UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
Commission File Number 33-11795
RECOM MANAGED SYSTEMS, INC.
-----------------------------------------------------
(Exact name of Registrant as specified in its charter)
DELAWARE 87-0441351
-------------------------------- --------------------------------------
(State of other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
2412 Professional Drive
Roseville, California 95661
---------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number including area code: (916) 789-2022
Indicate by check mark whether the issuer (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the issuer was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days:
YES X NO
Common stock, $.001 par value, 3,448,986 issued and outstanding as of May 15,
1999.
<PAGE>2
INDEX
PAGE
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited) .............................3
ITEM 2. Management's Discussion and Analysis .........................7
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings............................................12
ITEM 2. Changes in Securities........................................12
ITEM 3. Defaults upon Senior Securities..............................12
ITEM 4. Submission of Matters to a Vote of Security Holders..........12
ITEM 5. Other Information............................................12
ITEM 6. Exhibits and Reports on Form 8-K.............................12
<PAGE>3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<PAGE>4
RECOM MANAGED SYSTEMS, INC.
(A Development Stage Company)
Balance Sheet
<TABLE>
<S> <C>
March 31,
2000
-------------
ASSETS
Current assets:
Cash $ 14,088
Accounts receivable 72,258
Deferred offering costs --
Inventory 12,186
Other current assets 25,262
-------------
Total current assets 123,794
Property and equipment, net 197,069
Goodwill, net 198,197
-------------
Total assets $ 519,060
=============
LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 127,766
Accrued professional fees 65,646
Accrued payroll, bonuses and benefits --
Accrued interest 33,547
Due to related parties 862,946
Line of credit 200,000
Notes payable to stockholders 190,000
Deferred revenue 29,361
-------------
Total current liabilities 1,509,266
Stockholders (deficit):
Common Stock, $0.001 par value; 50,000,000 shares authorized;
3,249,000 shares issued and outstanding and 200,000 subscribed 3,449
Additional paid-in capital 753,326
Stock subscriptions receivable from stockholders --
Deficit accumulated during the development stage (1,746,981)
-------------
Total stockholders equity (deficit) (990,206)
-------------
Total liabilities and stockholders deficit $ 519,060
==============
</TABLE>
See notes to financial statements.
<PAGE>5
RECOM MANAGED SYSTEMS, INC.
(A Development Stage Company)
Statements of Operations
<TABLE>
<S> <C> <C>
Three months Three months
Ended Ended
March 31, March 31,
2000 1999
----------------- -----------------
Revenues:
Information technology consulting services $ 160,423 $ 171,932
Information technology products 32,378
----------------- -----------------
Total revenues 192,801 171,932
Cost of revenues:
Information technology consulting services 278,069 110,115
Information technology products 25,854
----------------- -----------------
Total cost of revenues 303,923 110,115
----------------- -----------------
Gross profit (111,122) 61,817
----------------- -----------------
Operating expenses:
Development 29,206 118,597
Marketing and selling 53,263 105,475
General and administrative 142,736 56,921
----------------- -----------------
Total operating expenses 225,205 280,993
----------------- -----------------
Operating loss (336,327) (219,176)
Interest expense 13,366 4,685
Sale of assets (8,079)
Provision for income taxes 1,816
----------------- -----------------
Net loss (343,430) (223,861)
================= =================
Basic and diluted loss per share ($0.10) ($0.08)
Basic and diluted weighted average number
Of shares outstanding 3,448,986 2,891,620
</TABLE>
See notes to financial statements.
<PAGE>6
RECOM MANAGED SYSTEMS, INC.
(A Development Stage Company)
Statements of Cash Flows
<TABLE>
<S> <C> <C>
Three months Three months
Ended Ended
March 31, March 31,
2000 1999
----------------- ----------------
Cash flows from operating activities:
Net loss $ (343,430) $ (223,861)
Depreciation and amortization expense 22,641 3,963
Other -- 320
Change in assets and liabilities:
Accounts receivable 121,404 (75,419)
Inventory (3,992)
Other current assets (15,602) (8,000)
Accounts payable 61,275 29,150
Accrued professional fees (16,446) (49,339)
Accrued payroll, bonuses and benefits (63,585) 57,715
Accrued interest 3,911 4,685
Due to Related Party 14,998
Deferred revenue 1,505
----------------- ----------------
Net cash used in operating activities (232,319) (245,788)
Cash flows from investing activities:
Acquisitions of property and equipment -- (88,238)
----------------- ----------------
Net cash used in investing activities -- (88,238)
Cash flows from financing activities:
Borrowings from related parties 247,773
Net proceeds on sale of equipment 913 --
Deferred offering costs -- 21,686
Payments received on stock subscriptions 75,000
Reverse acquisition (Note 1) -- --
Issuance of stock (Note 7) -- 504,850
----------------- ----------------
Net cash provided by financing activities 323,686 526,536
Net increase in cash 91,367 192,510
Cash at beginning of the period 216,365 23,855
----------------- ----------------
Cash at end of the period $ 124,998 $ 216,365
================= ================
</TABLE>
See notes to financial statements
<PAGE>7
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. RMSI provides a modular set of services that cover the entire lifecycle of
desktops, networks and business applications from initial design through
implementation, ongoing maintenance, upgrade and retirement. RMSI is considered
to be in the development stage as limited revenues have been derived from
operations.
RMSI was formed on July 31, 1998 as J2 Technologies, LLC ("J2"), a
California limited liability company. On October 30, 1998, pursuant to a
"Stock-for-Membership Interest Exchange Agreement", J2 acquired all of the
outstanding common stock of an inactive public shell company, Mt. Olympus
Enterprises, Inc. ("MOE"). For accounting purposes the acquisition has been
treated as a recapitalization of MOE with J2 as the acquirer (reverse
acquisition). In connection with the closing of the reverse acquisition, MOE's
name was changed to Recom Managed Systems, Inc. The historical financial
statements prior to October 30, 1998, are those of J2.
2. BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited financial
statements contain all adjustments necessary to present fairly RMSI's financial
position at March 31, 2000 and the results of operations and cash flows for the
quarter ending March 31, 2000. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted. For further
information, refer to our financial statements for the year ended December 31,
1999.
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. RMSI has had a limited operating
history, are in the development stage, and, at March 31, 2000, have negative
working capital as well as an accumulated net deficit. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
The financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amount of
liabilities that might be necessary should RMSI be unable to continue in
existence. Continuation as a going concern is dependent on obtaining necessary
funds to continue operations. There is no assurance, however, that sufficient
funds will be obtained to enable continued operations.
3. BUSINESS ACQUISITION
On June 11, 1999, RMSI 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.
<PAGE>8
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 March 31, 2000 was $118,693 and is
recorded as a payable due to related parties.
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. As of March 31,
2000, an Earnout for the first 12 months was negotiated to be $48,000 as part of
a revised employment agreement with the principal stockholder.
4. LINE OF CREDIT AGREEMENT
In May 1999, RMSI 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, plant and equipment; and bears
interest at the prime rate. At March 31, 2000, RMSI had borrowed $200,000
against the line of credit to fund general development and operating expenses.
5. RELATED PARTY TRANSACTIONS
RMSI leases our office space subject to a month-to-month lease agreement
from Recom Technologies, a company majority owned by officers and directors of
RMSI. RMSI recorded $47,280 in lease expense for the period from July 31, 1998
(inception) to December 31, 1998. Lease expenses for the three months ending
March 31, 2000 were $3,683.
RMSI also leased an employee by Recom Technologies and was provided with
administrative support as part of the monthly rent. RMSI recorded $19,200 for
the three months ending March 31, 2000 for the leased employee. In addition to
these services, Recom Technologies has advanced RMSI $210,000 as of March 31,
2000. RMSI included $3,031 in revenue for the three months ended March 31, 2000
from Recom Technologies.
In February 2000, RMSI signed a lease for office space and internet
services for $3,293 per month with a related party. The lease runs for six
months.
<PAGE>9
6. NOTES PAYABLE TO STOCKHOLDERS
Notes payable to stockholders consist of the following at March 31, 2000:
<TABLE>
<S> <C> <C>
Interest
Rate Payable
---------- -------------
Recom Technologies, unsecured, monthly interest
only payments, due on demand 10.00% $ 20,000
Notes to John C. Epperson, Jr., unsecured, monthly interest
only payments, maturity dates from March - May, 2002 8.50% $ 52,000
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
-----------
$ 242,000
===========
</TABLE>
It is not practicable to determine the fair value of notes payable to
stockholders due to their related party nature.
7. STOCKHOLDERS DEFICIT
In September 1999, RMSI 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 March 31, 2000 RMSI had received $124,000 in proceeds
from the sale. The agreements were renogotiated in March, 2000 and 200,000
shares of common stock was issued in exchange for the money received.
In March 1999, RMSI 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.
During the three months ended March 31, 2000, a total of $75,000 was
received from the foreign owned corporations and is recorded as Additional
paid-in capital. No selling expenses were charged in connection with these
proceeds. Also during this period, $52,000 was loaned to RMSI by a related
party.
8. SUBSEQUENT EVENTS
In January 2000, the four foreign owned corporations advanced an
additional $75,000. On March 6, 2000, RMSI modified the agreement made with
these four foreign owned corporations. The new agreement called for the sale of
a total of 1,652,000 shares of common stock for $826,000 in cash. In addition,
200,000 shares of common stock (Note 7) were issued to the investors of the
foreign corporations in exchange for the previous advances of $124,000. However,
no money has been received to date in accordance with terms of the renegotiated
agreement.
<PAGE>10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Caution about forward-looking statements
This Form 10-QSB includes "forward-looking" statements about future
financial results, future business changes and other events that haven't yet
occurred. For example, statements like we "expect," we "anticipate" or we
"believe" are forward-looking statements. Investors should be aware that actual
results may differ materially from our expressed expectations because of risks
and uncertainties about the future. We do not undertake to update the
information in this Form 10-QSB if any forward-looking statement later turns out
to be inaccurate. Details about risks affecting various aspects of our business
are discussed throughout this Form 10-QSB. Investors should read all of these
risks carefully.
Results of operations
For the quarter ended March 31, 2000, and the quarter ended March 31, 1999,
revenues totaled $192,801 and $171,932 respectively. Revenues during the first
quarter 1999 were earned exclusively from consulting contracts with three
customers. Revenues earned during the quarter ended March 31, 2000, were derived
from a combination of consulting contracts, networking services obtained through
the acquisiton of Valley Networking, Inc. in June 1999, and an electronic
commerce development project. Revenues from consulting contracts decreased in
2000 as the Company focused on providing network and applications services.
The net loss of $343,430 and $223,861 for the quarter ended March 31, 2000,
and the quarter ended March 31, 1999, respectively, can be attributed to
development, marketing and selling, and general and administrative expenses
incurred during our developing stage. Also, the Company was unable to further
develop capabilities or perform an aggressive marketing program due to the
failure of investors to provide funding according to the terms of Stock Purchase
and Sales contracts (see "Capital Financing" below).
According to the terms of acquisition of Valley Networking, the Company is
obligated to make 18 monthly payments of $13,500 to Valley's principal
stockholder, commencing July 1999. These payments amounted to $40,500 during the
quarter ended March 31, 2000.
Capital Financing
On September 15, 1999, we entered into an agreement with four foreign owned
corporations for the sale of 1,333,332 shares of our common stock for $0.75 per
share. Because the purchasers required free-trading shares, we guaranteed the
registration of the shares sold by issuing unsecured promissory notes to the
purchasers in the aggregate amount of $1,000,000 that automatically cancel upon
the effective date of our planned Registration Statement on Form SB-2. The
Company filed the Registration Statement with the Securities and Exhange
Commission on July 26, 1999. At December 31, 1999, we received $49,000 related
to these agreements and an additional $75,000 was received in January 2000. On
March 6, 2000, the agreements were renegotiated. The investors agreed to fund
$826,000 in four weekly payments of no less than $50,000, followed by weekly
payments of no less than $25,000. However, as of March 31, 2000, no payments had
been received. Due to the failure of these investors to provide the funds agreed
to, the Company withdrew its Registration Statement on June 6, 2000.
In March 1999, we completed private placement offerings of 504,000 shares
of common stock resulting in gross proceeds of $630,000. The shares,
representing 16% of our outstanding shares after completion of the offering,
<PAGE>11
were sold to 17 qualifying investors. Net proceeds from the offering, after
selling commissions of $78,650 and direct offering costs of $46,500, totaled
$504,850. The net proceeds from the offering were used to fund our continuing
operations and development. The selling commissions and direct offering costs
were charged directly to equity.
Liquidity and sources of capital
As of March 31, 2000, we had current assets of $123,794 with current
liabilities of $1,509,266 representing a negative working capital of $990,206
compared to a positive working capital of $19,753 for the quarter ended 3/31/99.
Cash used in operating activities, totaling $225,205, for the quarter ended
3/31/00 and $280,993 for the quarter ended 3/31/99, which is attributable to
development, marketing and selling, and general and administrative expenses
incurred during our developing stage.
During the three month period ended 3/31/00, cash flows from financing
activities consisted of $75,000 of net proceeds from the stock purchases
described above and the borrowing of $68,000 from related parties. During the
comparable three-month period in 1999, cash flows from financing activities
include $504,850 from the sale of stock referred to above.
Our capital deficit in late 1999 and continuing through the first quarter
of 2000 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, as of March 6, 2000, the agreements
with these investors were renegotiated; however no payments have been received
to date and the Company does not anticipate any further funding from these
investors.
The Company had projected that investment funding would be used to support
on-going operations and growth such that we would realize a positive cash flow
in the third quarter of 2000 from operations. This investment funding would have
also included debt reduction of approximately $350,000 and negotiating the
conversion of $500,000 related party long-term debt to equity. The combination
of debt payoff and conversion to equity was expected to reduce long-term debt
obligations to approximately $200,000 by the end of 2000. However, since no
investment funding has been received subsequent to the date the investment
agreements were renegotiated, the Company will not be able meet these
projections. Furthermore, due to the loss of this anticipated capital
investment, the Company is no longer able to continue operations.
On April 28, 2000, the Company determined to seek voluntary bankruptcy
protection. The Company is currently evaluating whether to attempt to reorganize
itself in bankruptcy (a Chapter 11 filing) or to liquidate itself (a Chapter 7
filing). Bankruptcy counsel has been retained and a bankruptcy filing is
anticipated in the near future.
Subsequent Events
Subsequent to March 31, 2000 the Company failed to receive any payments
from the foreign investors. It obtained an additional loan of $10,000 from
related parties to meet immediate cash flow requirements and significantly
reduced operational expenses. The Board of Directors authorized the Company to
file for bankruptcy protection with the U.S. Bankruptcy Court in the Eastern
Division of California.
The Company is currently preparing an application for consideration by the
trustee of the bankruptcy court.
<PAGE>12
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no legal proceedings against the Company, or to which the Company
or any of its officers or directors are a party, and to the knowledge of the
Company's management, no claims have been made against the Company for the
quarter covered by this report.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
As of March 31, 2000, the Company was current on all of its debt
obligations. However, due to insufficient cash flow, subsequent to the quarter
ended March 31, 2000, the Company became delinquent in its debt and lease
obligations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
Due to a severe shortage of cash flow and the lack of anticipated capital
infusions, the Company's future is in doubt. As of March 31, 2000, the Company
had reduced its staff and operations and management was evaluating various
options relating to the Company's future business activities including the
possible discontinuance of business operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: None
(b) Reports on Form 8-K: Subsequent to the end of the quarter the
Company filed a Form 8-K reporting an Item 5 event regarding its
intention to file for bankruptcy.
<PAGE>13
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934,
the Registrant has caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RECOM MANAGED SYSTEMS, INC.
Dated: June 19, 2000 /s/ JACK EPPERSON, JR.
-------------------------------------
Jack Epperson, Jr.
President and Chief Financial Officer
