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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-QSB
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|x| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended: June 30, 1999
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number: 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)
2412 Professional Drive
Roseville, CA 95661
(Address of principal executive offices)
(916) 774-0953
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes |x| No |_|
As of August 12, 1999, the Registrant had 3,249,000 shares of Common Stock
outstanding.
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INDEX
<CAPTION>
Page
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PART I: FINANCIAL INFORMATION
Item 1 Financial Statements
Balance Sheets at June 30, 1999 and December 31, 1998 1
Statements of Operations for the six and three month periods ended June 30, 1999 and the
cumulative period July 31, 1998 (inception) to June 30, 1999 2
Statements of Cash Flows for the six and three month periods ended June 30, 1999 and the
cumulative period July 31, 1998 (inception) to June 30, 1999 3
Notes to Financial Statements 4
Item 2 Management's Discussion and Analysis of Results of Operations and Financial Condition 6
PART II: OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K 8
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<TABLE>
RECOM MANAGED SYSTEMS, INC.
(A Development Stage Company)
Balance Sheets
<CAPTION>
June 30, December 31,
1999 1998
--------- ---------
(unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash ............................................................................... $40,319 $23,855
Accounts receivable............................................................ 109,787 53,766
Deferred offering costs........................................................ -- 21,686
Other current assets........................................................... 14,643 --
--------- ---------
Total current assets...................................................... 164,749 99,307
Property and equipment, net......................................................... 221,455 13,678
Goodwill, net....................................................................... 200,043 --
--------- ---------
Total assets.............................................................. $ 586,247 $ 112,985
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable............................................................... $ 7,513 $ 10,006
Accrued professional fees ..................................................... 24,575 62,789
Accrued payroll, bonuses and benefits.......................................... 39,276 22,500
Accrued interest............................................................... 16,679 7,257
Due to related party........................................................... 334,246 81,989
Line of credit................................................................. 50,000 --
Notes payable to stockholders.................................................. 190,000 190,000
--------- ---------
Total current liabilities................................................. 662,289 374,541
Due to related party, less current portion.......................................... 73,394 --
--------- ---------
735,683 374,541
--------- ---------
Stockholders' equity (deficit):
Common Stock, $0.001 par value; 50,000,000 shares authorized;
3,249,000 and 2,605,000 shares issued and outstanding....................... 3,249 2,605
Additional paid-in-capital..................................................... 629,526 --
Accumulated deficit............................................................ (782,211) (264,161)
--------- ---------
Total stockholders' equity (deficit)...................................... (149,436) (261,556)
--------- ---------
Total liabilities and stockholders' equity (deficit)...................... $ 586,247 $ 112,985
========= =========
</TABLE>
See notes to financial statements.
1
<PAGE>
<TABLE>
RECOM MANAGED SYSTEMS, INC.
(A Development Stage Company)
Statements of Operations
(unaudited)
<CAPTION>
Cumulative period
Six months Three months July 31, 1998
ended ended (inception) to
June 30, 1999 June 30, 1999 June 30, 1999
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Information technology consulting services $ 339,357 $ 167,425 $ 418,649
Cost of revenues:
Information technology consulting services 217,714 107,599 269,254
----------- ----------- -----------
Gross profit .................................. 121,643 59,826 149,395
----------- ----------- -----------
Operating expenses:
Development .............................. 263,907 145,310 263,907
Marketing and selling .................... 111,889 54,968 132,820
General and administrative ............... 254,475 149,000 330,374
----------- ----------- -----------
Total operating expenses ...................... 630,271 349,278 729,927
----------- ----------- -----------
Operating loss ................................ (508,628) (289,452) (580,532)
Interest expense .............................. 9,422 4,737 16,679
----------- ----------- -----------
Loss before income taxes ...................... (518,050) (294,189) (597,211)
Provision for income taxes .................... -- -- --
----------- ----------- -----------
Net loss ...................................... $ (518,050) $ (294,189) $ (597,211)
=========== =========== ===========
Basic and diluted loss per share .............. $ (0.17) $ (0.09) $ (0.22)
=========== =========== ===========
Basic and diluted weighted average
number of shares outstanding ............... 2,975,580 3,134,616 2,706,266
=========== =========== ===========
</TABLE>
See notes to financial statements.
2
<PAGE>
<TABLE>
RECOM MANAGED SYSTEMS, INC.
(A Development Stage Company)
Statements of Cash Flows
(Unaudited)
<CAPTION>
Cumulative period
Six months Three months July 31, 1998
ended ended (inception) to
June 30, 1999 June 30, 1999 June 30, 1999
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss .......................................... $(518,050) $(294,189) $(597,211)
Depreciation and amortization expense ............. 20,231 16,274 26,607
Other ............................................. 320 -- 320
Change in assets and liabilities:
Accounts receivable .......................... (56,021) 19,398 (109,787)
Other current assets ......................... (9,631) (1,631) (9,631)
Accounts payable ............................. (2,493) (31,643) 7,513
Accrued professional fees .................... (38,214) (11,125) 24,575
Accrued payroll, bonuses and benefits ........ 16,776 (40,939) 39,276
Accrued interest ............................. 9,422 4,737 16,679
Due to related party ......................... 62,851 47,853 144,840
--------- --------- ---------
Net cash provided by operating activities (514,803) (269,015) (456,819)
--------- --------- ---------
Cash flows from investing activities:
Acquisitions of property and equipment ............ (139,019) (50,781) (139,019)
Business acquisitions (Note 3) .................... (25,000) (25,000) (25,000)
--------- --------- ---------
Net cash used in investing activities ... (164,019) (75,781) (164,019)
--------- --------- ---------
Cash flows from financing activities:
Borrowings on line of credit (Note 4) ............. 50,000 50,000 50,000
Proceeds from notes payable to stockholders ....... -- -- 190,000
Reverse acquisition (Note 1) ...................... -- -- (202,443)
Issuance of stock (Note 5) ........................ 623,600 118,750 623,600
Deferred offering costs (Note 5) .................. 21,686 -- --
--------- --------- ---------
Net cash provided by financing activities 695,286 168,750 661,157
--------- --------- ---------
Net increase in cash ................................... 16,464 (176,046) 40,319
Cash at beginning of the period ........................ 23,855 216,365 --
--------- --------- ---------
Cash at end of the period .............................. $ 40,319 $ 40,319 $ 40,319
========= ========= =========
</TABLE>
See notes to financial statements.
3
<PAGE>
RECOM MANAGED SYSTEMS, INC.
(A Development Stage Company)
Notes to Financial Statements
Note 1 - Organization
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). 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.
Note 2 - Basis of Presentation
In the opinion of management, the accompanying unaudited financial
statements contain all adjustments necessary to present fairly our financial
position at June 30, 1999 and December 31, 1998, and our results of operations
and cash flow for the three and six month periods ended June 30, 1999 and the
cumulative period July 31, 1998 (inception) to June 30, 1999. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted. For further information, refer to our Form 10-KSB for the
year ended December 31, 1998. Operating results for the three and six month
periods ended June 30, 1999 and the cumulative period July 31, 1998 (inception)
to June 30, 1999 are not necessarily indicative of future results.
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 June 30, 1999, 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.
Note 3 - Business Acquisition
On June 11, 1999, the Company completed the acquisition (the "Acquisition")
of substantially all of the assets of Valley Networking, Inc. ("Valley"), a
Sacramento, California based firm which provides a comprehensive set of high
quality computer products and services to local mid-sized companies. The Company
acquired assets primarily including computer systems and technologies, equipment
and inventory for a purchase price of $294,050. The acquisition was accounted
for using the purchase method of accounting. The allocation of purchase price
has not been finalized; however, any changes are not expected to be material.
The Acquisition was financed with (1) $25,000 of cash on hand, (2) $50,000
due to the seller upon the Company's completion of an equity offering, (3)
issuance of 5,000 shares of common stock, and (4) a $212,800 amount due to
Valley. The amount due to Valley bear's interest at 15% and is payable in 18
4
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equal installments of $13,500. The current and non-current portion of this
balance at June 30, 1999 is $139,406 and $73,394, respectively.
The allocation of purchase price to the assets acquired and liabilities
assumed has been made using estimated fair values at the date of acquisition and
is summarized as follows:
Purchase price $ 294,050
Costs assigned to tangible assets 93,310
---------
Costs attributable to intangible assets $ 200,740
=========
Note 4 - Line of Credit Agreement
In May 1999, the Company entered into into a line of credit agreement with
its bank with a maximum borrowing capacity of $200,000. The agreement matures in
May 2000; is secured by all accounts receivable, inventory, plant and equipment;
and bears interest at the prime rate. The Company borrowed $50,000 against the
line of credit in June to fund general development and operating expenses.
Subsequent to June 30, 1999, the Company borrowed an additional $100,000 against
the line of credit.
Note 5 - Stockholders' Equity
In June 1999, the Company completed a private placement offering of 554,000
shares of common stock. Gross and net proceeds after selling commissions and
direct offering costs totaled $730,000 and $604,850, respectively. Selling
commissions and direct offering costs of $78,650 and $46,500, respectively,
where charged to equity upon completion of the private placement.
In June 1999, 75,000 warrants for the purchase of common stock at an
exercise price of $0.25 were exercised.
5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of operations
For the three and six month periods ended June 30, 1999 and the cumulative
period July 31, 1998 (inception) to June 30, 1999, revenues from information
technology consulting services (IT Revenues) totaled $74,856, $200,942 and
$280,234, respectively. IT Revenues from a single customer with a master
contract that has month-to-month terms totaled $126,086, $126,086 and $205,378
for the three and six month periods ended June 30, 1999 and the cumulative
period July 31, 1998 (inception) to June 30, 1999, respectively. The Company
believes that it has a very good relationship with the customer and expects the
contract to continue for the foreseeable future. IT Revenues under a separate
month-to-month contract with a second customer totaled $38,877 and $104,618 for
the three and six month periods ended June 30, 1999. The Company also earned IT
Revenue of $4,305 and $14,410 during the three and six month periods ended June
30, 1999 from Recom Technologies, a related party. Revenues from Valley (see
below) from the date of acquisition to June 30, 1999 totaled $19,387.
The net loss of $294,189, $518,050 and $597,211 for the three and six month
periods ended June 30, 1999 and the cumulative period July 31, 1998 (inception)
to June 30, 1999, respectively, can be attributed to development, marketing and
selling, and general and administrative expenses incurred during the Company's
developing stage.
Acquisition of Valley Networking
On June 11, 1999, the Company completed the acquisition (the "Acquisition")
of substantially all of the assets of Valley Networking, Inc. ("Valley"), a
Sacramento, California based firm which provides a comprehensive set of high
quality computer products and services to local mid-sized companies. Acquired
assets primarily included computer systems and technologies, equipment and
inventory. The Company intends to use the acquired assets to position itself as
a business-to-business ISP. By combining the new ISP services with its Web
application development, the Company can provide its clients with a full service
e-commerce solution. The purchase price of $294,050 was based on arm's length
negotiations between the Company and Valley and was financed from (1) $25,000 of
cash on hand, (2) $50,000 due to the seller upon the Company's completion of an
equity offering, (3) issuance of 5,000 shares of common stock, and (4) a
$212,800 amount due to Valley. The amount due to Valley bear's interest at 15%
and is payable in 18 equal installments of $13,500.
Capital Financing
In June 1999, the Company completed a private placement offering of 554,000
shares of common stock resulting in gross proceeds of $730,000. The shares,
representing 17% of the Company's outstanding shares after completion of the
offering, were sold to 19 qualifying investors. Net proceeds to the Company,
after selling commissions of $78,650 and direct offering costs of $46,500,
totaled $604,850. The net proceeds from the offering are being used to fund the
Company's continuing operations and development. The selling commissions and
direct offering costs where charged directly to equity.
Liquidity and sources of capital
As of June 30, 1999, the Company had current assets of $164,749 with
current liabilities of $662,289. This represents a negative working capital of
$497,540. Cash used in operating activities, totaling $269,015, $514,803 and
$456,819 for the three and six month periods ended June 30, 1999 and the
cumulative period July 31, 1998 (inception) to June 30, 1999, respectively, can
be attributed to development, marketing and selling, and general and
administrative expenses incurred during the Company's developing stage.
Cash used in investing activities of $75,781 and $164,019 for the three and
six month periods ended June 30, 1999 was expended on information technology
infrastructure used to support the Company's developing business and to acquire
Valley. Cash flows from financing activities primarily have consisted of
6
<PAGE>
$604,850 of net proceeds from the private placement offering described above and
the borrowing of $50,000 against the Company's line of credit.
Plan of operation for the next twelve months
The Company planned business execution during its development stage will
require the Company to pursue sources of capital funding during the next twelve
months in addition to the capital raised in the private placement offering
described above and the $200,000 capacity of the Company's line of credit. 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 Compliance
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:
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 March 31, 1999 were not significant. Amounts
expected to be spent through the remainder of 1999 are also not expected to be
significant.
Caution about forward-looking statements
This Form 10-QSB 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-QSB 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-QSB. Investors should read all of these
risks carefully.
7
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PART II
ITEM 1 through 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
1) Exhibits:
27 Financial Data Schedule.
2) The following reports on Form 8-K were filed during the quarter ended
June 30, 1999:
On June 28, 1999, the Company filed a report on Form 8-K reporting the
acquisition of substantially all of the assets of Valley Networking,
Inc.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Recom Managed Systems, Inc.
August 16, 1999
By: /s/ JOHN C. EPPERSON, JR.
---------------------------------------
John C. Epperson, Jr.,
President and Chief Executive Officer
8
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<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1999
<CASH> 40319
<SECURITIES> 0
<RECEIVABLES> 109787
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 164749
<PP&E> 247365
<DEPRECIATION> (25910)
<TOTAL-ASSETS> 586247
<CURRENT-LIABILITIES> 662289
<BONDS> 0
0
0
<COMMON> 3249
<OTHER-SE> (149436)
<TOTAL-LIABILITY-AND-EQUITY> 586247
<SALES> 167425
<TOTAL-REVENUES> 167425
<CGS> 107599
<TOTAL-COSTS> 107599
<OTHER-EXPENSES> 349278
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4737
<INCOME-PRETAX> (294189)
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