U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended Commission File Number
-------------------------- ----------------------
December 31, 1999 33-11795
RECOM MANAGED SYSTEMS, INC.
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(Formerly Mt. Olympus Enterprises, Inc.)
Delaware 87-0441351
- ------------------------------------- ----------------------------------
(State of Incorporation) (I.R.S. Employer Identification)
Principal Executive Offices:
2412 Professional Drive
Roseville, CA 95661
Telephone: (916) 789-2022
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
The issuer's revenues for its most recent fiscal year were $1,307,878.
As of March 14, 2000, 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 $1,586,127 based upon the
closing sales price of $0.75/share.
As of March 14, 2000, the Registrant had outstanding 3,448,986 shares of common
stock ($.001 par value).
Documents Incorporated by Reference
Certain exhibits required by Item 13 have been incorporated by reference
from the Company's previously filed Form 8-K's, SB-2, Form 10-QSB and Form
10-KSB.
<PAGE>2
PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
RECOM Managed Systems, Inc. ("Recom" or the "Company" or "we") was formed
to develop, service and manage commercial computer networks both on-site and
remotely via the Internet. The Company is expanding its service offerings to
develop, host and support Internet-based applications for electronic business.
We are affiliated with Recom Technologies, Inc., in that our founding
shareholders, John C. Epperson and Jack Lee, are its majority shareholders.
Recom Technologies has extensive historical experience in providing technical
services related to basic business applications and network systems.
The Company intends to become a national Application Service Provider,
referred to as an ASP that provides Internet-based applications for small and
mid-size companies. We anticipate offering a contractual service to deploy,
host, manage and rent access to applications from a centrally managed facility.
These hosted applications will focus on supporting the e-business needs of
customers. As an ASP we are:
o An aggregator and integrator of web-based applications created by
independent software vendors,
o A developer of our own web-based applications,
o A consultant responsible for implementing web-based systems to meet our
customers' specific business requirements, and
o A support organization charged with supporting users according to specific
service performance metrics and improving our applications with version
upgrades to keep up with technology and business advancements.
The Company plans to introduce its services and products initially to the
Sacramento area and then expand from there as resources allow. The Sacramento
Valley is a fast growing business region and is already experiencing rapid
growth in technology-related companies. We believe it provides an excellent
incubator for the growth of our business.
The Company is a Delaware corporation with its business offices located at
2412 Professional Drive, Roseville, California 95661. Its telephone number is
(916) 789-2022. The Company also maintains a second facility at 9795 Business
Park Drive, Sacramento, California 95827.
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 been formed on July 31, 1998.
Subsequently, MOE changed its name to Recom Managed Systems, Inc. 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:
<PAGE>3
1. As of the closing date on October 30, 1998, MOE, then an inactive public
Delaware corporation, acquired all of the issued and outstanding Membership
Interests of J2 in exchange for 2,200,000 shares of common stock issued to
the J2 members, constituting approximately 84.4% of its reverse split
issued and outstanding shares. Thereafter, 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 to Recom and J2 was dissolved. Thus, Recom currently has no
subsidiaries.
Recom was formed to provide full computer network and desktop support
services to small and mid-sized companies. The ultimate goal was to provide a
"turnkey" solution whereby customers would receive all hardware, software,
maintenance, technical support, Internet connectivity and remote systems
management for a fixed monthly price. However, the Company's initial revenues
were primarily generated from technical consulting contracts.
In June 1999, the Company acquired Valley Networking to expand its network
support capabilities and to provide Internet connectivity for businesses. This
acquisition also included a second facility in Sacramento, California. All
network, desktop and on-call consulting requirements are managed from that
location. In addition, the facility includes an assembly laboratory that is used
to manufacture and test computer systems.
During mid-1999, the Company recognized that rapidly changing technologies
with respect to the Internet would require a modification to its original
business plan. The original plan was based on the assumption that a company's
computer applications would be maintained on its network or individual desktop
systems. This requires a significant investment in hardware, software and
support services. With the recent availability of cost-effective high speed
Internet access, the trend is to web-enable applications and rent such systems
to the end user. With the migration to web based applications, the user's local
system requirements are significantly reduced.
As a result, the Company has revised its business plan to serve as an
Applications Service Provider with emphasis in supporting electronic business
applications. These applications include e-commerce transactions, which normally
concern sales and purchases, business-to-business communications and customer
information resources via websites. The Company intends to develop and host such
sites. In addition, the Company will continue to provide network and desktop
services as a collateral business line.
<PAGE>4
Specific Service Offerings
The information technology industry is characterized by rapid technological
change, which often leads to increased costs for companies to maintain internal
information technology resources that are capable of responding to such changes.
Supporting these internal systems often depletes a company's ability to focus on
its core business or take advantage of important new technologies. Many
organizations react by hiring temporary staff, yet real expertise and reliable
results are sometimes hard to find. Increasingly, companies are solving this
problem by renting their applications from ASPs.
The ASP approach of renting applications is a recent phenomenon that is
made possible by widespread access to the Internet and the availability of
inexpensive, high-speed data communications. The ASP hosts several applications
for remote access by its subscriber companies. Each application is always
available for access, is updated to its most recent version and includes
adequate security protection for clients. Customers benefit by having access to
applications that they may not be able to afford themselves based upon licensing
and maintenance costs.
Recom plans to offer the services listed below:
Information Technology Professional Services
Our IT Professional Services provide the basic infrastructure for our ASP
practice as well as direct access to businesses that are candidates for our
e-business ASP products. This service represented the majority of our revenues
in 1999. We offer these fundamental IT services:
o Provide on-site consulting and staff augmentation services.
o Provide value added reseller network products coupled with implementation
and technical support services. We currently support over 25 such accounts.
o Develop and host customer websites.
While IT Professional Services are not specifically an ASP offering, this
capability sets Recom apart from most other ASP ventures. It permits us to offer
a comprehensive package consisting of the ASP application, network and desktop
systems to utilize the application, and on-site consulting to assist with
implementation and training.
This service area will also provide the corporate infrastructure that will
facilitate our growth as an ASP. This includes functions such as technical staff
recruiting, data center operations, technical support center and maintenance of
reseller agreements. We are a certified Microsoft Solutions Provider and an
authorized reseller for Hewlett Packard and IBM.
E-Business Applications Service Provider
With the rapid growth of the Internet as a means of conducting business,
companies are becoming increasingly aware of the need to implement systems that
their customers can access remotely. This applies to both business-to-business
and business-to-consumer applications. We believe that the demand for such
capabilities by small and mid-sized businesses will increase as it becomes
apparent that web-based applications will fundamentally redefine their business
role in the market. Moreover, we believe that most companies will prefer to
utilize a service provider that is capable of developing, hosting and
maintaining such systems.
<PAGE>5
As an e-business ASP, Recom is responsible for the total design of a
system. We prepare a development strategy that usually includes techniques to
expand and integrate the customer's existing databases into the new web-based
system. We then develop the system according to specifications and implement it
in facilities that are managed and operated by Recom. We have already been
contracted to develop e-commerce systems and have developed software that links
various commercial "off-the-shelf" products into a cohesive e-business package.
We intend to use this package as the basis for our ASP offerings.
We also assume a production responsibility for each e-business system. This
includes ensuring that the system is reliable and available for access by the
public. We monitor the servers, network and data center as well as traffic
congestion on the data communications lines. In concert with customers we
regularly manage and update the supporting databases. We also update and enhance
the system as user requirements and technology evolve.
While we are already generating revenue from this service offering, certain
risks could impact our ability to significantly grow the business. These include
our ability to attract sufficient technical personnel in a tight labor market
and the availability of future outside investment to fund our ongoing business
activities and sales and marketing campaigns.
To strengthen our position in this service area, we acquired substantially
all of the assets of Valley Networking, Inc. which provides a comprehensive set
of high quality computer products and services to local mid-sized companies. We
intend to use the acquired assets to position ourselves as a
business-to-business Internet Service Provider. By combining the ISP services
with our web application development, we can provide our customers with a full
service e-commerce solution.
Our current services utilize publicly available technology and hardware.
Although we deem our services to be proprietary, we have not and don't intend to
apply for patents or copyrights of our technical services.
Services Strategy
Our strategy is to become a leading provider of remotely hosted
applications services for commercial customers. We intend to provide to
companies the same high-quality technical support we have previously provided to
government organizations such as NASA by using proven business practices and
support technologies based on proprietary and intellectual assets assigned to us
by Recom Technologies, Inc.
Our approach is to offer IT professional services as the foundation on
which to build our e-business and related ASP capabilities. Recom is already
providing IT professional services and is currently developing e-commerce
systems. We expect e-business revenue to exceed IT professional services revenue
by the end of 2000.
Should we obtain sufficient funding, we intend to establish a total of six
regional offices throughout the United States by mid-2001. This will enable us
to offer a nationwide program of ASP services utilizing standard systems hosted
at redundant locations. The regional offices will concentrate on sales and
on-site customer support services.
Each ASP product will be assigned a product manager. This person will serve
as the primary interface between Recom and the software vendor for those systems
that are not developed in house. The product manager will coordinate the
integration and testing of the product before its release to customers. This
<PAGE>6
individual will also be responsible for maintaining the application at the most
recent version level and coordinates any subscriber customization needs with the
technical staff.
Market Analysis
Gartner Group research forecasts that the ASP services market will grow
from $900 million in 1998 to over $22 billion by 2003. Three key market trends
drive the business opportunity for Recom. These are:
1. The convergence of Internet-based applications and bandwidth availability
is moving key business functions to the Internet.
2. Competition is requiring mid-sized organizations to automate key business
processes.
3. Businesses will increasingly require partners to utilize the Internet as
means of communication and normal conduct of business operations.
The ASP market is complex and various types of providers have recognized
this trend. Many of these companies are attempting to establish themselves as
early leaders. Global providers from many market sectors, including
telecommunications / networking companies, traditional integrators, independent
software vendors and industry leaders are joining the ASP market. At a regional
level, systems integrators, value added resellers and Internet service providers
seek to implement ASP services to replace their increasingly commoditized
businesses. Recom is building a "pure play" ASP business that is a true
aggregator of application, network, consulting and support services. We intend
to become the single point of contact for mid-sized companies.
Several pure play ASPs have a head start on Recom. Corio, USInternetworking
and Futurelink have already built data centers, secured their first partner
offerings and acquired their first customers. Recom believes that these early
companies are helping to educate the market as well as refining the service
delivery model. Recom is positioned to take advantage of the pre-marketing and
the process refinement of these early ASPs.
Our market concentrates on mid-sized enterprises consisting of 20 to 2,000
workers. Typically these organizations are companies producing between $5
million and $750 million in annual revenue, regional extensions of larger
enterprises or departments of government agencies. There are approximately 13
million companies in the United States that fit this profile. Mid-sized
enterprises are estimated to account for 55% of total information technology
spending. The Gartner Group has predicted that by 2002, 70% of mid-sized
enterprises will be selectively outsourcing part or all of their information
technology functions.
Marketing Plan
In February, 1999, we conducted interviews with 22 mid-sized, Sacramento
based companies to understand practices and attitudes regarding the use of
internal staff, outsourcing organizations, perceptions of the total cost of
ownership, help desk practices, spending patterns for 1999, and anticipated
spending in 2000. We also conducted customer focus groups in September and
October 1999. These focus groups helped us understand the needs for application
outsourcing as opposed to managed desktop systems and were instrumental in our
decision to move to the ASP model.
Based on this research, our marketing plan is to demonstrate the benefits
of the ASP services model by first taking the message to the market through a
direct sales team. Once Recom has established the ASP service as a credible
<PAGE>7
standard, we intend to utilize channel partners. Marketing and sales will be
conducted through the following channels:
Direct Sales
Recom is building a sales organization in Sacramento, California. It is our
intention to develop regional sales offices in each of the remaining five
regions during 2000 and 2001. Each sales representative will be supported by a
technical account manager in the pre-sales process. Our recruiting process will
place high value on sales and technical personnel with demonstrated experience
in our selected vertical markets. Our sales strategy emphasizes an understanding
of the benefits, improved operations, reduced risks of ASP services which allow
the customer to return to its core business function.
Selling Through Channel Partners
Recom's plan for channel distribution includes both traditional and
innovative partners:
Value Added Resellers, Integrators and Internet Service Providers. This
group of companies represents a very broad customer base, but is better
organized to fill orders rather than create demand. For this reason we
intend to develop an initial customer base for our ASP services and utilize
these organizations to assist in rapidly increasing our subscriber base.
Vertical Integrators. Vertical integrators will assist Recom in penetrating
our vertical markets. Mutually beneficial alliances will enable integrators
to offer additional services to the pre-existing customers and will enable
Recom to test and gain entry to vertical markets.
Technology Partners. We intend to develop application alliance partners as
preferred resellers of Recom services and will actively provide training
and incentive programs to support this effort.
General Advertising
The primary goals of our marketing efforts are to create corporate and
brand awareness and to generate leads. We believe that through increased
market recognition we will be invited to participate in more sales
opportunities, and obtain a higher ratio of customers from these leads. We
intend to gain greater public exposure through public relations campaigns,
regional advertising, direct mail and vertical trade shows.
Competition
We believe that the competition for ASP services falls into two main
categories. The first category is that of other pure play ASP companies. While
many new companies are currently attempting to enter this market, only a few
have established themselves as early leaders. These include Corio, Futurelink
and US Internetworking. These companies, however, primarily focus on providing
enterprise ASP solutions rather than e-business solutions.
<PAGE>8
The second category of competitors is much larger and is composed of
companies that currently support certain segments of the ASP model. Such
companies are better suited as business partners. These include:
Type of Company Examples
------------------------------- ------------------------------------
Software Vendors SAP, J D Edwards, Oracle, PeopleSoft
Traditional Integrators IBM, EDS, Anderson Consulting
Telecommunications Companies Qwest, Nortel
Industry Giants Microsoft, Intel
In addition to the above companies are organizations that are smaller and
more regionally oriented candidates. These include regional systems integrators
and value added resellers as well as Internet service providers.
Customers
Our primary target market is companies consisting of 20 to 2,000 workers
and represented by mid-sized to large local companies, regional extensions of
larger enterprises or departments of government agencies.
During 1999, three customers represented approximately 60% of our total
revenue. We expect to continue to provide services in the current year for two
of these customers while services for the third customer were completed during
1999.
Employees
During the past several months, the Company was compelled to reduce staff
because of the failure to receive anticipated investor funding. We currently
have 7 employees consisting of: 2 management and sales, 4 technical and 1
consulting. One of the management employees continues to be leased from Recom
Technologies. We also have a part-time CFO and a part-time accounting clerk. We
believe that we have good relations with our employees. We are not subject to
any collective bargaining agreement.
Risks Associated with Recom's Developing Business
Recom is a development stage company and, as such, we have only a limited
history of revenues and no established business track record. Recom's future
success will be dependent on its ability to attract and retain experienced
computer technicians and new customers in Recom's core business sectors. The
inability to retain technically qualified personnel or to secure new customers
would have an adverse effect in Recom's business.
At this time, Recom's operating expenses exceed its revenues. Consequently,
we are currently dependent almost exclusively an outside capital to fund our
business operations. Such outside capital has included the sale of additional
stock and borrowing. To date, the availability of outside capital has been
sporadic and there can be no assurance that sufficient capital will be available
to meet our current and future operating and development costs. As discussed
below, Recom is currently negotiating with certain foreign investors to generate
investment capital to fund Recom's current operations. However, there is no
assurance that such plans will be completed or, if completed, will provide
sufficient funds to enable the Company to continue operations. Any delay in or
failure to receive such capital would have a substantially adverse impact on
Recom's ability to continue business operations. The issuance of additional
<PAGE>9
equity securities by us will result in a significant dilution in the equity
interests of our current stockholders. Obtaining commercial or private loans,
assuming those loans would be available, will increase our liabilities and
future cash commitments.
Recom is primarily a service-based company and does not own significant
tangible assets. Consequently, if Recom were unsuccessful, there would be few
tangible assets, which would have little liquidation value.
The audit report of Recom's independent auditors includes a "going concern"
qualification. In the auditor's opinion, Recom's limited operating history,
negative working capital position and the accumulated net deficit as of December
31, 1999, raise substantial doubt about the Company's ability to continue as a
going concern.
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. The lease includes administrative/secretarial support, supplies,
office furnishings and certain equipment. The Company also leases approximately
2,800 square feet in Sacramento, California where the majority of the technical
support services are performed. The lease rate is $2,249 per month and expires
in June 2000. Recom has identified a 3,500 square foot facility in El Dorado
Hills, California that would serve as a consolidated corporate facility and may
consider this option upon expiration of the Rancho Cordova lease. The Company
believes that its current facilities are adequate to meet its foreseeable
requirements or that suitable additional or substitute space will be available
if necessary.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the annual meeting of stockholders of the Company, held November 11,
1999 in Roseville, California, the stockholders (i) elected seven directors to
serve on the Company's Board of Directors; (ii) ratified the Company's 1998
Stock Option Plan; and (iii) ratified the Company's appointment of Burnett +
Company LLP as independent accountants.
The vote for nominated directors was as follows:
Nominee For Against Abstain
------------------ --------- ------- -------
Jack Epperson 2,385,093 125 0
G.K. (Jack) Lee 2,385,093 125 0
Syed Z. Shariq 2,385,093 125 0
Robert S. Iger 2,385,093 125 0
John Thomas Flynn 2,385,093 125 0
Curt Pringle 2,385,093 125 0
Roger L. Akers 2,385,093 125 0
<PAGE>10
The vote to approve the Company's 1998 Stock Option Plan was as follows:
For Against Abstain
--------- ------- --------
2,385,091 127 0
The vote for ratifying the appointment of Burnett + Company LLP was as
follows:
For Against Abstain
--------- ------- --------
2,385,218 0 0
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 14, 2000, the average closing price of Recom's
common stock was $0.75.
Year Ended December 31, 1999 Low High
----- ------
Fourth Quarter $1.00 $2.68
Third Quarter $0.93 $4.50
Second Quarter $1.875 $7.00
First Quarter $4.00 $9.25
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
As of March 31, 2000, there were approximately 282 holders of record of the
Company's Common Stock. This amount does not include shares held in street name.
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.
<PAGE>11
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS AND PLAN OF OPERATION
For more detailed financial information, please refer to the audited
December 31, 1999 Financial Statements included in this Form 10-KSB.
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.
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 below.
However, our growth plan is expected to generate a negative cash flow for the
foreseeable future thus making outside capital investments essential to fund our
ongoing business operations and growth. We intend to utilize investor funds to
support activities relative to information technology professional services and
network support. These include designing, installing and maintaining networks;
implementing and maintaining websites; providing Internet access for businesses;
providing on-site technical staff augmentation; and hosting customer
applications. As internal growth and investor funding permit, we intend to
expand our e-commerce development and maintenance capabilities with the
objective of becoming an e-commerce applications service provider.
Results of Operations
For the period ended December 31, 1998, the year ended December 31, 1999
and the cumulative period July 31, 1998 (inception) to December 31, 1999,
revenues from information technology services totaled $79,292, $1,016,989 and
$1,096,281, respectively. Revenues from a single customer with a master contract
that has month-to-month terms totaled $398,847 for the year ended December 31,
1999. Revenues related to this contract totaled $79,292 for the period ended
December 31, 1998. We anticipate the project with this customer will be
concluded in the second quarter of 2000. Revenues under a separate
month-to-month contract with a second customer totaled $227,771 for the year
ended December 31, 1999. Revenues under a separate contract, which expired in
December 1999, with a third customer totaled $117,300 for the year ended
December 31, 1999. We also earned revenues of $32,891 for the year ended
December 31, 1999 from Recom Technologies, a related party. 78% of revenues for
1999 were derived from technology consulting services while the balance of
$290,889 was generated from the sale of information technology products during
the year ended December 31, 1999. Revenues from Valley Networking, Inc. (see
below) from the date of acquisition to December 31, 1999 totaled $411,538.
The net loss of $79,161, $1,051,916 and $1,131,077 for the period ended
December 31, 1998, the year ended December 31, 1999 and the cumulative period
July 31, 1998 (inception) to December 31, 1999, respectively, can be attributed
to development, marketing and selling, and general and administrative expenses
incurred during our developing stage.
<PAGE>12
Marketing and selling expenses as well as General and Administrative costs
increased substantially during 1999 as compared to 1998 due primarily to the
full year of operations in 1999. The Company incurred no expenses in 1998 for
development while it spent $329,616 for such expenses in 1999.
Acquisition of Valley Networking
On June 11, 1999, we completed the acquisition of substantially all of the
assets of Valley Networking, Inc., 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 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 note due to Valley. The amount due to Valley bear's interest at 15% and
is payable in 18 equal installments of $13,500. As of December 31, 1999, Recom
had paid the $25,000, issued the 5,000 shares of stock and had paid $81,000 of
installments on the note due to Valley.
Capital Financing
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 to fund our continuing operations and development. The selling
commissions and direct offering costs were charged directly to equity.
On September 15, 1999, Recom 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. At December 31, 1999, we received $49,000 related to this agreement (and
an additional $75,000 was received in January 2000). As of March 13, 2000, the
agreements have been renegotiated to reduce the amount of the transaction to
200,000 shares issued for the $124,000 previously paid.
Liquidity and Sources of Capital
As of December 31, 1999, we had current assets of $316,971 with current
liabilities of $1,370,527. This represents a negative working capital of
$1,053,556. Cash used in operating activities, totaling $954,119, for the year
ended December 31, 1999 can be attributed to development, marketing and selling,
and general and administrative expenses incurred during our developing stage.
Cash used in investing activities of $205,814 was expended on information
technology infrastructure used to support our developing business and to acquire
Valley. Cash flows from financing activities for the year ended December 31,
1999, primarily have consisted of $604,850 of net proceeds from the private
placement offering described above, the $49,000 payment received on the stock
<PAGE>13
subscription, the borrowing of $200,000 against the Company's line of credit and
$366,077 net borrowings from related parties.
Our capital deficit in 1999 was primarily caused by the failure of the four
foreign owned corporations to invest $1,000,000 according to their stock
purchase agreements. As a result, we borrowed extensively from related parties
in order to maintain a positive cash position. As stated above, the agreements
with these investors were renegotiated.
Using investment funding to support on-going operations and growth, we
project a positive cash flow by the end of 2000, including a long-term debt
reduction of approximately $350,000. Additionally, we are in the process of
negotiating the conversion of $500,000 related party long-term debt to equity.
The combination of debt payoff and conversion to equity would reduce long-term
debt obligations to approximately $200,000.
Year 2000 Issue
We did not experience any disruptions to operations or any other problems
relating to the Y2K issue. The Y2K issue generally refers to the problems some
computer systems may have in determining the correct year for the century. We do
not foresee any future problems resulting from the Y2K issue.
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-KSB. Refer to
the index to financial statements at Item 13 below.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On March 4, 1999, Recom selected Burnett + Company LLP to serve as its new
independent accountants and, accordingly, dismissed Hansen, Barnett & Maxwell.
The decision to engage Burnett + Company LLP and dismiss Hansen, Barnett &
Maxwell was approved by Recom's Board of Directors. Through March 4, 1999, there
were no disagreements with Hansen, Barnett & Maxwell on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure.
<PAGE>14
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:
<TABLE>
<S> <C> <C>
Name Age Office
----------------------------- ----- -------------------------------------------------
John (Jack) C. Epperson, Jr. 51 Chairman of the Board and Chief Executive Officer
G.K. (Jack) Lee 63 Director, Secretary
Syed Z. Shariq, Ph.D. 50 Director
Robert S. Iger, Esq. 58 Director
John T. Flynn 50 Director
Curt Pringle 40 Director
Roger L. Akers 46 Director
James D. Collins 31 Chief Financial Officer
</TABLE>
John (Jack) C. Epperson, Jr. has served as Recom's Chairman of the Board
and Chief Executive Officer since August 1998. He also currently serves and has
served for the past 11 years as the executive vice president of Recom
Technologies, Inc., a corporation majority owned by he and Jack Lee. He has more
than 27 years of experience in the field of corporate management, information
technology and facility support services. The Company leases Mr. Epperson's
services on a part-time basis from Recom Technologies, Inc. under a three-year
executive employment agreement. Mr. Epperson was founder of three successful
information service companies and currently serves on the board of directors of
Recom International and Recom Applied Solutions.
G.K. (Jack) Lee has served as Recom's secretary and a director since August
1998. Mr. Lee was a founder of Recom Technologies, Inc. and has been its
president and a director since 1980. Mr. Lee has more than 25 years experience
in the information technologies services field, including 20 years in
management. He is also a board member for Recom Technologies, Inc., Goodwill
Industries and Attention Control Systems, Inc.
Syed Z. Shariq, Ph.D. has served as a director since November 1998. For the
last 2 years Dr. Shariq has been a visiting professor at Stanford University.
Dr. Shariq is assistant to the Center Director for Strategic Alliances at NASA
Ames Research Center. He also served as a part time assistant Knowledge Asset
Management Incorporated, a developer of expert systems for the CIA and the
Department of Defense. Prior to joining Stanford he served as director of NASA's
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 the 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 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
<PAGE>15
Xerox Corporation. Mr. Iger's practice concentrates on corporate and securities
law.
John T. Flynn has served as a director 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 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's 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 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.
Roger L. Akers has served as a director since February 1999. Mr. Akers is a
senior level executive with 20 years of experience, 15 of which were in
management positions, in information technology related businesses. For the last
two years Mr. Akers has been a partner in Akers & Waterman Investment Fund. 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. Prior to forming Akers & Waterman, he
spent 11 years building ProData, an eight office regional consulting company
employing over 400 people 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 D. Collins has served as our Chief Financial Officer on a part-time
basis since November 1998. Mr. Collins has been the Controller for Beringer Wine
Estates since 1998. Prior to that time he was with PricewaterhouseCoopers LLP
since 1990, where he was a senior manager prior to joining Recom. 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.
Family Relationships
There are no family relationships between any director or executive
officer.
<PAGE>16
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the compensation of the Company's Chief
Executive Officer during the last two complete fiscal years. Two other officers
received annual compensation in excess of $100,000 during the last completed
fiscal year.
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation
---------------------------------------------- -----------------------------------------------------------
Awards Payout
--------------------------- ----------
Restricted
Other Annual Stock Securities LTIP All Other
Bonus Compensation Award(s) Underlying Payout Compensation ($)
Year Salary ($) ($) ($) Option s (#) ($)
-------- -------------- --------- ------------- ------------ -------------- ---------- -----------------
Jack Epperson (CEO) 1999 $38,611 (1) -0- -0- -0- 100,000 -0- -0-
1998 -0- -0- -0- -0- -0- -0- -0-
James P. Joyce (COO) 1999 $110,000 (1) -0- -0- -0- 100,000 -0- -0-
Jamie B. Madison 1999 $100,000 -0- -0- -0- 100,000 -0- -0-
(Vice President)
- -----------------------------
(1) Pursuant to an employment agreement.
</TABLE>
Employment/Consulting Agreements
The Company has and intends to continue leasing Mr. Epperson's services
from Recom Technologies, Inc. under a three-year Executive Employment Agreement
which commenced effective November 11, 1998. Pursuant to the Agreement, Recom
Technology, Inc. is paid $100/hour for Mr. Epperson's time spent on Company
business. At December 31, 1999, the Company owed Recom Technologies, Inc.
$63,778 for Mr. Epperson's services during 1999. In January 1999, Mr. Epperson
was granted 100,000 stock options vesting ratably over a five-year period.
Mr. James 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. In January 1999, Mr. Joyce was granted 100,000 stock
options vesting ratably over a three-year period. Subsequent to year-end, Mr.
Joyce resigned as an employee of the Company.
In 1998 the Company entered into a one-year Consulting Agreement with Mr.
James Collins to act as its Chief Financial Officer. As of January 1, 1999, Mr.
Collins became a part-time employee of the Company. He is paid a base
compensation of $57/hour and does not participate in Recom's benefit programs.
The Company laid off Ms. Madison on February 18, 2000.
<PAGE>17
Director Compensation
We may reimburse directors for any reasonable expenses pertaining to
attending meetings, including travel, lodging and meals and presently pay
outside directors $1,000 per meeting for their service. We have issued options
to outside directors to purchase up to 30,000 shares of our common stock for
$.25 per share. Outside directors are those who are not principal shareholders
or officers, which are presently limited to Syed Shariq, Robert Iger, Kurt
Pringle, Roger Akers and John Flynn. These options have different vesting
schedules from 1 to 3 years. Messrs. Shariq, Iger and Flynn also each received
20,000 shares of common stock on the merger, which was issued as founders stock.
Stock Option Plan
Our Board of Directors adopted and our shareholders approved our 1998 Stock
Option Plan for the issuance of incentive and non-qualified stock options in
December 1998. The stock plan was established to furnish incentives for
employees, consultants and other participants to continue their service to
Recom. There are 520,000 shares of common stock authorized for issuance upon
exercise of options and stock appreciation rights granted under the stock plan,
which have designated vesting schedules up to 5 years. As of December 31, 1999,
517,100 options to purchase Recom shares of common stock at exercise prices
ranging from $.25 to $1.25 had been granted. The Board of Directors administers
the Stock Option Plan. We may have to issue additional stock, options or other
incentives to attract and retain qualified management and directors, both
advisory and voting. Such plans and incentives could have a dilutive effect on
our common stock. No option is transferable by the optionee other than by will
or the laws of descent and distribution.
<TABLE>
<S> <C> <C> <C> <C>
OPTIONS GRANTED IN THE YEAR ENDED DECEMBER 31, 1999
Number of
Securities % of Total Option
Underlying Granted to Exercise of
Options Granted Employees in Fiscal Base Price
Name in 1999 Year 1999 ($/share) Expiration Date
- --------------------- ---------------- ------------------- ----------- ---------------
Roger Akers 30,000 5.8% $0.25 1/12/02
Vintzen Bellamy 5,500 1.1% $0.25 1/1/02
James Collins 100,000 15.5% $0.25 1/1/04
John Epperson, Jr. 100,000 19.3% $0.275 1/1/04
Mike Gibson 1,000 0.2% $1.25 6/11/02
Bobbie Hales 20,000 3.9% $0.70 10/1/03
Joni Hedin 13,000 2.5% $0.25 1/1/02
James Joyce 100,000 19.3% $0.25 1/1/02
Jamie Madison 100,000 19.3% $0.25 1/1/02
Mehrdad Mehranpour 20,000 3.9% $0.25 1/1/02
Mark Otero 5,000 1.0% $1.25 8/18/02
Carol Pierson 6,000 1.2% $0.25 1/1/02
Curt Pringle 30,000 5.8% $0.25 1/12/02
Donald Simmons 600 0.1% $1.25 8/2/02
Zachary Stephen 3,000 0.6% $1.25 10/4/02
Amyn Visram 3,000 0.6% $0.25 1/1/00
</TABLE>
<PAGE>18
<TABLE>
<S> <C> <C>
FISCAL YEAR END OPTION VALUE (DECEMBER 31, 1999)
Number of Securities Underlying
Unexercised Options/SARs at Fiscal Value of Unexercised in the Money
Year End (#) Options/SARs at Fiscal Year End
Exercisable/Unexercisable Options Exercisable/Unexercisable Options
Name at December 31, 1999 at December 31, 1999
- -------------------------- ---------------------------------- ------------------------------------
Roger Akers 0/30,000 0/15,000
Vintzen Bellamy 1,833/3,667 917/1,834
James Collins 16,000/64,000 8,000/32,000
John Epperson, Jr. 20,000/80,000 9,500/38,000
Mike Gibson 0/1,000 0/0
Bobbie Hales 0/20,000 0/1,000
Joni Hedin 4,333/8,667 2,167/4,334
James Joyce 33,333/66,667 16,667/33,334
Jamie Madison 33,333/66,667 16,667/33,334
Mehrdad Mehranpour 6,667/13,333 3,334/6,667
Mark Otero 0/5,000 0/0
Carol Pierson 2,000/4,000 1,000/2000
Curt Pringle 0/30,000 0/15,000
Donald Simmons 0/600 0/0
Zachary Stephen 0/3,000 0/0
Amyn Visram 3,000/0 1,500/0
- ----------------------
* The value of unexercised in-the-money options is based on a per share price
of $0.75 as quoted on the OTC Bulletin Board on March 14, 2000.
</TABLE>
Limitation of Liability and Indemnification Matters
Our bylaws provide that we will indemnify our officers and directors,
employees and agents and former officers, directors, employees and agents unless
their conduct is finally adjudged as grossly negligent or to be willful
misconduct. This indemnification includes expenses (including attorneys' fees),
judgments, fines, and amounts paid in settlement actually and reasonably
incurred by these by these individuals in connection with such action, suit, or
proceeding, including any appeal thereof, subject to the qualifications
contained in Delaware law as it now exists. Expenses (including attorneys' fees)
incurred in defending a civil or criminal action, suit, or proceeding will be
paid by us in advance of the final disposition of such action, suit, or
proceeding upon receipt of an undertaking by or on behalf of the director,
officer, employee or agent to repay such amount, unless it shall ultimately be
determined that he or she is entitled to be indemnified by us as authorized in
the bylaws. This indemnification will continue as to a person who has ceased to
be a director, officer, employee or agent, and will benefit their heirs,
executors, and administrators. These indemnification rights are not deemed
exclusive of any other rights to which any such person may otherwise be entitled
apart from the bylaws. Delaware law generally provides that a corporation shall
have the power to indemnify persons if they acted in good faith in a manner
reasonably believed to be in, or not opposed to, the best interests of the
Company and, with respect to any criminal action or proceeding, had no
reasonable cause to believe the conduct was unlawful. In the event any such
person is judged liable for negligence or misconduct, this indemnification will
apply only if approved by the court in which the action was pending. Any other
indemnification shall be made only after the determination by Recom's Board of
Directors (excluding any directors who were party to such action), by
independent legal counsel in a written opinion, or by a majority vote of
stockholders (excluding any stockholders who were parties to such action).
<PAGE>19
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, 2000 by, (i) each executive officer and
director of the Company; (ii) all executive officers and directors of the
Company as a group; and (iii) owners of more than 5% of the Company's Common
Stock.
<TABLE>
<S> <C> <C> <C>
Name and address of Number of Shares
Beneficial Owner Position Beneficially Owned Percent
---------------------------- ------------ ------------------- ----------
Officers and Directors
John Epperson, Jr. (1) Chairman
10695 Pear Tree Ct. and CEO 300,000 5.88%
Auburn, CA 95603
Jack Lee (1) Secretary
19108 Bonnet Way and Director 300,000 5.88%
Saratoga, CA 95070
Recom Technologies, Inc. (1) 659,150 12.92%
2412 Professional Drive
Roseville, CA 95661
James Joyce (2) COO 57,000 1.8%
2412 Professional Drive
Roseville, CA 95661
Syed Shariq, Ph.D. Director 25,000 0.49%
204 Robin Way
Menlo Park, CA 94025
Robert Iger, Esq. Director 20,000 0.39%
601 Lido Park Drive, Suite 4F
Newport Beach, CA 92663
John Thomas Flynn Director 20,000 0.39%
11719 Prospect Hill Drive
Gold River, CA 95670
Curt Pringle Director 5,000 0.10%
2532 DuPont Drive
Irvine, CA 92612
Roger Akers Director 5,000 0.10%
8436 Marina Vista Lane
Fair Oaks, CA 95628
All officers and directors
as a group (8 individuals) 1,334,150 26.15%
<PAGE>20
Other Stockholders holding over 5%
Kayne International None 280,000 5.49%
c/o Hutchings, Barsamian & Levy
110 Cedar Street, Suite 250
Wellesley Hills, MA 02181
------------------------------------------------------
(1) Messrs. Epperson and Lee are also officers, directors and controlling
shareholders of Recom Technologies, Inc., and should be considered the
beneficial owners of and to have control over the 659,150 shares owned by
Recom Technologies, Inc.
(2) Mr. Joyce resigned his position as COO on February 25, 2000.
</TABLE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company leases 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 $47,280 in lease expense during December 31,
1999 and $7,880 in lease expense from July 31, 1998 (inception) to December 31,
1998. The Company believes this rent is comparable to rent that would be charged
by a non-affiliated landlord.
In August 1998, Recom's predecessor, J-2 Technologies, LLC, borrowed a
total of $150,000 from four of our shareholders. John C. Epperson, Jr., Jack
Lee, Kayne International, Ltd., and SOMA 2000, LLC, loaned the Company $37,500
each, evidenced by one year, unsecured promissory notes bearing interest at ten
percent (10%). The proceeds of the loans were used to effect the merger with
MOE. These loans are still outstanding and accruing interest and have been
extended until a future secondary round of funding is completed. As of December
31, 1999, the total balance of these loans was $150,000.
In August 1998, Recom Technologies, Inc., loaned the Company $20,000
evidenced by a one year, ten percent (10%) Promissory Note, which we used to pay
for appraisals and other due diligence. In November 1998, SOMA 2000, LLC and
Kayne International. Ltd., each loaned the Company an additional $10,000
pursuant to 10% Promissory Notes, which was used to pay past legal and
accounting bills. These loans are still outstanding and accruing interest and
have been extended until a future secondary round of funding is completed. As of
December 31, 1999, the balance of these loans was $40,000.
Recom leased certain employees and was provided with administrative support
by Recom Technologies, Inc. We recorded $51,540 and $0 cost of sales and $22,569
and $63,778 operating expenses for the period from July 31, 1998 (inception)
through December 31, 1998 and the year ended December 31, 1999, respectively,
related to these services. In addition to these services, Recom Technologies,
Inc. has advanced Recom $210,000 as of December 31, 1999. We included $32,891 in
revenue for the year ended December 31, 1999 from Recom Technologies, Inc.
Recom has debt payable to related parties of $515,173 in connection with
the above costs and advances and $195,693 due to Valley Networking relating to
the acquisition.
<PAGE>21
Executive Employment From Affiliate
The Company leases the services of its President, John (Jack) Epperson,
Jr., from Recom Technologies, Inc., an affiliate of the Company pursuant to a
three-year Executive Employment Agreement. Pursuant to this Agreement, Mr.
Epperson spends approximately 40% of his time on Company matters.
ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
<TABLE>
<S> <C>
(1) Financial Statements
Report of Independent Accountants
Balance Sheet at December 31, 1999 F-1
Statements of Operations for the period July 31, 1998 (inception)
through December 31, F-3 1998, for the year ended December 31,
1999 and the cumulative period July 31, 1998 to December 31, 1999 F-2
Statement of Changes in Stockholders' Equity (Deficit) for the
cumulative period July F-4 31, 1998 (inception) to December 31,
1998, for the year ended December 31, 1999 and the cumulative
period July 31, 1998(inception) to December 31, 1999 F-3
Statements of Cash Flows for the period July 31, 1998 (inception)
through December 31, F-5 1998, for the year ended December 31,
1999 and the cumulative period July 31, 1998 to December 31, 1999 F-4
Notes to Financial Statements F-5 to 11
</TABLE>
(2) Exhibits
Exhibit 2(1) Stock-For-Membership Interest Exchange
Agreement
Exhibit 3.1(2) Amended Articles of Incorporation dated
May 10, 1999.
Exhibit 3.2(3) Bylaws dated May 10, 1991.
Exhibit 10.1(4) Shareholder Statement (filed as an exhibit
to the Company's report on Form 10-QSB dated
November 16, 1998)
Exhibit 10.2(4) Majority Shareholder Consent
Resolution (filed as an exhibit to the
Company's report on Form 10-QSB dated
November 16, 1998)
Exhibit 10.3(5) 1998 Stock Option Plan
Exhibit 10.4(5) Executive Employment Agreement between
RECOM Managed Systems, Inc. and Mr.
James P. Joyce.
Exhibit 10.5 Executive Employment Agreement with John
Epperson, Jr.
Exhibit 16(6) 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
<PAGE>22
(b) Reports on Form 8-K filed during the quarter ended December 31, 1999:
None
- --------------------
(1) Incorporated by reference to exhibits previously filed on Form 8-K filed on
November 10, 1998.
(2) Incorporated by reference to exhibits previously filed on Form 8-K on May
10, 1991.
(3) Incorporated by reference to exhibits previously filed on Form SB-2 on July
26, 1999.
(4) Incorporated by reference to exhibits previously filed on Form 10-QSB on
November 16, 1998.
(5) Incorporated by reference to exhibits previously filed on Form 10-KSB on
March 30, 1999.
(6) Incorporated by reference to exhibits previously filed on form 8-K on
August 23, 1999.
<PAGE>23
SIGNATURES
In accordance with 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>
<S> <C> <C>
Signature Title Date
- ------------------------------- -------------------------------------- ----------------
/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 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>
<PAGE>F-1
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, 1999, and the related statements
of operations, changes in stockholders' deficit and cash flows for the period
July 31, 1998 (inception) through December 31, 1998, for the year ended December
31, 1999 and the cumulative period July 31, 1998 to December 31, 1999. 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 audits 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, 1999, and the results of its
operations and its cash flows for the period July 31, 1998 (inception) through
December 31, 1998, for the year ended December 31, 1999 and the cumulative
period July 31, 1998 to December 31, 1999 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, 1999, 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 & COMPANY LLP
Rancho Cordova, California
March 13, 2000
<PAGE>F-2
RECOM MANAGED SYSTEMS, INC.
(A Development Stage Company)
Balance Sheet
<TABLE>
<S> <C>
December 31,
-------------
1999
ASSETS
Current assets:
Cash .......................................................................... $ 105,455
Accounts receivable............................................................ 193,662
Inventory...................................................................... 8,194
Other current assets........................................................... 9,660
---------
Total current assets...................................................... 316,971
Property and equipment, net......................................................... 221,057
Goodwill, net....................................................................... 198,197
----------
Total assets.............................................................. $ 736,225
==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable............................................................... $ 66,491
Accrued professional fees ..................................................... 82,092
Accrued payroll, bonuses and benefits.......................................... 63,586
Accrued interest............................................................... 29,636
Due to related parties......................................................... 710,866
Line of credit................................................................. 200,000
Notes payable to stockholders.................................................. 190,000
Deferred revenue 27,856
----------
Total current liabilities................................................. 1,370,527
Stockholders' deficit:
Common Stock, $0.001 par value; 50,000,000 shares authorized;
3,249,000 shares issued and outstanding, 200,000 shares subscribed.......... 3,449
Additional paid-in capital..................................................... 753,326
Stock subscriptions receivable from stockholders............................... (75,000)
Deficit accumulated during the development stage............................... (1,316,077)
----------
Total stockholders' deficit............................................... (634,302)
----------
Total liabilities and stockholders' deficit............................... $ 736,225
==========
</TABLE>
See notes to financial statements.
<PAGE>F-3
RECOM MANAGED SYSTEMS, INC.
(A Development Stage Company)
Statements of Operations
<TABLE>
<S> <C> <C> <C>
Period July Cumulative period
31, 1998 July 31, 1998
(inception) to Year ended (inception) to
December 31, December 31, December 31,
-------------- -------------- -----------------
1998 1999 1999
-------------- -------------- -----------------
Revenues:
Information technology consulting services...............$ 79,292 $ 1,016,989 $ 1,096,281
Information technology products.......................... -- 290,889 290,889
-------------- -------------- -----------------
Total revenues........................................ 79,292 1,307,878 1,387,170
-------------- -------------- -----------------
Cost of revenues:
Information technology consulting services............... 51,540 827,931 879,471
Information technology products.......................... -- 309,414 309,414
-------------- -------------- -----------------
Total cost of revenues............................... 51,540 1,137,345 1,188,885
-------------- -------------- -----------------
Gross profit.................................................. 27,752 170,533 198,285
-------------- -------------- -----------------
Operating expenses:
Development.............................................. -- 329,616 329,616
Marketing and selling.................................... 23,757 208,538 232,295
General and administrative............................... 75,899 643,483 719,382
-------------- -------------- -----------------
Total operating expenses...................................... 99,656 1,181,637 1,281,293
-------------- -------------- -----------------
Operating loss................................................ (71,904) (1,011,104) (1,083,008)
Interest expense.............................................. 7,257 40,812 48,069
-------------- -------------- -----------------
Net loss...................................................... $ (79,161) $ (1,051,916) $ (1,131,077)
============== ============== =================
Basic loss per share.......................................... $ (0.03) $ (0.34) $ (0.39)
============== ============== =================
Basic weighted average
number of shares outstanding............................... 2,361,471 3,113,487 2,891,620
============== ============== =================
</TABLE>
See notes to financial statements.
<PAGE>F-4
RECOM MANAGED SYSTEMS, INC.
(A Development Stage Company)
Statements of Changes in Stockholders' Equity (Deficit)
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Common Stock Additional Note Receivable Accumulated
Shares Amount paid-in-capital from Stockholders Deficit Total
--------- -------- ----------------- ------------------- ------------ -----------
Contributions at July 31, 1998 2,200,000 $ 2,200 $ 17,848 $ -- $ -- $ 20,048
(inception)
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)
Issuance of stock 644,000 644 629,526 630,170
Stock subscribed 200,000 200 123,800 124,000
Stock subscriptions receivable
from stockholders (75,000) (75,000)
Net loss (1,051,916) (1,051,916)
--------- -------- ----------------- ------------------- ------------ -----------
Balance at December 31, 1999
3,449,000 $ 3,449 $ 753,326 $ (75,000) $(1,316,077) $ (634,302)
========= ======== ================= =================== ============ ===========
</TABLE>
See Notes to financial statements.
<PAGE>F-5
RECOM MANAGED SYSTEMS, INC.
(A Development Stage Company)
Statements of Cash Flows
<TABLE>
<S> <C> <C> <C>
Cumulative
Period July 31 period July 31,
1998 (inception) 1998 (inception)
to Year ended to
December 31, December 31, December 31,
1998 1999 1999
---------------- ------------- ----------------
Cash flows from operating activities:
Net loss............................................... $ (79,161) $(1,051,916) $(1,131,077)
Depreciation and amortization expense.................. 6,370 69,369 75,739
Consulting expense..................................... -- 19,070 19,070
Change in assets and liabilities:
Accounts receivable............................... (53,766) (139,896) (193,662)
Inventory......................................... -- (8,194) (8,194)
Other current assets.............................. -- (9,660) (9,660)
Accounts payable.................................. 10,006 56,485 66,491
Accrued professional fees......................... 62,789 19,303 82,092
Accrued payroll, bonuses and benefits............. 22,500 41,085 63,585
Accrued interest.................................. 7,257 22,379 29,636
Deferred revenue.................................. -- 27,856 27,856
---------------- ------------- ----------------
Net cash used in operating activities.......... (24,005) (954,119) (978,124)
---------------- ------------- ----------------
Cash flows from investing activities:
Acquisitions of property and equipment................. -- (180,894) (180,894)
Business acquisitions (Note 3)......................... -- (25,000) (25,000)
---------------- ------------- ----------------
Net cash used in investing activities.......... -- (205,894) (205,894)
---------------- ------------- ----------------
Cash flows from financing activities:
Borrowings from related parties........................ 81,989 458,184 540,173
Payments to related parties............................ -- (92,107) (92,107)
Borrowings on line of credit (Note 5).................. -- 200,000 200,000
Proceeds from notes payable to stockholders............ 190,000 -- 190,000
Payment received on stock subscription................. -- 49,000 49,000
Reverse acquisition (Note 1)........................... (202,443) -- (202,443)
Issuance of stock (Note 8)............................. -- 604,850 604,850
Deferred offering costs................................ (21,686) 21,686 --
---------------- ------------- ----------------
Net cash provided by financing activities...... 47,860 1,241,613 1,289,473
---------------- ------------- ----------------
Net increase in cash........................................ 23,855 81,600 105,455
Cash at beginning of the period............................. -- 23,855 --
---------------- ------------- ----------------
Cash at end of the period................................... $ 23,855 $ 105,455 $ 105,455
================ ============= ================
See notes to financial statements.
</TABLE>
<PAGE>F-6
RECOM MANAGED SYSTEMS, INC.
(A Development Stage Company)
Notes to Financial Statements
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Recom Managed Systems, Inc., (RMSI) a Delaware corporation, engages in the
business of providing information technology desktop services and application
solutions to mid-sized commercial and government entities in the Sacramento
area. 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.
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.
Revenue recognition Information technology consulting service revenues are
recognized in the period services are provided based upon rates established by
contract. Revenue from the sale of information technology products is recognized
upon equipment installation. Billing for internet services in advance of
performance is recorded as deferred revenue.
Concentration of credit risk Financial instruments which potentially expose us
to concentrations of credit risk consist primarily of cash and accounts
receivable. We place temporary cash investments with FDIC-insured financial
institutions in accounts which, at times, may exceed federally insured limits.
We have not experienced any losses in such accounts and accordingly do not
believe we are exposed to any significant credit risk on cash. We generally
require no collateral from our customers but do perform credit evaluations of
our customers' financial condition when we deem it appropriate. Concentrations
of credit risk with respect to accounts receivable consist of approximately 32%
of the accounts receivable balance at December 31, 1999 due from one customer,
and are generally limited due to the credit-worthiness of the customers. No
provision for doubtful accounts has been recorded during the period from July
31, 1998 (inception) to December 31, 1998, the year ended December 31, 1999 or
for the cumulative period July 31, 1998 to December 31, 1999.
Concentration of revenues Total revenue from a single customer accounted for
100% of information technology consulting services revenue for the period from
July 31, 1998 (inception) to December 31, 1998. Total revenue from three
customers accounted for approximately 74% of information technology consulting
services revenue for the year ended December 31, 1999.
Inventory Inventory consists of computer components, stated at the lower of cost
(determined on the average cost basis) or market.
<PAGE>F-7
Property and equipment Property and equipment is recorded 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
currently ranging from one to three years.
Stock-based compensation We account for our stock option plan in accordance with
the provisions of Accounting Principles Board (APB) No. 25, "Accounting for
Stock Issued to Employees," and comply with the disclosure provisions of
Statement of Financial Accounting Standard (SFAS) No. 123, "Accounting for
Stock-Based Compensation." Under APB No. 25, compensation cost is recognized
based on the difference, if any, on the date of grant between the fair value of
our stock and the amount an employee must pay to acquire the stock.
Goodwill Goodwill is amortized on a straight-line basis over 15 years.
Advertising Advertising is expensed to operating exepenses as incurred.
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 our 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 (inception) to December 31, 1998 and for the
year ended December 31, 1999, we generated a federal and state net operating
loss of approximately $75,000 and $1,050,000, respectively. These losses can be
used to offset future taxable income through the year 2019 and 2006 for federal
and state purposes, respectively. We have recorded a full valuation allowance
for the deferred tax asset related to these operating losses.
Earnings per share Basic net loss per share is computed on the weighted average
number of shares of common stock outstanding during each period. The weighted
average number of shares outstanding do not include potentially dilutive
instruments including stock options and warrants as we have reported a loss from
operations for the period from July 31, 1998 (inception) to December 31, 1998,
the year ended December 31, 1999 and the cumulative period from July 31, 1998
(inception) to December 31, 1999.
Reclassifications Reclassifications have been made to the 1998 financial
statements to conform to the 1999 presentation.
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. We have had a limited operating
history, are in the development stage, and, at December 31, 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.
<PAGE>F-8
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 RMSI's completion of an equity offering, (3) issuance of
5,000 shares of common stock valued at $6,250, 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 balance at December 31, 1999 was $145,693 and
is recorded as a payable due to related parties. At December 31, 1999, there was
$1,821 in accrued interest relating to this note payable.
The allocation of the 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.......................... 88,298
---------
Cost attributable to intangible assets.................... $ 205,752
=========
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 for the year ended December 31, 1999.
The resulting intangible assets have been allocated to goodwill and are being
amortized on a straight line basis over 15 years. At December 31, 1999
accumulated amortization was $7,555.
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):
Period from
May 26, 1998 to Year ended
December 31, 1998 December 31, 1999
------------------ ------------------
Revenues ......................... $ 383,084 $ 1,626,037
Operating loss.................... (118,539) (982,977)
Net loss ......................... (148,331) (1,024,972)
Basic loss per share.............. (0.06) (0.33)
<PAGE>F-9
4. PROPERTY AND EQUIPMENT
Property and equipment, net consists of the following at December 31, 1999:
Computer equipment......................................... $ 151,174
Software................................................... 108,674
Furniture and equipment.................................... 9,000
------------
268,848
Less accumulated depreciation.............................. (67,791)
------------
201,057
Equipment not placed in service............................ 20,000
------------
$221,057
============
5. LINE OF CREDIT AGREEMENT
In May 1999, we entered into a line of credit agreement with a bank with a
maximum borrowing capacity of $200,000. The agreement matures in May 2000; is
secured by all accounts receivable, inventory, property and equipment; and bears
interest at the prime rate. At December 31, 1999, we have borrowed $200,000
against the line of credit to fund general development and operating expenses.
6. RELATED PARTY TRANSACTIONS
We lease our office space subject to a month-to-month lease agreement from Recom
Technologies, a company majority owned by officers and directors of RMSI. We
recorded $7,880 and $47,280 in lease expense for the period from July 31, 1998
(inception) to December 31, 1998 and the year ended December 31, 1999,
respectively.
We also leased certain employees and were provided with administrative support
by Recom Technologies. We recorded $51,540 and $0 cost of sales and $22,569 and
$63,778 operating expenses for the period from July 31, 1998 (inception) through
December 31, 1998 and the year ended December 31, 1999, respectively, related to
these services. In addition to these services, Recom Technologies has advanced
RMSI $210,000 as of December 31, 1999. We included $32,891 in revenue for the
year ended December 31, 1999 from Recom Technologies.
We have a due to related parties of $515,173 related to the above costs and
advances and $195,693 due to Valley relating to the acquisiton.
<PAGE>F-10
7. NOTES PAYABLE TO STOCKHOLDERS
Notes payable to stockholders consist of the following at December 31, 1999:
<TABLE>
<S> <C> <C>
Interest
Rate Payable
--------- ------------
Recom Technologies, unsecured, monthly interest
only payments, due on demand 10.00% $ 20,000
Various stockholders, unsecured, monthly interest only payments, original
maturity date of August, 1999 or
the closing date of the second private placement offering 10.00% 170,000
-----------
$ 190,000
===========
</TABLE>
At December 31, 1999, there is $26,257 in accrued interest on these notes
payable.
It is not practicable to determine the fair value of notes payable to
stockholders due to their related party nature.
8. STOCKHOLDERS DEFICIT
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 December 31, 1999, we have received $49,000 which has been recorded
against the stock subscriptions receivable. Subsequent to year end the
transaction was renegotiated to reflect that 200,000 shares were issued for a
total consideration of $49,000 (received as of December 31, 1999) and $75,000
subsequently received in January, 2000. We have recorded the transaction based
on the renegotiated agreement.
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, we issued 75,000 shares as compensation in connection with a
corporate advisory agreement.
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.
In January 1999, we issued 10,000 shares of common stock to two directors as
compensation for their service.
<PAGE>F-11
9. STOCK OPTIONS
In January 1999, we adopted the 1998 Stock Option Plan providing for the
granting of options to purchase shares of our common stock to key employees,
directors, officers and consultants as designated by our Board of Directors.
Under the plan, we are 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.
No compensation cost has been recognized in connection with option grants. Had
compensation cost for the options issued under our plan been based on the fair
value at the grant dates, as described in SFAS 123, our net loss would not have
been materially different from the loss reported in the financial statements.
Under SFAS 123, the fair value of each option grant is estimated on the date of
grant using the minimum value option-pricing model considering the following
weighted average assumptions: (a) an expected life of 2 years , (b) risk-free
interest rate of 5.35%, (c) expected volatility ranging from 12% to 50% and (d)
0% dividend yield. The weighted-average fair value of options granted using the
minimum value option pricing model was $3,833 in 1999.
10. COMMITMENT
In August 1998, we entered into a sales agreement with Pacific Bell Internet
Services ("PBI") in which PBI will provide us with internet access services. The
sales agreement requires us to pay PBI $907 per month and expires in July 2001.
The schedule of future minimum payments required under the above agreement is as
follows:
Year Ending December 31: Amount
------------------------ ------------
2000 $ 10,884
2001 6,349
------------
$ 17,233
============
11. PENSION PLAN
We established a 401(k) savings plan during 1999, which covers substantially all
employees of RMSI. 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). We make 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 RMSI's matching contributions. For the year
ended December 31, 1999 we contributed $14,532.
<PAGE>F-12
12. SUPPLEMENTAL DISCLOSURES REGARDING CASH FLOWS
For the year ended December 31, 1999, non-cash investing and financing
activities consist of $88,298 in tangible assets and $205,752 in goodwill for
the purchase of Valley which was acquired through debt of $262,800, cash of
$25,000 and the issuance of 5,000 shares of common stock valued at $6,250 Also,
a $124,000 note receivable was acquired for issuance of common stock
subscriptions, of which $75,000 was still outstanding at December 31, 1999 (See
Note 13).
For the period of July 31, 1998 (inception) to December 31, 1998, non-cash
investing and financing activities consisted of the issuance of 2,200,000 shares
of common stock in exchange for assets with a book value of $20,048.
During the year ended December 31, 1999, we issued 85,000 shares in exchange for
consulting services valued at $19,070.
Interest expense paid for the year ended December 31, 1999 amounted to $18,433.
13. SUBSEQUENT EVENTS
In January, we received an additional $75,000 on the stock subscriptions
receivable. In March 2000, the agreement was modified and 200,000 shares of
common stock were issued to the investors of the foreign corporations in
exchange for the previous advances of $49,000 and $75,000.
In February 2000, we signed a lease for office space and internet services for
$4,543 per month with a related party. The new lease run through January 2001.
Executive Employment Agreement
This AGREEMENT is entered into as of November 11, 1998, by and between RECOM
TECHNOLOGIES, Incorporated ("RTI"), a California Corporation, JOHN C. EPPERSON,
JR. ("Manager") and RECOM MANAGED SYSTEMS, INCORPORATED, a Delaware Corporation,
("RECOM").
WHEREAS, RECOM desires to engage and to obtain the benefit of the services of
Manager in the performance of the activities hereinafter set forth;
WHEREAS, Manager is an employee of RTI;
WHEREAS, Manager and RTI desire to provide RECOM with the benefit of Manager's
services;
NOW, THEREFORE, IN CONSIDERATION of the mutual promises and agreements herein
contained, RTI, Manager and RECOM agree as follows:
1. Services. Manager shall provide for RECOM a full range of managerial
services in the capacity of President and Chief Executive Officer of RECOM.
Manager shall be responsible for implementing the policies and directives of the
board of directors of RECOM. He will establish corporate goals and regularly
report progress to the board. Manager is provided broad authority with regard to
corporate operations and is empowered to commit the corporation as necessary to
implement the directives of the board of directors. Manager represents and
warrants to RECOM that he possesses the skill, expertise and experience
reasonably required to perform adequately and fully the services and that the
services to be provided hereunder will be of quality reasonably expected of any
manager of a similar company.
2. Term. The term of this agreement shall commence November 11, 1998, and
shall continue for 36 months. Thereafter, it shall continue on a month-to-month
basis unless terminated by mutual agreement of all parties.
3. Payment. RECOM shall pay to RTI the rate of $100 per hour. Manager agrees
to devote the time necessary to support RECOM's managerial requirements that are
estimated to require 24 hours per week. Invoices shall be submitted bi-weekly
and payment for the services will be made on a Net 15 basis.
4. Participation in RECOM Incentive Stock Option Plan. Upon execution of this
agreement, Manager shall be entitled to participate in the RECOM Incentive Stock
Option Plan. He will be issued options for 100,000 shares of RECOM common stock
in accordance with terms of the plan. Option shares will be vested at the rate
of 20% per year for five years.
5. Benefits. Except for participation in the RECOM Incentive Option Plan,
Manager is not entitled to participate in the RECOM benefits program. All fringe
benefits expenses are the responsibility of RTI.
<PAGE>
6. Expenses. Manager is entitled to reimbursement for all reasonable expenses
that are associated with the performance of his duties and President and CEO.
Requests for reimbursement may be submitted directly to the accounting and
finance office of RECOM. Any expense that is not considered normal and customary
must be first presented to the board of directors for approval.
7. Terms of Engagement.
A. RTI agrees that during the term of this Agreement and for one year
thereafter, it will not solicit business from any RECOM client without
the prior written consent of RECOM.
B RECOM agrees that during the term of this Agreement and for one year
thereafter, it will not solicit business from any RTI client without
the prior written consent of RTI.
5. No Assignments. It is mutually acknowledged that this agreement
contemplates the services of Manager and, accordingly, neither this Agreement
nor any right hereunder of interest herein may be assigned, transferred to or
otherwise delegated by RTI without the express prior written consent of RECOM.
6. Insurance. RECOM shall provide Directors & Officers liability insurance for
the Manager. RTI shall be responsible for all other insurance required or
desired (including Workman's Compensation) at no direct cost to RECOM.
7. Severability. If any term or provision of this Agreement shall be found by
a court of competent jurisdiction to be illegal or otherwise unenforceable, the
same shall not invalidate the whole of this Agreement, but such term or
provision shall be deemed modified to the extent necessary on the court's
opinion to render such term or provision enforceable, and the rights and
obligations of the parties shall be construed and enforced accordingly,
preserving to the fullest permissible extent the agreements of the parties
herein set forth.
8. Notices. Any notices in connection with the subject matter of this
agreement shall be in writing and shall be effective when delivered personally
to the other party(s) for whom intended, or five (5) days following deposit of
the same item into the United States mail, certified mail, return receipt
requested, first class postage prepaid, addressed to such party at the address
set forth below its signature to this Agreement. Any party may designate a
different address by notice to the other given in accordance herewith.
10. Complete Agreement. This Agreement and all appendices attached hereto
contain the entire integrated agreement between the parties hereto with respect
to the matters covered herein. No variations, modifications or changes herein or
hereof shall be binding upon either party hereto unless set forth in writing
duly executed by such party.
11. Choice of Law. This Agreement and the obligations of the parties hereunder
shall be interpreted, construed and enforced in accordance with the laws of the
State of California. If any legal action is necessary to enforce the terms of
this agreement, the prevailing party shall be entitled to reasonable attorney
fees in addition to any other relief to which he may be entitled.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
date first written above.
RECOM TECHNOLOGIES, INCORPORATED (RTI)
By: _______________________________________
David Lawrence
Title: Vice President
Address: 2412 Professional Drive
Roseville, CA 95661
RECOM MANAGED SYSTEMS, INCORPORATED (RECOM)
By: _______________________________________
Jack G.K. Lee
Title: Secretary
Address: 960 Saratoga Avenue, Suite 210
San Jose, CA 95129
MANAGER
By: ________________________________________
John C. Epperson, Jr.
Address: 2412 Professional Drive
Roseville, CA 95661
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE 10-KSB
FOR THE YEAR ENDED DECEMBER 31, 1999, FOR RECOM MANAGED SYSTEMS, INC., AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 105,455
<SECURITIES> 0
<RECEIVABLES> 193,662
<ALLOWANCES> 0
<INVENTORY> 8,194
<CURRENT-ASSETS> 316,971
<PP&E> 288,848
<DEPRECIATION> (67,791)
<TOTAL-ASSETS> 736,225
<CURRENT-LIABILITIES> 1,370,527
<BONDS> 200,000
0
0
<COMMON> 3,449
<OTHER-SE> (637,751)
<TOTAL-LIABILITY-AND-EQUITY> 736,225
<SALES> 290,889
<TOTAL-REVENUES> 1,307,878
<CGS> 309,414
<TOTAL-COSTS> 1,137,345
<OTHER-EXPENSES> 1,181,637
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 40,812
<INCOME-PRETAX> (1,051,916)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,051,916)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,051,916)
<EPS-BASIC> (0.34)
<EPS-DILUTED> (0.34)
</TABLE>
