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 September 30, 2000
Commission File Number 33-11795
RECOM MANAGED SYSTEMS, INC.
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(Exact name of Registrant as specified in its charter)
DELAWARE 87-0441351
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(State of other jurisdiction (I.R.S. Employer Identification Number)
incorporation or organization)
914 Westwood Blvd.
Suite 809
Los Angeles, California 90024
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number including area code: (818) 702-9977
2412 Professional Drive
Roseville, California 95661
(916) 789-2022
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(Former address if changed since last report)
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes [X] No [ ]
Common stock, $.001 par value, 1,320,000 issued and outstanding as of
November 10, 2000.
<PAGE>2
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INDEX
PAGE
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited) ..............................................3
ITEM 2. Management's Discussion and Analysis ..........................................9
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings.............................................................10
ITEM 2. Changes in Securities.........................................................10
ITEM 3. Defaults upon Senior Securities...............................................10
ITEM 4. Submission of Matters to a Vote of Security Holders...........................11
ITEM 5. Other Information.............................................................11
ITEM 6. Exhibits and Reports on Form 8-K..............................................11
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<PAGE>3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<PAGE>4
Recom Managed Systems, Inc.
(A Development Stage Company)
Balance Sheet
(Unaudited)
September 30,
2000
-------------
ASSETS
Current Assets:
Cash $ 5,373
--------------
Total Current Assets $ 5,373
Property and equipment, net $ 72,651
--------------
Total assets $ 78,024
==============
LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)
Current Liabilities:
Accounts Payable $ 150,011
Accrued Legal & Accounting $ 82,092
Interest Payable $ 24,237
Due to Related Party-Current (Note 5) $ 935,710
Notes payable to stockholders (Note 6) $ 190,000
Deferred Revenue $ 11,737
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Total Current Liabilities $ 1,393,787
Stockholders (deficit):
Common stock, $.001 par value; 50,000,000 shares
authorized; 3,448,986 shares issued and outstanding $ 3,449
Additional paid-in capital $ 753,326
Deficit accumulated during the development stage ($2,072,538)
--------------
Total stockholders deficit ($1,315,763)
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Total liabilities and stockholders deficit $ 78,024
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See notes to financial statements
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Recom Managed Systems, Inc
(A Development Stage Company)
Income Statement
(Unaudited)
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<S> <C> <C> <C> <C> <C>
Cummulative
period
Three months Three months Nine months Nine months July 1, 1998
Ended Ended Ended Ended (inception)to
September 30, September 30, September 30, September 30, September 30,
2000 1999 2000 1999 2000
------------- --------------- --------------- -------------- -------------
Revenues:
Information Tech Consulting Services $ 0 $ 271,568 $ 279,119 $ 610,925 $ 1,375,400
Information Technology Products $ 0 $ 27,408 $ 34,970 $ 27,408 $ 325,859
Other Income $ 0 $ 0 $ 9,347 $ 0 $ 9,347
------------- --------------- --------------- -------------- -------------
Total revenues $ 0 $ 298,976 $ 323,436 $ 638,333 $ 1,710,606
------------- --------------- --------------- -------------- -------------
Adjustments to Revenue $ 0 $ 0 ($60,868) $ 0 ($60,868)
------------- --------------- --------------- -------------- -------------
Net Revenue $ 0 $ 298,976 $ 262,568 $ 638,333 $ 1,649,738
------------- --------------- --------------- -------------- -------------
Cost of Revenues:
Information Tech Consulting Services ($572) $ 250,001 $ 283,497 $ 467,715 $ 1,162,968
Information Technology Products $ 0 $ 35,436 $ 30,383 $ 35,436 $ 339,797
------------- --------------- --------------- -------------- -------------
Total Cost of Revenues ($572) $ 285,437 $ 313,880 $ 503,151 $ 1,502,765
------------- --------------- --------------- -------------- -------------
Gross Profit $ 572 $ 13,539 ($51,312) $ 135,182 $ 146,973
------------- --------------- --------------- -------------- -------------
Operating expenses:
Development $ 0 $ 71,661 $ 29,206 $ 335,568 $ 358,822
Marketing and Selling $ 0 $ 63,410 $ 54,675 $ 175,299 $ 286,970
General and Administrative $ 286,817 $ 173,848 $ 520,251 $ 428,323 $ 1,239,633
------------- --------------- --------------- -------------- -------------
Total operating expenses $ 286,817 $ 308,919 $ 604,132 $ 939,190 $ 1,885,425
------------- --------------- --------------- -------------- -------------
Operating profit / (loss) ($286,245) ($295,380) ($655,444) ($804,008) ($1,738,452)
------------- --------------- --------------- -------------- -------------
Interest Expense $ 0 ($17,489) ($12,521) ($26,911) ($60,590)
Gain/Loss on Disposition of Assets $ 0 $ 0 ($83,259) $ 0 ($83,259)
Provisions for Taxes ($205) $ 0 ($5,237) $ 0 ($5,237)
============= =============== =============== ============== =============
NET LOSS ($286,450) ($312,869) ($756,461) ($830,919) ($1,887,538)
============= =============== =============== ============== =============
Basic and diluted loss per share ($0.08) ($0.09) ($0.22) ($0.26) ($0.61)
Basic and diluted weighted average 3,448,986 3,448,986 3,448,986 3,195,990 3,084,554
number of shares outstanding
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See notes to financial statements
<PAGE>6
Recom Managed Systems, Inc.
(A Development Stage Company)
Statement of Cash Flows
(unaudited)
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<S> <C> <C> <C>
Cumulative period
July 1, 1998 (inception)
Nine months ended Nine months ended to September 30,
September 30, 2000 September 30, 1999 2000
------------------ ------------------ ------------------------
Cash flows from operating activities:
Net loss ($756,461) ($830,919) ($1,887,538)
Depreciation and amortization expense $ 72,571 $ 42,381 $ 148,310
Writedown of goodwill $ 188,160 $ 188,160
Bad debts $ 28,966 $ 28,966
Loss and disposition of property & equipment $ 83,259 $ 83,259
Other $ 320 $ 19,070
Change in assets and liabilities:
Accounts receivable $ 164,696 ($19,075) ($28,966)
Inventory $ 8,194 ($32,335) $ 0
Other current assets (Note 3) $ 9,660 ($10,206) $ 0
Accounts payable $ 83,520 $ 27,838 $ 150,010
Accured professional fees $ 0 ($20,828) $ 82,092
Accured payroll, bonuses and benefits ($63,585) ($1,907) $ 0
Accured interest ($5,399) $ 19,052 $ 24,237
Due to related party, net $ 24,844 $ 207,489 $ 472,910
Deferred revenue ($16,119) $ 11,737
------------------ ------------------ ------------------------
Net cash used in operating activities ($177,695) ($618,190) ($707,753)
Cash flows from investing activities:
Acquisitions of property and equipment ($149,255) ($180,894)
Business acquisitions ($25,000) ($25,000)
Proceeds of disposition of property & equipment $ 2,613 $ 2,613
------------------ ------------------ ------------------------
Net cash provided by (used in) investing activities $ 2,613 ($174,255) ($203,281)
Cash flows from financing activities:
Borrowings on line of credit $ 200,000 $ 200,000
Reverse acquisition ($202,443)
Notes payable to stockholders $ 190,000
Issuance of stock $ 75,000 $ 623,600 $ 728,850
Deferred offering costs $ 21,686 $ 0
------------------ ------------------ ------------------------
Net cash provided by financing activites $ 75,000 $ 845,286 $ 916,407
Net increase (decrease) in cash ($100,082) $ 52,841 $ 5,373
Cash at beginning of period $ 105,455 $ 23,855 $ 0
------------------ ------------------ ------------------------
Cash at end of period $ 5,373 $ 76,696 $ 5,373
See notes to financial statements
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<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.
On June 26, 2000, RMSI filed for Chapter 11 bankruptcy protection with the
United States Bankruptcy Court, Eastern District of California. The Company has
significantly reduced its current operations. (See Note 7) During the three
months ended September 30, 2000, the Company recorded valuation allowances
totaling $217,126 to write off goodwill and receivables associated with its
discontinued operation. As a result, any comparisons of financial information
with prior periods may not be meaningful.
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 September 30, 2000 and the results of operations and cash flows for
the quarter ending September 30, 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.
3. LINE OF CREDIT AGREEMENT
In May 1999, RMSI entered into a line of credit agreement with Comerica Bank
with a maximum borrowing capacity of $200,000. The agreement matured in May 2000
and was secured by all accounts receivable, inventory, plant and equipment; and
bears interest at the prime rate. The holder of the Line of Credit note issued a
demand for payment of the outstanding balance of $200,000 plus accrued interest
on July 12, 2000. Because RMSI lacked the cash reserves to pay the note, the
bank issued a demand against Recom Technologies, a related company that had
signed as guarantor on the note. Recom Technologies subsequently paid the
balance. This obligation is reflected on financial statements as Due to Related
Party.
4. RELATED PARTY TRANSACTIONS
RMSI leases its 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, 1999. Lease expenses for the nine months ending
September 30, 2000 were $5,258.
<PAGE>8
5. DUE TO RELATED PARTIES
Obligatons to related parties consist of the following at September 30,
2000:
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Interest
Rate Payable
Recom Technologies, unsecured, monthly interest
only payments, due on demand 10.00% $ 230,000
Notes to John C. Epperson, Jr., unsecured, monthly interest
only payments, maturity dates from March - May, 2002 8.50% $ 78,000
Recom Technologies, outstanding invoices N/A $ 427,710
Recom Technologies, line of credit payoff N/A 200,000
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$ 935,710
============
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It is not practicable to determine the fair value of notes payable to
stockholders due to their related party nature.
6. NOTES PAYABLE TO STOCKHOLDERS AND RELATED PARTIES
Notes payable to stockholders and related parties consist of the following
at September 30, 2000:
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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
============
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It is not practicable to determine the fair value of notes payable to
stockholders due to their related party nature.
7. SUBSEQUENT EVENTS
On October 26, 2000 the United States Bankruptcy Court, Eastern District of
California confirmed a Chapter 11 reorganization plan for the company. Specific
details of the reorganization are presented in a Form 8-K that was submitted
November 9, 2000.
<PAGE>9
ITEM 2. 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
The Company filed for bankruptcy protection on June 26, 2000 with the
U.S. Bankruptcy Court, Eastern District of California. Given insufficient cash,
it had not actively conducted operations during the third quarter 2000. Hence,
any comparisons of financial information presented herein with prior periods may
not be meaningful.
The Company realized no revenues during the period July 1, 2000 through
September 30, 2000 compared to revenues of $298,976 for the comparable quarter
of 1999. The lack of revenues is a result of the Company filing for bankruptcy
and changing its business objectives to developing new lines of business.
The Company reported a reduction in costs of revenue of $572 for the
quarter ended September 30, 2000 compared to costs of $285,437 for the quarter
ended September 30, 1999. The reduction in costs of revenue occurred as a result
of a refund from a supplier. This significant reduction in costs also reflects
the Company's reduced operations due to its bankruptcy.
As a result of the Company's bankruptcy and the anticipated change in
business direction, general and administrative expenses include a write-off of
the Company's remaining accounts receivable in the amount of $28,966 and a
write-off of its remaining goodwill of $188,160. The Company is also eliminating
its prepaid costs and deposits of $16,500, as these amounts have now been
charged against related expenses. As a result of these adjustments, a net loss
of $286,450 was realized for the third quarter of 2000 compared to a net loss of
$312,869 for the third quarter of 1999. These changes have also reduced the
Company's total assets to $78,024 compared to $364,474 for the preceding quarter
ended June 30, 2000. As a result of the confirmation of the Company's
Reorganization Plan and discharge of debts which occurred subsequent to the end
of the third quarter, the Company anticipates removing most of its current
liabilities during the fourth quarter.
As of June 26, 2000, the Company was carrying on minimal business
operations until after the bankruptcy reorganization is completed. For the
foreseeable future, the Company does not expect to reorganize revenues and will
keep operating expenses to a minimum until new lines of business are developed
or acquired.
<PAGE>10
Liquidity and sources of capital
In anticipation of receiving $826,000 in capital financing according to
agreements, John Epperson, former President and CEO, provided personal bridge
loans of $22,000, bringing his total loans to the Company for the year to
$78,000.
As a result of the bankruptcy, the Company is no longer conducting
operations as an Application Service Provider supporting electronic business
applications and expenses have been reduced to a minimum. The Company will pay
on-going expenses with either additional capital investments in or advances to
the Company from its largest stockholder.
Subsequent Events
On October 26, 2000 the United States Bankruptcy Court, Eastern District of
California confirmed a Chapter 11 reorganization plan for the Company. Specific
details of the reorganization are presented in a Form 8-K that was filed
November 9, 2000.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Due to ongoing, insufficient cash flow and/or outside capital
investments, the Company's Board of Directors determined that the Company should
seek bankruptcy protection. On June 26, 2000, the Company voluntarily filed a
petition with the U.S. Bankruptcy Court in the Eastern District of California,
Sacramento Division (Case No. 00-27398-B-11). The Company sought to reorganize
under Chapter 11 of the Bankruptcy Code. On October 26, 2000, the Company's Plan
of Reorganization was confirmed by the Bankruptcy Court. The Plan of
Reorganization became effective on November 6, 2000 and the implementation of
the Plan commenced on that date.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
As of September 30, 2000, the Company was delinquent in its debt and
lease obligations. On July 14, 2000, the Company's line of credit (in the amount
of $200,000) was paid by the guarantor, Recom Technologies, Inc. Recom
Technologies submitted a claim in the Company's bankruptcy proceeding for a like
amount.
The lease obligation was terminated on June 30, 2000 with $2,759.20 in
arrears which was listed as a claim against the Company in its bankruptcy
proceeding.
<PAGE>11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On September 25, 2000, the Company, as debtor in a Chapter 11 bankruptcy
proceeding and pursuant to an order of the Bankruptcy Court, mailed to all
stockholders of record a "Debtor's Proposed Disclosure Statement" and "Debtor's
Proposed Plan of Reorganization." This material was sent to stockholders seeking
their approval of the Proposed Plan of Reorganization. The overwhelming majority
of those stockholders responding, voted in favor of acceptance of the Proposed
Plan of Reorganization.
ITEM 5. OTHER INFORMATION
Due to a severe shortage of cash flow and the lack of anticipated
capital infusions, as of September 30, 2000, the Company had reduced its work
force down to only its President, John Epperson, and the Company was not
conducting any of its former business. Subsequent to the end of the quarter and
as a result of the confirmation of the Company's reorganization plan, the
Company's outstanding common stock was reverse split, effective November 9,
2000, in a ratio of 1 post-split share for each 28.74 shares previously held.
However, no existing shareholder received less than one post-split share.
Pursuant to the Reorganization Plan, the Company also anticipates issuing up to
60,000 shares of common stock to creditors of the Company. In addition,
1,200,000 shares of common stock were issued to Vanguard West LLC which will own
approximately 87% of the outstanding voting stock upon the full implementation
of the Reorganization Plan. The Company's previous officers and directors have
voluntarily resigned and Sim Farar and Arthur Lyons now comprise the officers
and directors of the Company. The Company's business operations will now focus
on identifying and evaluating new lines of business and commercial opportunities
for the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: None
(b) Reports on Form 8-K:
None filed for the period covered by this Report.
<PAGE>12
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: November 16, 2000
/s/ SIM FARAR
-------------------------------------
Sim Farar
President and Chief Financial Officer
