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: September 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
-------- ----------
(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 October 15, 1999, the Registrant had 4,582,332 shares of Common Stock
outstanding.
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<CAPTION>
INDEX
Page
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PART I: FINANCIAL INFORMATION
Item 1 Financial Statements
<S> <C>
Balance Sheets at September 30, 1999 and December 31, 1998 1
Statements of Operations for the nine and three month periods ended September 30, 1999 2
and the cumulative period July 31, 1998 (inception) to September 30, 1999
Statements of Cash Flows for the nine and three month periods ended September 30, 1999 3
and the cumulative period July 31, 1998 (inception) to September 30, 1999
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>
<CAPTION>
RECOM MANAGED SYSTEMS, INC.
(A Development Stage Company)
Balance Sheets
September 30, December
1999 1998
----------- -----------
(unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash ........................................................ $ 76,696 $ 23,855
Accounts receivable ......................................... 72,841 53,766
Deferred offering costs ..................................... -- 21,686
Inventory ................................................... 37,347 --
Other current assets ........................................ 10,206 --
----------- -----------
Total current assets ................................... 197,090 99,307
----------- -----------
Property and equipment, net ...................................... 212,893 13,678
Goodwill, net .................................................... 196,697 --
----------- -----------
Total assets ........................................... $ 606,680 $ 112,985
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable ............................................ $ 37,844 $ 10,006
Accrued professional fees ................................... 41,961 62,789
Accrued payroll, bonuses and benefits ....................... 20,593 22,500
Accrued interest ............................................ 26,309 7,257
Due to related parties ...................................... 517,106 81,989
Line of credit .............................................. 200,000 --
Notes payable to stockholders ............................... 190,000 190,000
- ------------------------------------------------------------------ ----------- -----------
Total current liabilities .............................. 1,033,813 374,541
Due to related parties, less current portion ..................... 35,172 --
----------- -----------
1,068,985 374,541
----------- -----------
Stockholders' equity (deficit):
Common Stock, $0.001 par value; 50,000,000 shares authorized;
4,582.332 and 2,605,000 shares issued and outstanding 4,582 2,605
Additional paid-in capital .................................. 1,628,193 --
Notes receivable from stockholders .......................... (1,000,000) --
Accumulated deficit ......................................... (1,095,080) (264,161)
----------- -----------
Total stockholders' equity (deficit) ................... (462,305) (261,556)
----------- -----------
Total liabilities and stockholders' equity (deficit) ... $ 606,680 $ 112,985
=========== ===========
</TABLE>
See notes to financial statements.
1
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<TABLE>
<CAPTION>
RECOM MANAGED SYSTEMS, INC.
(A Development Stage Company)
Statements of Operations
(unaudited)
Cumulative period
Nine months Three months July 31, 1998
ended ended (inception) to
September 30, September 30, September 30,
----------- ----------- -----------
1999 1999 1999
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Information technology consulting services............... $ 610,925 $ 271,568 $ 690,217
Information technology products.......................... 27,408 27,408 27,408
----------- ----------- -----------
Total revenues........................................ 638,333 298,976 717,625
----------- ----------- -----------
Cost of revenues:
Information technology consulting services............... 467,715 250,001 519,255
Information technology products.......................... 35,436 35,436 35,436
----------- ----------- -----------
Total cost of revenues................................ 503,151 285,437 554,691
----------- ----------- -----------
Gross profit.................................................. 135,182 13,539 162,934
----------- ----------- -----------
Operating expenses:
Development.............................................. 335,568 71,661 335,568
Marketing and selling.................................... 175,299 63,410 199,056
General and administrative............................... 428,323 173,848 504,222
----------- ----------- -----------
Total operating expenses...................................... 939,190 308,919 1,038,846
----------- ----------- -----------
Operating loss................................................ (804,008) (295,380) (875,912)
Interest expense.............................................. 26,911 17,489 34,168
----------- ----------- -----------
Loss before income taxes...................................... (830,919) (312,869) (910,080)
Provision for income taxes.................................... -- -- --
----------- ----------- -----------
Net loss...................................................... $ (830,919) $ (312,869) $ (910,080)
=========== =========== ===========
Basic and diluted loss per share.............................. $ (0.26) $ (0.09) $ (0.32)
=========== =========== ===========
Basic and diluted weighted average
number of shares outstanding ............................ 3,195,990 3,504,483 2,861,387
=========== =========== ===========
</TABLE>
See notes to financial statements.
2
<PAGE>
<TABLE>
<CAPTION>
RECOM MANAGED SYSTEMS, INC.
(A Development Stage Company)
Statements of Cash Flows
(Unaudited)
Cumulative period
Nine months Three months July 31, 1998
ended ended (inception) to
September 30, September 30, September 30,
------------ ----------- ----------------
Cash flows from operating activities:
<S> <C> <C> <C>
Net loss .......................................... $(830,919) $(312,869) $(910,080)
Depreciation and amortization expense ............. 42,381 22,144 48,751
Other ............................................. 320 -- 320
Change in assets and liabilities:
Accounts receivable .......................... (19,075) 36,946 (72,841)
Inventory .................................... (32,335) (32,335) (37,347)
Other current assets ......................... (10,206) (575) (5,194)
Accounts payable ............................. 27,838 30,331 37,844
Accrued professional fees .................... (20,828) 17,386 41,961
Accrued payroll, bonuses and benefits ........ (1,907) (18,683) 20,593
Accrued interest ............................. 19,052 9,630 26,309
Due to related parties ......................... 207,489 144,638 289,478
- -------------------------------------------------------- --------- --------- ---------
Net cash used in operating activities ... (618,190) (103,387) (560,206)
--------- --------- ---------
Cash flows from investing activities:
Acquisitions of property and equipment ............ (149,255) (10,236) (149,255)
Business acquisitions (Note 3) .................... (25,000) -- (25,000)
--------- --------- ---------
Net cash used in investing activities ... (174,255) (10,236) (174,255)
--------- --------- ---------
Cash flows from financing activities:
Borrowings on line of credit (Note 4) ............. 200,000 150,000 200,000
Proceeds from notes payable to stockholders ....... -- -- 190,000
Reverse acquisition (Note 1) ...................... -- -- (202,443)
Issuance of stock (Note 5) ........................ 623,600 -- 623,600
Deferred offering costs ........................... 21,686 -- --
--------- --------- ---------
Net cash provided by financing activities 845,286 150,000 811,157
- -------------------------------------------------------- --------- --------- ---------
Net increase in cash ................................... 52,841 36,377 76,696
Cash at beginning of the period ........................ 23,855 40,319 --
--------- --------- ---------
Cash at end of the period .............................. $ 76,696 $ 76,696 $ 76,696
========= ========= =========
</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. We
provide 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. We are considered to be in the
development stage as limited revenues have been derived from operations.
We were 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 our opinion, the accompanying unaudited financial statements contain all
adjustments necessary to present fairly our financial position at September 30,
1999 and December 31, 1998, and our results of operations and cash flow for the
three and nine month periods ended September 30, 1999 and the cumulative period
July 31, 1998 (inception) to September 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 financial statements for the year
ended December 31, 1998. Operating results for the three and nine month periods
ended September 30, 1999 and the cumulative period July 31, 1998 (inception) to
September 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. We have had a limited operating
history, are in the development stage, and, at September 30, 1999, have negative
working capital as well as an accumulated net deficit. These factors raise
substantial doubt about our 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 we be unable to continue in
existence. Continuation as a going concern is dependent on obtaining necessary
funds to continue operations. We plan 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 continued operations for the next twelve
months.
Note 3 - Business Acquisition
On June 11, 1999, we 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 for a purchase price of $294,050. The acquisition was accounted for
using the purchase method of accounting.
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
equal installments of $13,500. The current and non-current portion of this
balance at September 30, 1999 is $144,700 and $35,172, respectively.
4
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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
Cost assigned to tangible assets.............................. 93,310
-----------
Cost attributable to intangible assets........................ $ 200,740
===========
Additionally, for a period of three years from the date of acquisition,
Valley or its principal stockholder (at the discretion of the principal
stockholder), is entitled to fifty percent of all net profits over four percent
of gross revenue derived from existing and new customer work obtained as a
direct result of the principal stockholder's efforts, provided that the
principal stockholder has served as a full time employee during each twelve
month period (the "Earnout"), provided that it does not exceed $100,000 per
year. No additional consideration was recorded for the Earnout.
The resultant intangible assets have been allocated to goodwill and are
being amortized on a straight line basis over 15 years.
The following pro forma unaudited information has been prepared assuming
that the Valley acquisition had taken place on May 26, 1998 (date of Valley's
inception):
<TABLE>
<CAPTION>
Period from Nine months
May 26, 1998 to ended
December 31, 1998 September 30, 1999
----------------- ------------------
<S> <C> <C>
Revenues ............................................ $ 383,084 $ 1,012,065
Operating loss....................................... (118,539) (693,121)
Net loss ............................................ (148,331) (735,108)
Basic and diluted loss per share..................... (0.06) (0.23)
</TABLE>
Note 4 - Line of Credit Agreement
In May 1999, we entered 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. We have borrowed $200,000 against the line of credit
to fund general development and operating expenses.
Note 5--Stockholders' Equity
In September 1999, we entered into an agreement with four foreign
corporations for the sale of a total of 1,333,332 shares of common stock for
$0.75 per share. As of September 30, 1999, no proceeeds from the sale of the
common stock have been received. Accordingly, at September 30, 1999, we have
recorded notes receivable from stockholders for $1,000,000 as a component of
stockholders' equity (deficit).
In June 1999, we completed a private placement offering of 50,000 shares of
common stock. Gross proceeds totaled $100,000 as no selling commissions or
direct offering costs were incurred in connection with the offering. Also in
June 1999, 75,000 warrants for the purchase of common stock, issued in January
1999, in connection with a corporate advisory agreement, were exercised at a
price of $0.25.
In March 1999, we 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. Selling and
commissions and direct offering costs of $78,650 and $46,500, respectively, were
charged to equity upon completion of the private placement.
5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of operations
For the three and nine month periods ended September 30, 1999 and the
cumulative period July 31, 1998 (inception) to September 30, 1999, revenues from
information technology services totaled $298,976, $638,333 and $717,625,
respectively. Revenues from a single customer with a master contract that has
month-to-month terms totaled $69,785, $270,727 and $350,019 for the three and
nine month periods ended September 30, 1999 and the cumulative period July 31,
1998 (inception) to September 30, 1999, respectively. We believe that we have a
very good relationship with the customer and expect the contract to continue for
the foreseeable future. Revenues under a separate month-to-month contract with a
second customer totaled $55,572 and $160,190 for the three and nine month
periods ended September 30, 1999. Revenues under a separate contract, expiring
in December 1999, with a third customer totaled $37,800 for the three and nine
month periods ended September 30, 1999. We also also earned revenues of $10,028
and $24,438 during the three and nine month periods ended September 30, 1999
from Recom Technologies, a related party. Revenues from Valley (see below) from
the date of acquisition to September 30, 1999 totaled $137,005.
The net loss of $312,869, $830,919 and $910,080 for the three and nine
month periods ended September 30, 1999 and the cumulative period July 31, 1998
(inception) to September 30, 1999, respectively, can be attributed to
development, marketing and selling, and general and administrative expenses
incurred during our developing stage.
Acquisition of Valley Networking
On June 11, 1999, we 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. We intend to use the acquired assets to position ourself as a
business-to-business ISP. By combining the new ISP services with its Web
application development, we can provide our clients with a full service
e-commerce solution. The purchase price of $294,050 was based on arm's length
negotiations with 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
On September 15, 1999, we entered into an agreement with four foreign owned
corporations for the sale of 1,333,332 shares of our common stock for $0.75 per
share. Because the purchasers required free-trading shares, we guaranteed the
registration of the shares sold by issuing unsecured promissory notes to the
purchasers in the aggregate amount of $1,000,000 that automatically cancel upon
the effective date of our planned Registration Statement on Form SB-2. We will
receive the proceeds from the sale in ten equal amounts of $100,000 each week
beginning on or about November 15, 1999. The stock certificates sold will be
held by our attorneys, Boyd & Chang, LLP, and delivered pro-rata as we receive
payment.
In March and June 1999, we completed private placement offerings of 504,000
and 50,000 shares of common stock resulting in gross proceeds of $630,000 and
$100,000, respectively. The shares, representing 17% of our outstanding shares
after completion of the offerings, were sold to 19 qualifying investors. Net
proceeds from both offerings, 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 ot fund our continuing operations and development. The selling
commissions and direct offering costs were charged directly to equity.
6
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Liquidity and sources of capital
As of September 30, 1999, we had current assets of $197,090 with current
liabilities of $1,033,813. This represents a negative working capital of
$836,723. Cash used in operating activities, totaling $103,387, $618,190 and
$560,206 for the three and nine month periods ended September 30, 1999 and the
cumulative period July 31, 1998 (inception) to September 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 $10,236 and $174,255 for the three and
nine month periods ended September 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 $604,850 of net proceeds from the private placement offering described above
and the borrowing of $200,000 against the Company's line of credit.
Plan of operation for the next twelve months
Our planned business execution during the development stage will require us
to pursue sources of capital funding during the next twelve months in addition
to the capital raised in the private placement offering described above,
including the sales of 1,333,332 shares in September 1999. These funds are
expected to be used for the continued development of our technology
infrastructure necessary to support our planned service offerings, anticipated
business acquisitions, and to support an expected increase in the number of
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. and (3) The potential adverse effect
upon the Company from year 2000 failure among third party service providers.
The Company believes that it 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 September 30, 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
September 30, 1999:
On August 23, 1999, the Company filed a report on Form 8-K-A 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.
November 12, 1999
By: /s/ JOHN C. EPPERSON, JR.
-------------------------
John C. Epperson, Jr.,
President and Chief Executive Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-10-1998
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 76696
<SECURITIES> 0
<RECEIVABLES> 78647
<ALLOWANCES> 0
<INVENTORY> 37347
<CURRENT-ASSETS> 197090
<PP&E> 257601
<DEPRECIATION> (44708)
<TOTAL-ASSETS> 606680
<CURRENT-LIABILITIES> 1033813
<BONDS> 200000
0
0
<COMMON> 4582
<OTHER-SE> (466887)
<TOTAL-LIABILITY-AND-EQUITY> 606680
<SALES> 298976
<TOTAL-REVENUES> 298976
<CGS> 285437
<TOTAL-COSTS> 285437
<OTHER-EXPENSES> 308919
<LOSS-PROVISION> 0
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