMSI's marketing strategy
is to aggressively enhance, promote and support the fact that our services will
improve our customers competitive position (through e-commerce/web presence) and
remove the burden of tedious and expensive infrastructure maintenance for an
affordable, predictable fee.
Branding will position RMSI as the leading, "high tech, high touch"
technology service provider to small and mid-sized businesses - a service
partner capable of providing a full, integrated solution suite that is highly
customized to fulfill unique customer requirements. Branding initiatives of
meaning, relevance, consistency, name recognition, design and singularity will
be rigorously followed.
We will utilize the following media and methods to drive our message home to our
customers:
1. World Wide Web - drawing upon our own expertise, we will actively
exploit all meaningful web opportunities including advertising,
co-marketing, web newsletters, etc.
2. Radio advertising and underwriting to reach people frequently and in the
context of their daily activities
3. Advertise in local publications and telephone directories
4. Donate services and/or sponsor local charitable events for exposure
Employees
The Company leased all of its employees from Recom Technologies at
December 31, 1998. On January 1, 1999, the Company hired seven full-time
employees from Recom Technologies. As of March 15, 1999, the Company had eight
full-time employees, two part-time employees and continues to lease one employee
from Recom Technologies.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's corporate headquarters are located in Roseville,
California. The Company sub-leases its office facilities for $3,940 per month
under a month-to-month lease agreement with Recom Technologies, an affiliated
entity in which the Company's Chairman and Chief Executive Officer, John
Epperson, Jr., and Director and Secretary, Jack Lee, are officers, directors and
controlling shareholders. RMSI believes that its current facilities,
approximately 1,000 square feet, are adequate to meet its foreseeable
requirements or that suitable additional or substitute space will be available
on commercially reasonable rates.
ITEM 3. LEGAL PROCEEDINGS
To the best knowledge of the Company, there are no material legal
proceedings to which the Company is a party; nor, to which any of its property
is subject.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On October 30, 1998, a Majority Shareholder Consent Resolution, which
was filed as an exhibit to the Company's report on Form 10-QSB dated November
16, 1998, was signed by the shareholders holding the majority of the issued and
outstanding shares. This consent approved the following corporate actions and
elections proposed by the Board of Directors requiring shareholder consent and
approval:
1. Approve the proposal to change the name of MOE to RECOM Managed Systems,
Inc.
2. Ratify, as part of the Stock-For-Membership Interest Exchange Agreement,
the reverse split of MOE's shares on a forty-three to-one ratio (43:1).
3. Ratify the change of business purpose and location of MOE to the
business currently conducted by J2 at its current place of business in
Roseville, California.
4. Approve the election of the following nominees by J2 to be the new Board
of Directors of the Company: John (Jack) C. Epperson, Jr., G.K. (Jack)
Lee, Syed Z. Shariq, Ph.D., and Robert Iger, Esq.
5. Ratify all other terms and provisions of the Stock-For-Membership
Interest Exchange Agreement between MOE and J2.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
At all times during any period of trading through October 30, 1998, the
date of the reverse acquisition described above, the markets on which MOE traded
must be described as locally broker generated trading lists, such as the "pink
sheets." MOE's trading symbol during this time was "MTOP". In connection with
the reverse acquisition described above, the Company's stock has since traded on
the NASDAQ Electronic Bulletin Board under the symbol "RMSI". Within these
limitations, the following chart attempts to set-out the known high and low
price on a bid and ask basis for the Company's stock for each quarter during the
previous two years. On March 15, 1999, the closing price of RMSI's common stock
was $9.00.
Year Ended December 31, 1998 Low High
Fourth Quarter $5.00 $7.00
Third Quarter $6.45 $10.75
Second Quarter $6.45 $10.75
First Quarter $3.87 $8.60
Year Ended December 31, 1997
Fourth Quarter $3.87 $8.60
Third Quarter $5.16 $10.75
Second Quarter $3.87 $9.46
First Quarter No quotes No trades
As of March 16, 1999, there were approximately 319 holders of record
of the Company's Common Stock.
Dividend policy
We have never paid any cash dividends on our common stock. We currently
anticipate that we will retain all future earnings for use in our business, so
we don't anticipate paying any cash dividends in the foreseeable future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS AND PLAN OF OPERATION
For more detailed financial information, please refer to the audited
December 31, 1998 Financial Statements included in this Form 10-K.
Caution about forward-looking statements
This Form 10-KSB includes "forward-looking" statements about future
financial results, future business changes and other events that haven't yet
occurred. For example, statements like we "expect," we "anticipate" or we
"believe" are forward-looking statements. Investors should be aware that actual
results may differ materially from our expressed expectations because of risks
and uncertainties about the future. We will not necessarily update the
information in this Form 10-KSB if any forward-looking statement later turns out
to be inaccurate. Details about risks affecting various aspects of our business
are discussed throughout this Form 10-KSB. Investors should read all of these
risks carefully.
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Results of operations
For the period July 31, 1998 (inception) to December 31, 1998, revenues
from information technology consulting services totaled $79,292. All of this
revenue was from a single customer with a master contract that has
month-to-month terms. The Company believes that it has a very good relationship
with the customer and expects the contract to continue for the foreseeable
future. Since December 31, 1998, the Company has entered into two additional
information technology consulting contracts with different customers.
The net loss of $79,161 for the period July 31, 1998 (inception) to
December 31, 1998 can be attributed to selling, marketing and general and
administrative expenses incurred during the Company's developing stage.
Recent Financing
On March 4, 1999, the Company completed a private placement offering of
504,000 shares of common stock resulting in gross proceeds of $630,000. The
shares, representing 19% of the Company's outstanding shares after completion of
the offering, were sold to 17 qualifying investors. Net proceeds to the Company,
after selling commissions of $78,650 and direct offering costs of $46,500,
totaled $504,850. The Company intends to use the net proceeds in its continuing
operations.
Liquidity and sources of capital
As of December 31, 1998, the Company had current assets of $99,307 with
current liabilities of $374,541. This represents a negative working capital of
$275,234. Cash flows provided by operating activities, totaling $57,984 for the
period July 31, 1998 (inception) to December 31, 1998, were generated primarily
from changes in current assets and liabilities.
Cash flows used in financing activities included the inflow of $190,000
from notes payable to stockholders offset by $202,443 of expenses related to the
Reverse Acquisition (described in Item 1 - Description of Business) and $21,686
of expenses related to the private placement completed in March 1999.
At December 31, 1998, the Company had an accumulated deficit in net
equity of $261,556, representing the net loss of $79,161 for the period July 31,
1998 (inception) to December 31, 1998, plus the charge to equity related to the
Reverse Acquisition as described above.
Plan of operation for the next twelve months
The Company planned business execution during its development stage, as
described in Item 1 - Description of Business, will require the Company to
pursue sources of capital funding during the next twelve months in addition to
the capital raised in the March 1999 private placement offering. These funds are
expected to be used for the continued development of the Company's technology
infrastructure necessary to support its planned service offerings, anticipated
business acquisitions, and to support an expected increase in the number of
Company employees.
Year 2000
There is significant concern that certain computer programs and
computers are not presently configured to recognize the year 2000 or succeeding
years. This defect in computer functions could have a serious adverse impact
upon our industry and other industries if various computer programs and
applications cease to function or function erroneously as we approach the year
2000. The Company views the year 2000 compliance problems it may face to fall
within three general categories:
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1. The potential impact on the Company's own information technology.
2. The potential impact of the possibility of collateral failure or
miss-function in non-IT systems due to their computer components such
as telephone systems, security systems, etc.
3. The potential adverse effect upon the Company from year 2000 failure
among third party service providers.
The Company believes that is has addressed all of its year 2000
problems related to its owned IT systems and has determined that its' existing,
as well as in-development, internal hardware and software will function past the
year 2000 without modification. The Company has also addressed its non-IT
systems and believes that these systems also will function past the year 2000
without modification. The Company does not believe that there are any feasible
plans to adjust operations to potential industry-wide problems, such as may
occur with suppliers or outsource consultants. The Company will deal with those
problems when and if they arise on a case-by-case basis.
Amounts incurred by the Company related to the year 2000 for the period
July 31, 1998 (inception) to December 31, 1998 were not significant. Amounts
expected to be spent in 1999 are also not expected to be significant.
ITEM 7. FINANCIAL STATEMENTS
As noted in Item 1- Description of Business, the Company was formed on
July 31, 1998 as J2 Technologies, LLC and, on October 30, 1998, acquired all of
the outstanding common stock of MOE, an inactive public shell company. For
accounting purposes the acquisition has been treated as a recapitalization of
MOE with J2 as the acquirer (reverse acquisition). Also as described previously,
in connection with the closing of the reverse acquisition, MOE's name was
changed to RECOM Managed Systems, Inc. Accordingly, the historical financial
statements prior to October 30, 1998, are those of J2. Pro forma information is
not presented since the combination is not a business combination.
The financial statements are filed as part of this Form 10-K. Refer to
the index to financial statements at page 19.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
On March 4, 1999, the Registrant selected Burnett, Umphress & Company,
LLP to serve as its new independent accountants and, accordingly, dismissed
Hansen, Barnett & Maxwell. The decision to engage Burnett, Umphress & Company,
LLP and dismiss Hansen, Barnett & Maxwell was approved by the Board of Directors
of the Registrant. Through March 4, 1999, there were no disagreements with
Hansen, Barnett & Maxwell on any matter of accounting and financial disclosure.
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PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The following table sets forth information about the present directors
and senior officers of the Company:
Name Age Office
---- --- ------
John (Jack) C. Epperson, Jr. 50 Chairman of the Board and
Chief Executive Officer
G.K. (Jack) Lee 62 Director, Secretary
Syed Z. Shariq, Ph.D. 49 Director
Robert S. Iger, Esq. 57 Director
John T. Flynn 49 Director
Curt Pringle 39 Director
Roger L. Akers 45 Director
James P. Joyce 43 Chief Operating Officer
James D. Collins 30 Chief Financial Officer
Jamie B. Madison 45 Vice President, Marketing and Sales
John (Jack) C. Epperson, Jr. has served as the Chairman of the Board
and Chief Executive Officer of the Company since August 1998. He also currently
serves as the Executive Vice President of Recom Technologies, Inc. a related
corporation, and has more than 27 years of experience in the field of corporate
management, information technology and facility support services. The Company
has and intends to continue leasing Mr. Epperson's services on a part-time basis
from Recom Technologies, Inc. under a three-year Executive Employment Agreement
that has not yet been finalized. Mr. Epperson has acted as an entrepreneur on
the founding of three successful information service companies and currently
serves on the Board of Directors of Miranet, Inc., Recom International and Recom
Applied Solutions.
G.K. (Jack) Lee has served as Secretary and has been a Director of the
Company since August 1998. Mr. Lee was a founder of Recom Technologies, Inc. and
has more than 25 years experience in the information technologies services
field, including 20 years in management. Mr. Lee currently serves as President
of Recom Technologies, Inc. and as a member of its Board of Directors. He is
also a Board Member for Goodwill Industries and Attention Control Systems, Inc.
Syed Z. Shariq, Ph.D. has served as a Director of the Company since
November 1998. Dr. Shariq is Assistant to the Center Director for Strategic
Alliances at NASA Ames Research Center. He has also served as Director of Ames
Commercial Technology Office. Prior to joining NASA, Dr. Shariq served as a
Senior Associate with Montgomery Securities. He has served on the faculties of
several universities, including Duke and John Hopkins, and is a visiting faculty
fellow at Stanford University and University of Texas at Austin. Dr. Shariq is
also a member of numerous advisory groups, including the Governor's California
Information Technology Commission.
Robert S. Iger, ESQ. has served as a Director of the Company since
November 1998. Mr. Iger, in addition to practicing law since 1994, has served on
various boards and in executive positions with LAR Holding, Ltd., Oxford First
Corporation and Xerox Corporation. Mr. Iger's practice concentrates on corporate
and securities law.
John T. Flynn has served as a Director of the Company since December
1998. Mr. Flynn currently serves as a Vice President with Litton/PRC with
responsibilities for state and local government programs. Mr. Flynn was
13
<PAGE>
appointed by Governor Pete Wilson in November 1995, as California's first chief
information officer to oversee the state's two billion dollar annual investment
in information technology and telecommunications, a cabinet-level agency
reporting directly to the Governor. Previously, Mr. Flynn served as the state of
Massachusetts' first chief information officer since July 1994 after spending a
year as the Director of the Commonwealth's Office of Management Information
Systems. In October 1997, he was elected President of the National Association
of State Information Resources Executives (NASIRE). Mr. Flynn also serves on the
U.S. General Accounting Office Executive Counsel on Information Management and
Technology. He is also a member of the Board of Advisors of the Fisher Center
for Management and Information Technology at the University of California,
Berkeley.
Curt Pringle has served as a Director of the Company since January
1999. Mr. Pringle currently serves as a founder of Curt Pringle and Associates,
a firm that specializes in public relations, consulting and government affairs.
Previously, Mr. Pringle completed his final term with the California State
Assembly in November 1998. After serving two years from 1988-1990, he was
re-elected to the Assembly in 1992 and finished his final years of service
allowed under term limits. In January 1996, Mr. Pringle was elected Speaker of
the California State Assembly and presided as Speaker until November 1996, the
longest serving Republican Speaker in thirty years.
Roger L. Akers has served as a Director of the Company since February
1999. Mr. Akers is a senior level executive with 20 years of experience (15 in
management capacity) in information technology related businesses. A majority of
Mr. Akers experience has been in the facilities management, management
consulting, and systems development segments of the national and regional
consulting services industry. He spent eleven years building an eight office
regional consulting company employing over 400 employees serving public and
private sector clients throughout the western U.S. His most recent two years
have been spent providing strategic consulting to Fortune 100 companies,
including executive staff development and equity capital development for
emerging technology related businesses.
James P. Joyce has served as Chief Operating Officer of the Company on
a full-time basis since August 1998. Mr. Joyce has more than 21 years of
experience in providing information system services. Most recently, he served as
Director of the IT Consulting Division within Recom Technologies, Inc. since
1993. Previously, Mr. Joyce had a distinguished career in Information Systems
with the US Air Force. His varied technical experience included teaching
computer science at the US Air Force Academy and managing a $25 million
automation effort in support of the F-117 Stealth Fighter.
James D. Collins has served as Chief Financial Officer of the Company
on a part-time basis since November 1998. Mr. Collins was with
PricewaterhouseCoopers LLP since 1990, where he was a senior manager prior to
joining the Company. A majority of Mr. Collins experience has been related to
strategic financial consulting, management of financial due diligence and
acquisition efforts, and management of initial and other public offerings.
Jamie B. Madison has served as Vice President, Marketing and Sales of
the Company on a full-time basis since December 1998. Ms. Madison has performed
technical marketing and sales for 16 years. With specialties in software
products and services, she has consistently performed as top revenue producer
for several companies. She served as Western Regional Account Manager for
Client/Server Labs where she developed a marketing strategy and closed sales
with several banking institutions. She developed a region that grew to become
the top revenue producer in the company. Her prior responsibilities included
Director of Outsourcing Alliances with Novadigm, Marketing Manager for Optima
Software - a company of which she was a founding partner, and Account Manager
for Sterling Software. Ms. Madison has consistently developed innovative
marketing strategies that have resulted in sales volumes that exceeded goals.
14
<PAGE>
Compliance With Section 16(a) of the Exchange Act.
All Stockholders are believed required to file Forms 3, 4 & 5 under
Section 16 of the Securities Exchange Act of 1934. The Company has no record of
such filings and will actively request, encourage and assist the stockholders to
commence filing of these periodic reports.
ITEM 10. EXECUTIVE COMPENSATION
Directors who are employees of the Company receive no additional
compensation for serving on the Board of Directors. Each Director who is not an
employee of the Company receives $1,000 for attendance at each board meeting.
The following table sets forth certain information with respect to the
annual and long-term compensation of the executive officers and other employees
of the Company receiving or entitled to receive compensation exceeding $100,000
per year.
<TABLE>
<CAPTION>
Name Position Base Salary
---- -------- -----------
<S> <C> <C>
John (Jack) C. Epperson, Jr. Chairman of the Board and
Chief Executive Officer $120,000 (1)
James P. Joyce Chief Operating Officer $110,000 (2)
James D. Collins Chief Financial Officer $100 / hr (3)
Jamie Madison Vice President, Sales and Marketing $100,000 (4)
------------------
</TABLE>
(1) The Company has and intends to continue leasing Mr. Epperson's
services from Recom Technologies, Inc. under a three-year
Executive Employment Agreement that has not yet been finalized. At
December 31, 1998, the Company owed Recom Technologies, Inc.
$81,989 for services which included Mr. Epperson time during 1998.
In January 1999, Mr. Epperson was granted 100,000 stock options
that vest ratably over a five year period beginning in January
2000.
(2) Mr. Joyce's services were leased from Recom Technologies, Inc.
through December 31, 1998. Mr. Joyce became an employee of the
Company on January 1, 1999. The Company has entered into a one
year Executive Employment Agreement with Mr. Joyce that continues
after December 31, 1999 on a month-to-month basis. At December 31,
1998, the Company owed Recom Technologies, Inc. $81,989 for
services which included Mr. Joyce time during 1998. In January
1999, Mr. Joyce was granted 100,000 stock options that vest
ratably over a three year period beginning in January 2000.
(3) The Company has entered into a one year Consulting Agreement with
Mr. Collins to act as its Chief Financial Officer. At December 31,
1998, the Company owed Mr. Collins $6,000 for services rendered
during 1998. In January 1999, Mr. Collins was granted 100,000
stock options vesting ratably over a five year period.
(4) Ms. Madison was hired by the Company effective January 1, 1999. In
January 1999, Ms. Madison was granted 100,000 stock options that
vest ratably over a three year period beginning in January 2000.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth the number of shares of the Company's
Common Stock beneficially owned as of March 15, 1999 by (i) owners of more than
5% of the Company's Common Stock, (ii) each executive officer and director of
the Company and (iii) all executive officers and directors of the Company as a
group.
15
<PAGE>
<TABLE>
<CAPTION>
Name and address of Number of Shares
Beneficial Owner Position Beneficially Owned Percent
---------------- -------- ------------------ -------
<S> <C> <C> <C>
Officers and Directors
John Epperson, Jr. (1) Chairman
2412 Professional Drive and CEO 300,000 9.6%
Roseville, CA 95661
Jack Lee (1) Secretary
19108 Bonnet Way and Director 300,000 9.6%
Saratoga, CA 95070
Recom Technologies (2) 659,150 21.1%
2412 Professional Drive
Roseville, CA 95661
James Joyce COO 57,000 1.8%
2412 Professional Drive
Roseville, CA 95661
Syed Shariq, Ph.D. Director 25,000 0.8%
204 Robin Way
Menlo Park, CA 94025
Robert Iger, Esq. Director 20,000 0.6%
601 Lido Park Drive, Suite 4F
Newport Beach, CA 92663
John Flynn Director 20,000 0.6%
11719 Prospect Hill Drive
Gold River, CA 95670
Curt Pringle Director 5,000 0.2%
2532 DuPont Drive
Irvine, CA 92612
Roger Akers Director 5,000 0.2%
8436 Marina Vista Lane
Fair Oaks, CA 95628
All officers and directors
as a group 1,391,150 44.5%
Other Stockholders holding over 5%
Kayne International None 280,000 9.0%
C/o Hutchings, Barsamian & Levy
110 Cedar Street, Suite 250
Wellesley Hills, MA 02181
Soma 2000, LLC None 340,000 10.9%
640 Bercut Drive #A
Sacramento, CA 95814
------------------
</TABLE>
(1) Also an officer, director and controlling shareholder of Recom
Technologies, Inc., and should be considered the beneficial owner
and to have control over the 605,000 shares of the Company owned
by Recom Technologies, Inc.
(2) See (1) above.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company leases its office space subject to a month-to-month lease
agreement from Recom Technologies, a company majority owned by officers and
directors of the Company. The Company recorded $7,880 in lease expense from July
31, 1998 (inception) through December 31, 1998. The Company also leased certain
employees and was provided with administrative support by Recom Technologies
from July 31, 1998 (inception) through December 31, 1998, until the Company
could establish its own infrastructure. The Company recorded $51,540 and $22,569
of cost of sales and operating expenses from July 31, 1998 (inception) through
December 31, 1998 related to these services. The Company has a due to related
party of $81,989 at December 31, 1998 related to the above costs.
16
<PAGE>
ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
Exhibit 2 Stock-For-Membership Interest Exchange
Agreement (filed as an exhibit to the
Company's report on Form 10-QSB dated
November 16, 1998)
Exhibit 10.1 Shareholder Statement (filed as an exhibit to
the Company's report on Form 10-QSB dated
November 16, 1998)
Exhibit 10.2 Majority Shareholder Consent Resolution
(filed as an exhibit to the Company's report
on Form 10-QSB dated November 16, 1998)
Exhibit 10.3 1998 Stock Option Plan
Exhibit 10.4 Executive Employment Agreement between RECOM
Managed Systems, Inc. and Mr. James P. Joyce.
Exhibit 16 Letter on change in certifying accountant
(filed as an exhibit to the Company's report
on Form 8-K dated March 4, 1999)
Exhibit 27 Financial Data Schedule (not considered to be
filed)
(b) The following reports on Form 8-K were filed during the quarter
ended December 31, 1998:
On November 12, 1998, the Company filed a report on Form 8-K
reporting the completion of the Reverse Acquisition, on
October 30, 1998, through which control of the Company was
transferred from its existing shareholders to a group of
private owners. Refer to Item 1 - Description of Business for
further information on the Reverse Acquisition.
On March 4, 1999, the Company filed a report on Form 8-K
reporting the selection of Burnett, Umphress & Company, LLP
to serve as its independent public accountants for the year
1998 and, accordingly, the dismissal of Hansen, Barnett &
Maxwell.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Exchange
Act, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
RECOM MANAGED SYSTEMS, INC.
By /s/ John C. Epperson, Jr.
-------------------------
John C. Epperson, Jr.,
President and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ JOHN C. EPPERSON, JR.
- ----------------------------
John C. Epperson, Jr. Chairman of the Board, President March 25, 1999
and Chief Executive Officer
(Principal Executive Officer)
/s/ G.K. (JACK) LEE
- ----------------------------
G.K. (Jack) Lee Secretary and Director March 25, 1999
/s/ JAMES P. JOYCE
- ----------------------------
James P. Joyce Chief Operating Officer March 25, 1999
/s/ JAMES D. COLLINS
- ----------------------------
James D. Collins Chief Financial Officer
(Principal Financial and Accounting Officer) March 25, 1999
/s/ SYED Z. SHARIQ, Ph.D.
- ----------------------------
Syed A. Shariq, Ph.D. Director March 25, 1999
/s/ ROBERT S. IGER, ESQ.
- ----------------------------
Robert S. Iger, Esq. Director March 25, 1999
/s/ JOHN T. FLYNN
- ----------------------------
John T. Flynn Director March 25, 1999
/s/ CURT PRINGLE
- ----------------------------
Curt Pringle Director March 25, 1999
/s/ ROGER L. AKERS
- ----------------------------
Roger L. Akers Director March 25, 1999
</TABLE>
18
<PAGE>
INDEX TO FINANCIAL STATEMENTS
RECOM Managed Systems, Inc.
Report of independent accountants 20
Balance Sheet, December 31, 1998 21
Statement of Operations, July 31, 1998 (inception)
through December 31, 1998 22
Statement of Changes in Shareholders' Equity (deficit),
July 31, 1998 (inception) through December 31, 1998 23
Statement of Cash Flows, July 31, 1998 (inception)
through December 31, 1998 24
Notes to Financial Statements 25
19
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of RECOM Managed Systems, Inc.
We have audited the accompanying balance sheet of RECOM Managed Systems, Inc. (a
development stage company) as of December 31, 1998, and the related statements
of operations, changes in stockholders' equity (deficit) and cash flows for the
period from July 31, 1998 (inception) to December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of RECOM Managed Systems, Inc. (a
development stage company) as of December 31, 1998, and the results of its
operations and its cash flows for the period July 31, 1998 (inception) to
December 31, 1998 in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has a very limited operating history, is in
the development stage, and, at December 31, 1998 has a negative working capital
balance as well as an accumulated net deficit. These matters raise substantial
doubt as to the Company's ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 2. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ Burnett, Umphress & Company, LLP
- ------------------------------------
Burnett, Umphress & Company, LLP
Rancho Cordova, California
March 19, 1999
20
<PAGE>
RECOM MANAGED SYSTEMS, INC.
(A Development Stage Company)
Balance Sheet
December 31,
1998
================================================================================
ASSETS
Current assets:
Cash $ 23,855
Accounts receivable 53,766
Deferred offering costs 21,686
-----------
Total current assets 99,307
Property and equipment, net 13,678
-----------
Total assets $ 112,985
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 10,006
Accrued legal and accounting expenses 62,789
Accrued recruitment fees 22,500
Accrued interest 7,257
Due to related party 81,989
Notes payable to stockholders 190,000
-----------
Total current liabilities 374,541
Stockholders' deficit:
Common Stock, $0.001 par value; 50,000,000 shares authorized;
2,605,000 shares issued and outstanding 2,605
Additional paid-in-capital --
Accumulated deficit (264,161)
-----------
Total stockholders' deficit (261,556)
-----------
Total liabilities and stockholders' deficit $ 112,985
===========
See notes to financial statements.
21
<PAGE>
RECOM MANAGED SYSTEMS, INC.
(A Development Stage Company)
Statement of Operations
For the cumulative
period July 31, 1998
(inception) through
December 31, 1998
================================================================================
Revenues:
Information technology consulting services $ 79,292
Cost of revenues
Information technology consulting services 51,540
-----------
Gross profit 27,752
-----------
Operating expenses:
General and administrative 75,899
Selling and marketing 23,757
-----------
Total operating expenses 99,656
-----------
Operating loss (71,904)
Other income (expense):
Interest expense (7,257)
-----------
Loss before income tax benefit (79,161)
Income taxes --
-----------
Net loss $ (79,161)
===========
Basic and diluted net loss per share $ (0.03)
===========
Basic and diluted weighted average number of shares outstanding 2,361,471
===========
See notes to financial statements.
22
<PAGE>
<TABLE>
RECOM MANAGED SYSTEMS, INC.
(A Development Stage Company)
Statement of Changes in Stockholders' Equity (Deficit)
<CAPTION>
==================================================================================================================
Common Stock Additional Accumulated
Shares Amount paid-in-capital deficit Total
--------- ----------- --------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Contributions at July 31, 1998 (inception) * 2,200,000 $ 2,200 $ 17,848 $ -- $ 20,048
Reverse acquisition (Note 1) 405,000 405 (17,848) (185,000) (202,443)
Net loss (79,161) (79,161)
------------------------------------------------------------------
Balance at December 31, 1998 2,605,000 $ 2,605 $ -- $ (264,161) $ (261,556)
==================================================================
</TABLE>
* Balances have been restated to reflect recapitalization resulting as a
result of the reverse acquisition (Note 1).
See notes to financial statements.
23
<PAGE>
RECOM MANAGED SYSTEMS, INC.
(A Development Stage Company)
Statement of Cash Flows
For the cumulative
period July 31, 1998
(inception) through
December 31, 1998
================================================================================
Cash flows from operating activities:
Net loss $ (79,161)
Depreciation expense 6,370
Change in assets and liabilities:
Accounts receivable (53,766)
Accounts payable 10,006
Accrued legal and accounting expenses 62,789
Accrued recruitment fees 22,500
Accrued interest 7,257
Due to related party 81,989
-----------
Net cash provided by operating activities 57,984
-----------
Cash flows from financing activities:
Proceeds from notes payable to stockholders 190,000
Reverse acquisition (Note 1) (202,443)
Deferred offering costs (21,686)
-----------
Net cash used in financing activities (34,129)
-----------
Increase in cash 23,855
Cash at beginning of period --
-----------
Cash at end of period $ 23,855
===========
See notes to financial statements.
24
<PAGE>
RECOM MANAGED SYSTEMS, INC.
(A Development Stage Company)
Notes to Financial Statements
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
RECOM Managed Systems, Inc., a Delaware corporation, (the "Company") engages in
the business of providing information technology desktop services and
application solutions to mid-sized commercial and government entities. The
Company provides a modular set of services that cover the entire lifecycle of
desktops, networks and business applications from initial design through
implementation, ongoing maintenance, upgrade and retirement. The Company is
considered to be in the development stage as limited revenues have been derived
from operations.
The Company was formed on July 31, 1998 as J2 Technologies, LLC ("J2"), a
California limited liability company. On October 30, 1998, pursuant to a
"Stock-for-Membership Interest Exchange Agreement", J2 acquired all of the
outstanding common stock of an inactive public shell company, Mt. Olympus
Enterprises, Inc. ("MOE"). For accounting purposes the acquisition has been
treated as a recapitalization of MOE with J2 as the acquirer (reverse
acquisition). Costs of the transaction have been charged directly to capital. In
connection with the closing of the reverse acquisition, MOE's name was changed
to RECOM Managed Systems, Inc. The historical financial statements prior to
October 30, 1998, are those of J2. Pro forma information is not presented since
the combination is not a business combination.
A summary of significant accounting policies follows:
Basis of presentation The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Computer equipment Computer equipment is stated at historical cost. Maintenance
and repairs are expensed as incurred. Depreciation is provided using the
straight-line method over the estimated useful lives of the related assets. The
Company's assets are currently depreciated over three years.
The cost and accumulated depreciation of computer equipment consist of the
following at December 31, 1998:
Computer equipment $20,048
Less: accumulated depreciation 6,370
-------------
$13,678
=============
Revenue recognition Information technology consulting service revenues are
recognized in the period services are provided based upon rates established by
contract.
Concentrations of credit risk Financial instruments which potentially expose the
Company to concentrations of credit risk consist primarily of cash and accounts
receivable. The Company places its temporary cash investments with FDIC-insured
financial institutions in accounts which, at times, may exceed federally insured
limits. The Company has not experienced any losses in such accounts and
accordingly does not believe it is exposed to any significant credit risk on
cash. The Company generally requires no collateral from its customers but does
performs credit evaluations of its customers' financial condition when
management deems it appropriate. Concentrations of credit risk with respect to
accounts receivable are generally limited due to the credit-worthiness of the
25
<PAGE>
customers. All accounts receivable at December 31, 1998 are outstanding from a
single customer. No provision for doubtful accounts has been recorded during the
period from July 31, 1998 (inception) to December 31, 1998.
Concentration of revenues Revenues from a single customer amounted to all of the
Company's revenues for the period July 31, 1998 (inception) through December 31,
1998. Management believes its relationship with this customer is good and that
the contract, which is month-to-month, will continue.
Income taxes Income taxes are recorded using the liability method. Under this
method, deferred taxes are determined by applying current tax rates to the
difference between the tax and financial reporting bases of the Company's assets
and liabilities. In estimating future tax consequences, all expected future
events are considered, except for potential income tax law or rate changes.
For the period from July 31, 1998 to December 31, 1998, the Company generated a
federal and state net operating loss of approximately $79,000. These losses can
be used to offset future taxable income through the year 2006 and 2013 for
federal and state purposes, respectively. The Company has recorded a full
valuation allowance for its deferred tax asset related to these operating
losses. The Company had no other significant temporary or permanent differences
for the period July 31, 1998 (inception) to December 31, 1998.
Earnings per share Basic loss per share is computed using the weighted average
number of common shares outstanding. Diluted loss per share is computed using
the weighted average number of common shares outstanding adjusted for the
incremental shares attributed to outstanding securities with the ability to
purchase or convert into common stock. Basic and diluted loss per share are the
same for the period from July 31, 1998 (inception) to December 31, 1998 as the
Company had no dilutive securities outstanding.
2. GOING CONCERN
The accompanying financial statements have been prepared on a going concern
basis which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The Company has had limited
operating history, is in the development stage, and, at December 31, 1998, has
negative working capital as well as an accumulated net deficit. These factors
raise substantial doubt about the Company's ability to continue as a going
concern. The financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amount of
liabilities that might be necessary should the Company be unable to continue in
existence. Continuation of the Company as a going concern is dependent on
obtaining necessary funds to continue its operations. Management plans to
generate these funds through a combination of private placement and / or public
offerings. There is no assurance, however, that such plans will be completed or,
if completed, will generate sufficient funds to enable the Company to continue
operations for the next twelve months.
3. TRANSFER OF ASSETS FROM RELATED PARTY
In connection with the issuance of all membership shares of J2 on July 31, 1998
(inception), the Company was assigned on a non-exclusive basis certain
intellectual property and transferred computer equipment with a net book value
of $20,048 (Note 1). The intellectual property consists of technology management
plans and corporate documents, technical proposals and management plans,
technical operating procedures, corporate management plans and management
resources, and software and data, collectively, the "Intellectual Assets". The
Intellectual Assets were initially used or developed as part of noncommercial
projects and contracts by the contributors and are currently used in
governmental applications. The assignment does not include rights for the
Company to use the Intellectual Assets in governmental applications, which
rights are retained by the contributors. The Company is able to use the
Intellectual Assets without fees or royalties. The Company had the Intellectual
26
<PAGE>
Assets appraised by an independent valuation firm, which estimated in the fair
market value of the Intellectual Assets to be $4,750,000. The Intellectual
Assets were recorded at the contributors book value of zero.
4. RELATED PARTY TRANSACTIONS
The Company leases its office space subject to a month-to-month lease agreement
from Recom Technologies, a company majority owned by officers and directors of
the Company. The Company recorded $7,880 in lease expense from July 31, 1998
(inception) through December 31, 1998.
The Company also leased certain employees and was provided with administrative
support by Recom Technologies from July 31, 1998 (inception) through December
31, 1998, until the Company could establish its own infrastructure. The Company
recorded $51,540 and $22,569 of cost of sales and operating expenses from July
31, 1998 (inception) through December 31, 1998 related to these services.
The Company has a due to related party of $81,989 at December 31, 1998 related
to the above costs.
5. NOTES PAYABLE TO STOCKHOLDERS
Notes payable to stockholders accrue interest at 10% per annum and maturity
dates through August 1, 1999. It is not practicable to determine the fair value
of notes payable to stockholders due to their related party nature.
6. SUBSEQUENT EVENTS
In March 1999, the Company completed a private placement offering of 504,000
shares of common stock. Gross and net proceeds after selling commissions and
direct offering costs totaled $630,000 and $504,850, respectively. Costs of the
offering incurred by the Company through December 31, 1998, totaling $21,686,
have been recorded as a current asset in the December 31, 1998 Balance Sheet and
have subsequently been charged to equity upon completion of the private
placement.
In January 1999, the Company adopted the 1998 Stock Option Plan (the "Plan")
providing for the granting of options to purchase shares of the Company's common
stock to key employees, directors, officers and consultants as designated by the
Company's Board of Directors. Under the Plan, the Company is authorized to grant
both incentive and non-qualified stock options for up to 520,000 shares of
common stock at an exercise price not less than 100% and 85% of the fair market
value on the date of grant for incentive options and non-qualified options,
respectively. The options vest over a period determined on the date of grant and
expire after ten years from the date of grant. In January 1999, 451,000 options
were granted to key employees and officers.
Also in January and February of 1999, separate incentive options were granted to
each of the Company's outside Directors. A total of 110,000 options were granted
at fair market value, as determined by the Board of Directors, with vesting
ranging from one to three years. These options expire after ten years from the
date of grant. Two outside Directors were also issued 5,000 shares each of the
Company's common stock at a purchase price equal to the fair value of the
underlying stock at the date of issuance as determined by the Board of
Directors.
In connection with a corporate advisory agreement entered into in January 1999,
the Company issued a total of 75,000 warrants for the purchase of its common
stock at an exercise price equal to the fair market value of the underlying
stock at the date of issuance as determined by the Board of Directors.
In March 1999, the Company established a 401(k) savings plan which covers
substantially all employees of the Company. Under this plan, employees can elect
to contribute up to 14% of their annual pay to the plan, subject to certain
limits prescribed by tax law. The Company makes a matching contribution equal to
100% of every dollar the employees contribute to the plan up to a maximum of
$1,800 per year. Employees vest ratably over four years in the Company's
matching contributions.
27
RECOM MANAGED SYSTEMS, INC.
1998 STOCK OPTION PLAN
1. Purpose. This 1998 Stock Option Plan (this "Plan") is
established as a compensatory plan to attract, retain and provide equity
incentives to selected persons to promote the financial success of RECOM MANAGED
SYSTEMS, INC., a Delaware corporation or such successor entity upon merger or
reincorporation (the "Company"). Capitalized terms not previously defined herein
are defined in Section 17 of this Plan.
2. Types of Options and Shares. Options granted under this Plan
(the "Options") may be either (a) incentive stock options ("ISOs") within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"), or (b) nonqualified stock options ("NQSOs"), as designated at the time
of grant. The shares of stock that may be purchased upon exercise of Options
granted under this Plan (the "Shares") are shares of Common Stock of the Company
("Common Stock").
3. Number of Shares. The aggregate number of Shares that may be
issued pursuant to Options granted under this Plan is 520,000 Shares, subject to
adjustment as provided in this Plan. If any Option expires or is terminated
without being exercised in whole or in part, the unexercised or released Shares
from such Option shall be available for future grant and purchase under this
Plan. At all times during the term of this Plan, the Company shall reserve and
keep available such number of Shares as shall be required to satisfy the
requirements of outstanding Options under this Plan.
4. Eligibility.
------------
(a) General Rules of Eligibility. Options may be granted to
employees, officers, directors, consultants, independent contractors and
advisors (provided such consultants, contractors and advisors who render bona
fide services not in connection with the offer and sale of securities in a
capital-raising transaction) of the Company or any Parent, Subsidiary or
Affiliate of the Company. ISOs may be granted only to employees (including
officers and directors who are also employees) of the Company or a Parent or
Subsidiary of the Company. The Committee (as defined in Section 14) in its sole
discretion shall select the recipients of Options ("Optionees"). An Optionee may
be granted more than one Option under this Plan.
(b) Company Assumption of Options. The Company may also, from
time to time, assume outstanding options granted by another company, whether in
connection with an acquisition of such other company or otherwise, by either (i)
granting an Option under this Plan in replacement of the option assumed by the
Company, or (ii) treating the assumed option as if it had been granted under
this Plan if the terms of such assumed option could be applied to an option
granted under this Plan. Such assumption shall be permissible if the holder of
the assumed option would have been eligible to be granted an option hereunder if
the other company had applied the rules of this Plan to such grant.
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5. Terms and Conditions of Options. The Committee shall determine
whether each Option is to be an ISO or an NQSO, the number of Shares subject to
the Option, the exercise price of the Option, the period during which the Option
may be exercised, and all other terms and conditions of the Option, subject to
the following:
(a) Form of Option Grant. Each Option granted under this Plan
shall be evidenced by a written Stock Option Grant (the "Grant") in
substantially the form attached hereto as Exhibit "A" or such other form as
shall be approved by the Committee.
(b) Date of Grant. The date of grant of an Option shall be the
date on which the Committee makes the determination to grant such Option unless
otherwise specified by the Committee and subject to applicable provisions of the
Code. The Grant representing the Option will be delivered to the Optionee with a
copy of this Plan within a reasonable time after the date of grant; provided,
however, that if, for any reason, including a unilateral decision by the Company
not to execute an agreement evidencing such option a written Grant is not
executed within sixty (60) days after the date of grant, such option shall be
deemed null and void. No Option shall be exercisable until such Grant is
executed by the Company and the Optionee.
(c) Exercise Price. The exercise price of an NQSO shall be not
less than Eighty Five percent (85%) of the Fair Market Value of the Shares on
the date the Option is granted. The exercise price of an ISO shall be not less
than one hundred percent (100%) of the Fair Market Value of the Shares on the
date the Option is granted. The exercise price of any Option granted to a person
owning more than ten percent (10%) of the total combined voting power of all
classes of stock of the Company or any Parent or Subsidiary of the Company ("Ten
Percent Shareholders") shall not be less than one hundred ten percent (110%) of
the Fair Market Value of the Shares on the date the Option is granted.
(d) Exercise Period. Options shall be exercisable within the
times or upon the events determined by the Committee as set forth in the Grant;
provided that no Option shall be exercisable after the expiration of ten (10)
years from the date the Option is granted; and provided further, that no ISO
granted to a Ten Percent Shareholder shall be exercisable after the expiration
of five (5) years from the date the Option is granted.
(e) Limitations on Options. The aggregate Fair Market Value
(determined as of the time an Option is granted) of stock with respect to which
ISOs are exercisable for the first time by an Optionee during any calendar year
(under this Plan or under any other incentive stock option plan of the Company
or any Parent or Subsidiary of the Company) shall not exceed one hundred
thousand dollars ($100,000). To the extent that the Fair Market Value of stock
with respect to which ISOs are exercisable for the first time by an Optionee
during any calendar year exceeds $100,000, such Options shall be treated as
NQSOs. The foregoing shall be applied by taking options into account in the
order in which they were granted. In the event that the Code or the regulations
promulgated thereunder are amended after the effective date of this Plan to
provide for a different limit on the Fair Market Value of Shares permitted to be
subject to ISOs, such different limit shall be incorporated herein and shall
apply to any Options granted after the effective date of such amendment. In
addition, the number of Shares (i) subject to Options granted under this Plan,
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<PAGE>
and (ii) issued upon the exercise of an Option granted under this Plan for any
Optionee may not exceed, in the aggregate, 520,000. In the event Section 162(m)
of the Code or any proposed or final regulations promulgated thereunder are
amended after the effective date of this Plan to eliminate the requirement of a
per Optionee limit on the number of Options which may be granted, then the
restriction in the immediately preceding sentence shall not apply to any Options
granted after the effective date of such amendment.
(f) Options Non-Transferable. Options granted under this Plan,
and any interest therein, shall not be transferable or assignable by the
Optionee, and may not be made subject to execution, attachment or similar
process, otherwise than by will or by the laws of descent and distribution and
shall be exercisable during the lifetime of the Optionee only by the Optionee or
any permitted transferee.
(g) Assumed Options. In the event the Company assumes an
option granted by another company in accordance with Section 4(b) above, the
terms and conditions of such Option shall remain unchanged (except the exercise
price and the number and nature of shares issuable upon exercise, which will be
adjusted appropriately pursuant to Section 424 of the Code and the Treasury
Regulations applicable thereto). In the event the Company elects to grant a new
Option rather than assuming an existing option (as specified in Section 4), such
new Option need not be granted at Fair Market Value on the date of grant and may
instead be granted with a similarly adjusted exercise price.
6. Exercise of Options.
--------------------
(a) Notices. Options may be exercised only by delivery to the
Company of a written exercise agreement in a form approved by the Committee
(which need not be the same for each Optionee), stating the number of Shares
being purchased, the restrictions imposed on the Shares, if any, and such
representations and agreements regarding the Optionee's investment intent and
access to information, if any, as may be required by the Company to comply with
applicable securities laws, together with payment in full of the exercise price
for the number of Shares being purchased.
(b) Payment. Payment for the Shares may be made in cash (by
check) or, where approved by the Committee in its sole discretion at the time of
exercise and where permitted by law: (i) by cancellation of indebtedness of the
Company to the Optionee; (ii) by surrender of shares of Common Stock of the
Company already owned by the Optionee, having Fair Market Value equal to the
exercise price of the Option; (iii) by waiver of compensation due or accrued to
Optionee for services rendered; (iv) through delivery of a promissory note for
the full exercise price bearing interest at such rate with the note due at such
time, on a secured or unsecured basis, as determined by the Committee; (v)
provided that a public market for the Company's stock exists, through a "same
day sale" commitment from the Optionee and a broker-dealer that is a member of
the National Association of Securities Dealers, Inc. (an "NASD Dealer") whereby
the Optionee irrevocably elects to exercise the Option and to sell a portion of
the Shares so purchased to pay for the exercise price and whereby the NASD
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<PAGE>
Dealer irrevocably commits upon receipt of such Shares to forward the exercise
price directly to the Company; (vi) provided that a public market for the
Company's stock exists, through a "margin" commitment from the Optionee and an
NASD Dealer whereby the Optionee irrevocably elects to exercise the Option and
to pledge the Shares so purchased to the NASD Dealer in a margin account as
security for a loan from the NASD Dealer in the amount of the exercise price,
and whereby the NASD Dealer irrevocably commits upon receipt of such Shares to
forward the exercise price directly to the Company; (vii) by any combinations of
the foregoing or (viii) any other form of legal consideration that may be
acceptable to the Board of Directors in its discretion.
(c) Withholding Taxes. Prior to issuance of the Shares upon
exercise of an Option, the Optionee shall pay or make adequate provision for any
federal or state withholding obligations of the Company, if applicable. Where
approved by the Committee in its sole discretion, the Optionee may provide for
payment of withholding taxes upon exercise of the Option by requesting that the
Company retain Shares with a Fair Market Value equal to the minimum amount of
taxes required to be withheld. In such case, the Company shall issue the next
number of Shares to the Optionee by deduction the Shares retained from the
Shares exercised. The Fair Market Value of the Shares to be withheld shall be
determined on the date that the amount of tax to be withheld is to be determined
in accordance with Section 83 of the Code (the "Tax Date"). All elections by
Optionees to have Shares withheld for this purpose shall be made in writing in a
form acceptable to the Committee and shall be subject to the following
restrictions:
(i) the election must be made on or prior to the
applicable Tax Date;
(ii) once made, the election shall be irrevocable as
to the particular Shares as to which the election is made;
(iii) all elections shall be subject to the consent
or disapproval of the Committee;
(iv) if the Optionee is an officer or director of
the Company or other person (in each case, an "Insider") whose transactions in
the Company's Common Stock are subject to Section 16(b) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and if the Company is
subject to Section 16(b) of the Exchange Act, the election must be made at least
six (6) months prior to the Tax Date and must otherwise comply with Rule 16b-3
as promulgated by the Securities and Exchange Commission ("Rule 16b-3").
(d) Limitations on Exercise. Notwithstanding anything else to
the contrary in the Plan or any Grant, no Option may be exercisable later than
the expiration date of the Option.
7. Restrictions on Shares. At the discretion of the Committee,
the Company may reserve to itself and/or its assignee(s) in the Grant (a) a
right of first refusal to purchase all Shares that an Optionee (or a subsequent
transferee) may propose to transfer to a third party and/or (b) for so long as
the Company's stock is not publicly traded, a right to repurchase a portion of
or all Shares held by an Optionee upon the Optionee's termination of employment
or service with the Company or its Parent, Subsidiary or Affiliate of the
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<PAGE>
Company for any reason within a specified time as determined by the Committee at
the time of grant at the higher of (i) the Optionee's original purchase price
or, (ii) the Fair Market Value of such Shares.
8. Modification Extension and Renewal of Options. The Committee
shall have the power to modify, extend or renew outstanding Options and to
authorize the grant of new Options in substitution therefor, provided that any
such action may not, without the written consent of the Optionee, impair any
rights under any Option previously granted. Any outstanding ISO that is
modified, extended, renewed or otherwise altered shall be treated in accordance
with Section 424(h) of the Code. The Committee shall have the power to reduce
the exercise price of outstanding options; provided, however, that the exercise
price per share may not be reduced below the minimum exercise price that would
be permitted under Section 5(c) of this Plan for options granted on the date the
action is taken to reduce the exercise price.
9. Privileges of Stock Ownership. No Optionee shall have any of
the rights of a shareholder with respect to any Shares subject to an Option
until such Option is properly exercised. No adjustment shall be made for
dividends or distributions or other rights for which the record date is prior to
such date, except as provided in this Plan.
10. No Obligation to Employ; No Right to Future Grants. Nothing in
this Plan or any Option granted under this Plan shall confer on any Optionee any
right (a) to continue in the employ of, or other relationship with, the Company
or any Parent or Subsidiary of the Company or limit in any way the right of the
Company or any Parent, Subsidiary or Affiliate of the Company to terminate the
Optionee's employment or other relationship at any time, with or without cause,
or (b) to have any Option(s) granted to such Optionee under this Plan, or any
other plan, or to acquire any other securities of the Company, in the future.
11. Adjustment of Option Shares. In the event that the number of
outstanding shares of Common Stock of the Company is changed by a stock
dividend, stock split, reverse stock split, combination, reclassification or
similar change in the capital structure of the Company without consideration, or
if a substantial portion of the assets of the Company are distributed, without
consideration in a spin-off or similar transaction, to the shareholders of the
Company, the number of Shares available under this Plan and the number of Shares
subject to outstanding Options and the exercise price per share of such Options
shall be proportionately adjusted, subject to any required action by the Board
or shareholders of the Company and compliance with applicable securities laws;
provided, however, that a fractional share shall not be issued upon exercise of
any Option and any fractions of a Share that would have resulted shall either be
cashed out at Fair Market Value or the number of Shares issuable under the
Option shall be rounded down to the nearest whole number, as determined by the
Committee; and provided further that the exercise price may not be decreased to
below the par value, if any, for the Shares.
12. Assumption of Options by Successors.
(a) In the event of (i) a merger or consolidation in which the
Company is not the surviving corporation (other than a merger or consolidation
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<PAGE>
with a wholly-owned subsidiary or where there is no substantial change in the
shareholders of the corporation and the Options granted under this Plan are
assumed by the successor corporation), or (ii) the sale of all or substantially
all of the assets of the Company, any or all outstanding Options shall be
assumed by the successor corporation, which assumption shall be binding on all
Optionees, an equivalent option shall be substituted by such successor
corporation or the successor corporation shall provide substantially similar
consideration to Optionees as was provided to shareholders (after taking into
account the existing provisions of the Optionees' options such as the exercise
price and the vesting schedule), and, in the case of outstanding shares subject
to a repurchase option, issue substantially similar shares or other property
subject to repurchase restrictions no less favorable to the Optionee.
(b) In the event such successor corporation, if any, refuses
to assume or substitute, as provided above, pursuant to an event described in
subsection (a) above, or in the event of a dissolution or liquidation of the
Company, the Options shall, notwithstanding any contrary terms in the Grant,
expire on a date specified in a written notice given by the Committee to the
Optionees specifying the terms and conditions of such termination (which date
shall be at least twenty (20) days after the Committee gives the written
notice).
13. Adoption and Shareholder Approval. This Plan shall become
effective on the date that it is adopted by the Board of Directors of the
Company (the "Board"). This Plan shall be approved by the shareholders of the
Company, in any manner permitted by applicable corporate law, within twelve (12)
months before or after the date this Plan is adopted by the Board. Thereafter,
after the Company becomes subject to Section 16(b) of the Exchange Act, the
Company will comply with the requirements of Rule 16b-3 (or its successor) with
respect to shareholder approval.
14. Administration. This Plan may be administered by the Board or
the Committee appointed by the Board (the "Committee"). If, at any time after
the Company registers under the Exchange Act, all of the directors are not
Disinterested Persons, the Board shall appoint a Committee consisting of not
less than two directors, each of whom is a Disinterested Person and at all times
during which the Company is registered under the Exchange Act, the Committee
shall be comprised of Disinterested Persons. As used in this Plan, references to
the "Committee" shall mean either such Committee or the Board if no committee
has been established. The interpretation by the Committee of any of the
provisions of this Plan, any related agreements, or any Option granted under
this Plan shall be final and binding upon the Company and all persons having an
interest in any Option or any Shares purchased pursuant to an Option.
15. Term of Plan. Options may be granted pursuant to this Plan
from time to time on or prior to December 31, 2002, a date which is less than
ten years after the earlier of the date of approval of this Plan by the Board or
the shareholders of the Company pursuant to Section 13 of this Plan.
16. Amendment or Termination of Plan. The Board or Committee may,
at any time, amend, alter, suspend or discontinue the Plan, but no amendment,
alteration, suspension or discontinuation shall be made which would impair the
rights of any Optionee under any Option theretofore granted, without his or her
consent, or which, without the approval of the shareholders of the Company
would:
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(a) except as provided in Section 11 of the Plan, increase the
total number of Shares reserved for the purposes of the Plan;
(b) extend the duration of the Plan;
(c) extend the period during and over which Options may be
exercised under the Plan; or
(d) change the class of persons eligible to receive Options
granted hereunder (except as may be required to comport with changes in the
Code, ERISA or regulations promulgated thereunder).
Without limiting the foregoing, the Board or Committee may at any time or from
time to time authorize the Company, with the consent of the respective
Optionees, to issue new Options in exchange for the surrender and cancellation
of any or all outstanding Options.
17. Certain Definitions. As used in this Plan, the following terms
shall have the following meanings:
(a) "Parent" means any corporation (other than the Company) in
an unbroken chain of corporations ending with the Company if, at the time of the
granting of the Option, each of the corporations other than the Company owns
stock possessing fifty percent (50%) or more of the total combined voting power
of all classes of stock in one of the other corporations in such chain.
(b) "Subsidiary" means any corporation (other than the
Company) in an unbroken chain of corporations beginning with the Company if, at
the time of the granting of the Option, each of the corporations other than the
last corporation in the unbroken chain owns stock processing fifty percent (50%)
or more of the total combined voting power of all classes of stock in one of the
other corporations in such chain.
(c) "Affiliate" means any corporation that directly, or
indirectly through one or more intermediaries, controls or is controlled by, or
is under common control with, another corporation, where "control" (including
the terms "controlled by" and "under common control with") means the possession,
direct or indirect, of the power to cause the direction of the management and
policies of the corporation, whether through the ownership of voting securities,
by contract or otherwise.
(d) "Disinterested Persons" shall have the meaning set forth
in Rule 16b-3(c)(2) as promulgated by the Securities and Exchange Commission
under Section 16(b) of the Exchange Act, as such rule is amended from time to
time and as interpreted by the Securities and Exchange Commission.
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(e) "Fair Market Value" shall mean the fair market value of
the Shares as determined by the Committee from time to time in good faith. If a
public market exists for the Shares, the Fair Market Value shall be the average
of the last reported bid and asked prices for Common Stock of the Company on the
last trading day prior to the date of determination or, in the event the Common
Stock of the Company is listed on a stock exchange or is a NASDAQ National
Market security, the Fair Market Value shall be the closing price on such
exchange or quotation system on the last trading day prior to the date of
determination.
18. Applicable Law and Regulations. The obligations of the Company
under this Plan are subject to the approval of state and federal authorities or
agencies with jurisdiction over the subject matter hereof. The Company shall not
be obligated to issue or deliver shares under this Plan if such issuance or
delivery would violate applicable state or federal securities laws.
8
EXECUTIVE EMPLOYMENT AGREEMENT
------------------------------
THIS EXECUTIVE EMPLOYMENT AGREEMENT (this "Agreement") is entered into
as of January 1, 1999, between Recom Managed Systems, Inc., a Delaware
corporation (the "Company") and James P. Joyce, an individual ("Executive"),
with reference to the following.
RECITALS
--------
A. The Company is in the business of providing Information
Technology Services.
B. Executive is experienced in managing Information Technology
Service efforts.
C. The Company desires to employ Executive as the Company's Vice
President and Chief Operating Officer and Executive desires to
accept such employment subject to the terms and conditions set
forth in this Agreement.
AGREEMENT
---------
NOW THEREFORE, in consideration of the foregoing premises, the
provisions set forth below, and other good and valuable consideration, the
parties agree as follows.
1. Employment. The Company hereby employs Executive as the
Company's Vice President and Chief Operating Officer and Executive hereby
accepts such employment, for the term and subject to the provisions set forth
below.
2. Term. Unless sooner terminated as set forth below, this
Agreement shall remain in force for a period of one (1) year (the "Term")
commencing on the date hereof and terminating on December 31, 1999. The
Agreement shall continue on a month-to-month basis thereafter unless terminated
by either party upon 60 day written notice. The actual period of time that
Executive remains in the employ of the Company pursuant to this Agreement is
referred to herein as the "Employment Period."
3. Duties. During the Employment Period, Executive shall be
employed as the Vice President and Chief Operating Officer of the Company and
shall hold such other offices or positions with the Company as may be reasonably
requested by the Company from time to time; provided, however, that Executive
shall not be required to accept any position subordinate to Vice President
without his written consent. Executive shall use his reasonable efforts to
manage the Company's business and affairs for the maximum benefit of the
Company. Executive may act as an officer or director of any other corporation
upon written consent of the Company. In addition to the normal duties associated
with the position of Vice President of companies of similar size, Executive
shall have the following specific duties, which he shall at all times
faithfully, industriously and to the best of his ability perform.
a. To hire and fire employees.
b. To solicit, develop and service business of the Company.
c. To employ such professionals, employees and consultants as are
necessary for the development and operation of the Company.
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d. To take all actions necessary to successfully operate the
Company.
4. Authority. Executive shall have full and complete authority to
take all actions necessary to operate the Company, including without limitation,
the following.
a. Open bank accounts, write checks and deposit the Company
funds.
b. Hire and fire employees, consultants, professionals and
independent contractors.
c. To enter into all contracts in the name of the Company of any
kind or nature.
d. To retain attorneys and accountants to defend the Company or
Executive at the expense of the Company.
e. To borrow in the name of the Company.
f. To pledge as security for any loan or obligation of the
Company the assets of the Company.
g. To pay bonuses, dividends, fees, and other disbursements to
employees, consultants, professionals, or employees, including
himself.
5. Compensation.
a. Base Monthly Salary. The Company shall pay Executive a base
monthly salary (the "Base Salary") during the Employment Period, under the
following schedule, subject to adjustment from time to time by the Company and
Executive.
Employment Period Base Salary
----------------- -----------
Months 1-12 $9,167
Months 13+ TBD
b. Vacation. Executive shall be entitled to three weeks paid
vacation per year and one week personal leave per year in addition to all
holidays recognized by the Company. Executive shall be entitled to accrue
vacation or cause the Company to repurchase unused vacation days at the Base
Salary level then applicable.
c. Medical Expenses. The Company shall provide Executive and
Executive's spouse and children with medical coverage as follows:
1.) The Company will provide the Executive and his family with
company standard vision and dental insurance at no cost to
the Executive.
2.) The Executive elects to provide his own medical coverage,
therefore, the Company will reimburse the Executive for
the cost of such expenses up to a maximum of $350 per
month. Allowable medical expenses include the following:
insurance premiums, expenses not covered by insurance such
as co-pays and fees outside policy standard coverage
limits, dental and vision co-pays, orthodontia,
prescription cost not covered by insurance, home
improvements motivated by medical considerations, and
health club memberships.
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d. Disability Insurance. During the Employment Term, the Company
shall maintain for the benefit of Executive a policy of disability insurance for
not less than 66 2/3% of Executive's Base Salary, at no cost to the Executive.
e. Other Expenses. Executive shall be entitled to reimbursement
during the Employment Period for travel and other out-of-pocket expenses
incurred in the performance of his duties hereunder, upon submission and
approval of written statements and bills in accordance with the then regular
procedures of the Company. Executive shall also receive a credit card from the
Company to be utilized for expenses incurred by Executive.
f. RESERVED
g. Other Benefits. Executive shall participate in all other
standard employee benefits including the 401 (k) plan.
6. Performance-Based Bonus. As additional compensation, Executive
shall be entitled to receive an annual bonus (the "Bonus") based on the degree
to which the Company meets or exceeds performance goals submitted by Executive
and reasonably agreed to by the Board of Directors for each fiscal year. The
Bonus shall be a percentage of Executive's Base Salary, in accord with the
following scale:
Percentage of Goals Achieved Bonus (% of Base Salary)
---------------------------- ------------------------
90% 20%
100% 25%
110% and above 30%
The degree to which the Company meets or exceeds the financial goals
shall be determined on a fiscal year basis in accordance with the audited
financial records. Executive's Bonus shall be paid within thirty (30) days after
such accounting firm completes its certified audit for such fiscal year.
Executive's bonus shall be prorated on a monthly basis for any Employment Period
of less than one fiscal year.
7. Stock Option Plan. The Company shall adopt a Stock Option Plan
for the benefit of its executives including Executive. Executive shall receive
the option to purchase not less 33,333 shares per year during the term at a set
purchase price of $.25 per share. The Executive shall be entitled to receive
such additional options under the plan as may be determined by the Company's
Board of Directors.
8. Previously Granted Stock. As recognition for efforts to form
the Company, Executive has been granted a total of 59,000 shares of restricted
founders stock of the Company.
9. Termination. The Employment Period shall be immediately and
automatically terminated upon Executive's death. The Employment Period shall
also terminate under the following conditions.
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a. Termination for Cause. Notwithstanding anything in this
Agreement to the contrary, the Company may terminate Executive's employment
hereunder at any time if Executive:
(i) Is convicted of, or pleads guilty or nolo
contendere to (i) any felony, or (ii) any misdemeanor involving moral turpitude;
(ii) Embezzles or misappropriates any of the
Company's funds or assets;
(iii) In the reasonable opinion of a licensed
physician or psychiatrist retained by the Company, is substantially unable by
reason of drug (including alcohol) abuse or addiction, to reasonably and
effectively carry out Executive's duties hereunder for any period of time in
excess of Executive's accrued vacation time and sick leave, if any;
(iiii)Fails or refuses to perform Executive's
reasonable and customary duties hereunder for a period of 30 days after written
notice describing the duty or duties which Executive has failed or refused to
perform is given to Executive by the Company;
(v) Is grossly negligent with respect other
discharge of Executive's duties hereunder; or,
(iv) Is in violation of any provisions of this
Agreement; provided, however, that if such violation can be cured in a manner
that will restore the Company to the position it would have enjoyed in the
absence of the violation, Executive shall have a period of 30 days after written
notice describing the violation is given to Executive by the Company to
completely cure such violation and, if completely cured, this Agreement shall
not be subject to termination for such violation.
b. By Permanent Disability. The Term of Employment shall
terminate, without liability except as provided in this Section 9b, upon the
"Permanent Disability" of Executive. "Permanent Disability" shall mean, with
respect to Executive, (i) the suffering of any mental or physical illness,
disability or incapacity to the extent that Executive shall be unable to perform
his duties or (ii) the absence of Executive from his employment by reason of any
mental or physical illness, disability or incapacity for a period of three
months during any six-month period; provided, however, in either case, that such
illness, disability or incapacity shall be determined to be of a permanent
nature by a licensed physician selected by the Board of Directors. The
termination date in the event of a clause (i) of the immediately preceding
sentence, shall be the date of determination by the physician, and in the case
of clause (ii) of the immediately preceding sentence, the last day of such
three-month period. In the case of Permanent Disability, the Company shall
promptly pay to Executive (or his representative) the sum of (A) the unpaid Base
Salary to which he is entitled pursuant to Section 5(a) through the termination
date and (B) the lump sum amount of any unpaid portion of the bonuses to be paid
pursuant to Section 6(b), and all benefits under Executive's Disability
Insurance Plan.
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c. By The Company Without Cause. The Term may be terminated
by the Company without "Cause" provided the Company pays to Executive at the
time of termination the equivalent of six (6) months salary. The Company shall
also pay Executive the equivalent of any bonus he would have earned if he had
remained employed by the Company, payable at the time such bonus would be
earned. In addition, with respect to the Company's Incentive Stock Option plan,
the Executive shall be considered vested and entitled to exercise grants to the
extent of his entitlements as if employed at the end of an additional six (6)
months after the date of termination.
10. Affirmative Covenants. Executive promises and covenants to the
Company as follows.
(a) Confidentiality; Trade Secrets. Executive acknowledges
that his position with the Company is one of the highest trust and confidence
both by reason of his position and by reason of his access to and contact with
the trade secrets and confidential and proprietary business information of the
Company. Executive agrees that during the Term and thereafter:
(i) Executive shall use his best efforts and
exercise utmost diligence to protect and safeguard the trade secrets and
confidential and proprietary information of the Company, including, its data,
record, compilations of information, processes, programs know-how, improvements,
discoveries, marketing plans, strategies, forecasts, unpublished financial
statements, budgets, projections, licenses, prices, costs, files, documents,
drawings, memoranda, notes or other documents, whether maintained electronically
or in any other manner, relating to the business of the Company or its
contractors; (all such information is hereinafter called the "Proprietary
Information") other than information known to him before, learned from third
parties not associated with the Company or in the public domain;
(ii) Executive shall not disclose any of such
Proprietary Information, except as may be required in the ordinary course of
performing his duties to the Company or any affiliated companies;
(iii) Executive shall not use the trade secrets and
confidential and proprietary information of Executive's previous or present
employer to carry out his duties and responsibilities under this Agreement or
bring on to the Company's premises or any other property owned by the Company
any proprietary information of any other entity, in violation of any prior or
present employment, or noncompetition or confidentiality agreement.
(b) Remedies for Breach of Affirmative Covenants of Executive.
Subject to the limitations provided by applicable law, the covenants set forth
in this Section 10 shall continue to be binding upon Executive in accordance
with their terms, notwithstanding the termination of his employment with Company
for any reason whatsoever. Such covenants shall be deemed and construed as
separate agreements independent of any other provisions of this Agreement and
any other agreement between the Company and Executive. The existence of any
claim or cause of action by Executive against the Company, whether predicated on
this Agreement or otherwise, shall not constitute a defense to the enforcement
by the Company of any or all of such covenants in accordance with their terms.
5
<PAGE>
(c) Litigation. Executive agrees that during the Term and
thereafter as reasonably requested by the Company, Executive shall do all
things, including the giving of evidence in suits and other proceedings, which
the Company shall deem reasonably necessary or proper to obtain, maintain,
defend or assert rights accruing to the Company during the Term and in
connection with which Executive has knowledge, information and expertise.
(d) Future Cooperation. The parties hereto agree to cooperate
with each other without additional compensation from and after the date hereof,
to supply any information and to execute documents reasonably required for the
purpose of giving effect to this Agreement, or in connection with the
consummation of any actions contemplated hereby.
11. Representations and Warranties of Executive. Executive
represents and warrants to the Company that: (i) Executive is under no
contractual or other restriction or obligation that is inconsistent with the
execution of this Agreement, the performance of Executive's duties hereunder or
any of the rights of the Company hereunder; and (ii) Executive is under no
physical or mental disability that would impair the performance of Executive's
duties under this Agreement.
12. Key Person Insurance. The Company may at any time and from
time to time obtain such life and health insurance policies ensuring the life or
health of Executive in such amounts and with such insurers (collectively,
"Executive Insurance") as the Company, in its sole discretion, deems
appropriate. The Company shall have the right to all benefits payable pursuant
to any Executive Insurance obtained by the Company, including without
limitation, the sole right to designate the beneficiary of all such Insurance.
Executive agrees to cooperate with the Company if the Company elects to obtain
any Executive Insurance from time to time, including without limitation, timely
submitting to medical/physical examinations and assisting the Company with the
preparation of insurance applications.
13. Indemnification. The Company shall indemnify, defend and hold
Executive harmless for, from and against any and all liability of any kind or
nature resulting from or related to Executive's employment with the Company,
and/or any prior business deals entered into by Executive.
13. Notices. All notices, requests, demands or other communication
(collectively, "Notice") given to any party pursuant to this Agreement shall not
be effective unless given in writing and addressed to the parties at their
respective addresses as set forth below.
IF TO THE COMPANY: Recom Managed Systems, Inc.
2412 Professional Drive
Roseville, California 95661
Facsimile: (916) 789-2023
Telephone: (916) 789-2022
6
<PAGE>
IF TO EXECUTIVE: James P. Joyce
492 Rockport Circle
Roseville, California 95630
Telephone: (916) 983-5543
Notice shall be deemed duly given when delivered personally or by telegram,
telex or courier, or, if mailed, 48 hours after deposit in the United States
mail, certified mail, postage pre-paid. The addresses of the parties for the
purpose of providing Notice pursuant to this paragraph may be changed from time
to time by Notice to the other party duly given in the foregoing manner.
15. Governing Law; Disputes. This Agreement will be interpreted in
accordance with California law, including all matters of construction, validity,
performance and enforcement, without giving effect to any principles of conflict
of laws. Any dispute or proceeding concerning this Agreement will be resolved by
binding arbitration to be held in Placer County, California. Any party may
demand arbitration through written notice sent by certified mail to the other
(an "Arbitration Demand"). Within fifteen (15) days after the date that the
Arbitration Demand is first mailed, each of the parties will confer to select a
mutually acceptable arbitrator from the Judicial Arbitration and Mediation
Service ("JAMS"). If the arbitrator so selected is unavailable, the parties will
confer to select another arbitrator. If the parties cannot mutually agree to the
selection of an arbitrator, or if one party refuses to participate in the
selection process, JAMS will appoint an arbitrator. The arbitrator will be
governed by the provisions of this Agreement rather than the rules of JAMS.
If JAMS is unable or unwilling to select an arbitrator, the Presiding
Judge of the Sacramento County Superior Court will select an arbitrator upon the
request of either party, and such selection will be binding on the parties. The
arbitrator so selected will schedule the arbitration hearing within sixty (60)
days after he or she is first selected. The parties will be permitted written
discovery and one deposition each. The arbitrator will have authority to enter a
binding judgment even if the parties do not appear at the arbitration and may
also grant any remedy or relief that the arbitrator reasonably believes to be
just or appropriate, provided that such remedy or relief is within the scope of
this Agreement.
All fees and expenses of the arbitration will be paid equally by the
parties participating in the arbitration. At the conclusion of the arbitration,
the arbitrator will award the prevailing party reasonable costs and Attorneys'
Fees, including all arbitration costs. If the arbitration award is made, the
prevailing party may convert the award into a judgment and execute upon that
judgment.
16. Attorneys' Fees. If any arbitration, litigation, action, suit
or other proceedings is instituted to remedy, prevent or obtain relief from a
breach of this Agreement, in relation to a breach of this Agreement or
pertaining to a declaration of rights under this Agreement, the prevailing party
will recover all such party's attorneys' fees incurred in each and every such
action, suit or other proceeding, including any and all appeals or petitioner
therefrom. As used in this Agreement, Attorneys' Fees will be deemed to be the
7
<PAGE>
full and actual costs of any legal services actually performed in connection
with the matters involved, including those related to any appeal or the
enforcement of any judgment, calculated on the basis of the usual fee charged by
attorneys performing such services, and will not be limited to "reasonable
attorneys' fees" as defined in any statute or rule of court.
147. Amendments/Waivers. This Agreement may be amended,
supplemented, modified or rescinded only through an express written instrument
signed by all the parties or their respective successors and assigns. Either
party may specifically and expressly waive in writing any portion of this
Agreement or any breach hereof, but no such waiver shall constitute a further or
continuing waiver of any preceding or succeeding breach of the same or any other
provision. The consent by one party to any action for which such consent was
required shall not be deemed to imply consent or waiver of the necessity of
obtaining such consent for the same or similar acts in the future.
18. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one and the same instrument.
19. Severability. Each provision of this Agreement is intended to
be severable and if any term or provision herein is determined invalid or
unenforceable for any reason, such illegality or invalidity shall not affect the
validity of the remainder of this Agreement and, wherever possible, intent shall
be given to the invalid or unenforceable provision.
20. Entire Agreement. This Agreement contains the entire and
complete understanding between the parties concerning its subject matter and all
representations, agreements, arrangements and understandings between or among
the parties, whether oral or written, have been fully merged herein and are
superseded hereby.
21. Remedies. All rights, remedies, undertakings, obligations,
options, covenants, conditions and agreements contained in this Agreement shall
be cumulative and no one of them shall be exclusive of any other.
22. Assignment. Neither this Agreement, nor any interest herein,
shall be assignable (voluntarily, involuntarily, by judicial process or
otherwise) Executive to any person or entity without the prior written consent
of the Company. Any attempt to assign this Agreement without such consent shall
be void and, at the option of the Company, shall be an incurable breach of this
Agreement resulting in the termination of this Agreement.
23. Successors. Subject to the foregoing paragraph, this Agreement
shall be binding upon and inure to the benefit of the parties and their
respective heirs, legatees, legal representatives, successors and permitted
assigns.
24. Interpretation. The language in all parts of this Agreement
shall be in all cases construed simply according to its fair meaning and not
strictly for or against any party. Whenever the context requires, all words used
8
<PAGE>
in the singular will be construed to have been used in the plural, and vice
versa, and each gender will include any other gender. The captions of the
paragraphs of this Agreement are for convenience only and shall not affect the
construction or interpretation of any of the provisions herein.
25. Benefit of Agreement. This Agreement is for the sole and
exclusive benefit of the signators hereto and nothing in this Agreement shall be
construed to give any person or entity other than the parties hereto any legal
or equitable right, claim or remedy.
26. Limitation on Actions. Any claim, dispute, controversy or
action for breach relative to this Agreement must be brought and legal process
or arbitration, as the case may be, initiated within one year after the cause of
action for such claim first accrued or the breach first occurred, whichever is
sooner.
27. Miscellaneous. The recitals and all exhibits, attachments or
other documents referenced in this Agreement are fully incorporated into this
Agreement by reference. Unless expressly set forth otherwise herein, all
references herein to a "day," "month," or "year" shall be deemed to be a
reference to a calendar day, month or year, as the case may be. All
cross-references herein shall refer to provisions within this Agreement, and
shall not be deemed to be references to the overall transaction or to any other
agreement or document.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date set forth above.
"THE COMPANY" "EXECUTIVE"
RECOM MANAGED SYSTEMS, INC., James P. Joyce, an individual
a Delaware corporation
By: John C Epperson, Jr.
President and Chairman
9
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