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 June 30, 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
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(Address of Principal Executive Office) (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
July 31, 2000.
<PAGE>2
INDEX
PAGE
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited) ..............................3
ITEM 2. Management's Discussion and Analysis .........................10
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>
June 30,
2000
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ASSETS
Current Assets:
Cash $ 4,209
Prepaid and Deposits $ 16,500
Accounts Receivable $ 29,164
-------------
Total Current Assets $ 49,873
Property and equipment, net $ 116,404
Goodwill, net $ 198,197
-------------
Total assets $ 364,474
LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)
Current Liabilities:
Accounts Payable $ 150,598
Accrued Legal & Accounting $ 82,092
Interest Payable $ 28,078
Line of Credit $ 200,000
Due to Related Party-Current $ 731,282
Notes payable to stockholders $ 190,000
Deferred Revenue $ 11,737
-------------
Total Current Liabilities $ 1,393,787
Stockholders (deficit): $ 4,582
Common stock, $.001 par value; 50,000,000 shares
authorized; 3,448,986 shares issued and outstanding
Additional paid-in capital $ 752,193
Deficit accumulated during the development stage ($185,000)
Retained Earnings-Prior ($1,131,077)
Year-to-Date Earnings ($470,011)
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Total stockholders equity (deficit) ($1,029,313)
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Total liabilities and stockholders deficit $ 364,474
=============
</TABLE>
See notes to financial returns
<PAGE>5
Recom Managed Systems, Inc
(A Development Stage Company)
Income Statement
<TABLE>
<S> <C> <C> <C> <C>
Three months Three months Six Months Ended
Ended June 30, Ended June 30, June 30,
2000 1999 2000 1999
---------------- ---------------- ------------- ------------
Revenues:
Information Tech Consulting Services $ 118,696 $ 167,425 $ 279,119 $ 339,357
Information Technology Products $ 2,592 $ 0 $ 34,970 $ 0
Other Income $ 0 $ 0 $ 9,347 $ 0
---------------- ---------------- ------------- ------------
Total revenues $ 121,288 $ 167,425 $ 323,435 $ 339,357
---------------- ---------------- ------------- ------------
Adjustments to Revenue $ 0 $ 0 ($60,868) $ 0
---------------- ---------------- ------------- ------------
Net Revenue $ 121,288 $ 167,425 $ 262,568 $ 339,357
---------------- ---------------- ------------- ------------
Cost of Revenues:
Information Tech Consulting Services $ 6,000 $ 54,599 $ 284,069 $ 164,714
Information Technology Products $ 4,529 $ 0 $ 30,383 $ 0
---------------- ---------------- ------------- ------------
Total Cost of Revenues $ 10,529 $ 54,599 $ 314,452 $ 164,714
---------------- ---------------- ------------- ------------
Gross Profit $ 110,759 $ 112,826 ($51,884) $ 174,643
---------------- ---------------- ------------- ------------
Operating expenses:
Development $ 0 $ 145,310 $ 29,206 $ 263,907
Marketing and Selling $ 1,412 $ 54,968 $ 54,675 $ 111,889
General and Administrative $ 90,699 $ 183,250 $ 233,435 $ 288,725
---------------- ---------------- ------------- ------------
Total operating expenses $ 92,111 $ 383,528 $ 317,315 $ 664,521
---------------- ---------------- ------------- ------------
Operating profit / (loss) $ 18,648 ($270,702) ($369,199) ($489,878)
---------------- ---------------- ------------- ------------
Interest Expense ($13,336) ($4,737) ($12,521) ($9,422)
Gain/Loss/Deval of Assets $ 8,079 $ 0 ($83,259) $ 0
Provisions for Taxes $ 1,816 $ 0 $ 5,032 $ 0
================ ================ ============= ============
NET PROFIT $ 11,575 ($275,439) ($470,011) ($499,300)
================ ================ ============= ============
Basic and diluted loss per share $ 0.00 ($0.09) ($0.14) ($0.17)
Basic and diluted weighted average 3,448,986 3,133,560 3,448,986 2,975,052
number of shares outstanding
</TABLE>
See notes to financial statements
<PAGE>6
Recom Managed Systems, Inc.
(A Development Stage Company)
Statement of Cash Flows
<TABLE>
<S> <C> <C>
Six months ended Six months ended
June, 30 2000 June, 30 1999
---------------- -----------------
Cash flows from operating activities:
Net loss ($470,011) ($499,300)
Depreciation and amortization expense ($45,998) $ 8,623
Other $ 320
Change in assets and liabilities:
Accounts receivable $ 65,364 ($56,021)
Inventory ($8,194)
Other current assets (Note 3) ($183,504) ($17,679)
Accounts payable $ 69,107 $ 87,854
Accured professional fees $ 32,485 ($62,660)
Accured payroll, bonuses and benefits ($63,586) $ 16,776
Accured interest ($1,558) $ 9,422
Due to related party $ 94,550 ($10,002)
Deferred revenue ($16,119)
---------------- -----------------
Net cash used in operating activities ($527,464) ($522,667)
Cash flows from investing activities:
Acquisitions of property and equipment ($112,405)
Business acquisitions ($25,000)
Cash flows from financing activities:
Borrowings on line of credit $ 50,000
Net proceeds on sale of equipment $ 2,613
Notes payable to stockholders (Note 6) $ 239,000
Issuance of stock $ 75,000 $ 604,850
Deferred offering costs $ 21,686
---------------- -----------------
Net cash provided by financing activites $ 316,613 $ 676,536
Net increase in cash ($210,851) $ 16,464
Cash at beginning of period $ 216,365 $ 23,855
---------------- -----------------
Cash at end of period $ 5,514 $ 40,319
</TABLE>
<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. Until a
reorganization plan is approved by the court, the company has discontinued
operations. 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 June 30, 2000 and the results of operations and cash flows for the
quarter ending June 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. 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.
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
=========
<PAGE>8
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.
In lieu of two installments on the note described above, the company
transferred certain assets to the principal stockholder of Valley in April 2000.
This, together with certain inventory and depreciation adjustments, is reflected
in charges to Other Current Assets.
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 matured in May 2000 and
is secured by all accounts receivable, inventory, plant and equipment; and bears
interest at the prime rate. At June 30, 2000, RMSI had borrowed $200,000 against
the line of credit to fund general development and operating expenses.
5. 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 six months ending June
30, 2000 were $4,433.
6. NOTES PAYABLE TO STOCKHOLDERS AND RELATED PARTIES
Notes payable to stockholders and related parties consist of the following
at June 30, 2000:
<TABLE>
<S> <C> <C>
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, 200 28.50% $ 78,000
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
-----------
$478,000
===========
</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. RMSI had received $124,000 in proceeds from the sale and is
<PAGE>9
recorded as Additional paid-in capital. 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. Pursuant to the renegotiated agreement 200,000 shares of common stock
were issued in exchange for the funds received. No selling expenses were charged
in connection with these proceeds. However, no funds have been received in
accordance with terms of the renegotiated agreement. Also during this period,
$78,000 was loaned to RMSI by a related party
8. SUBSEQUENT EVENTS
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 will be
reflected on future financial statements as Due to Related Party.
<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
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 majority of the second
quarter 2000. Hence, any comparisons of financial information presented herein
with prior periods may not be meaningful.
The Company realized a net profit of $11,575 during the period April 1,
2000 through June 30, 2000. This resulted from residual billings for services
for which Company expenses were previously incurred. A net loss of $470,011 was
realized for the first six months of 2000 compared to a net loss of $499,300 for
the first six months of 1999.
As of June 30, 2000, the Company had ceased conducting any business and
does not expect to commence business operations until after the bankruptcy
reorganization is completed and a new line of business is identified by
management.
Liquidity and sources of capital
In anticipation of receiving $826,000 in capital financing according to
agreements, John Epperson, 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 has discontinued operations
and expenses have been reduced to a minimum. The Company will pay on-going
expenses with liquid assets on hand.
<PAGE>11
Subsequent Events
Comerica Bank, 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 will be reflected on future financial statements as Due to Related
Party
<PAGE>12
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 is seeking to
reorganize under Chapter 11 of the Bankruptcy Code.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
As of June 30, 2000, the Company was 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 has reduced its work force down to only its
President, John Epperson, and the Company is not conducting any business at the
present time. The Company does not anticipate conducting any business until
after a reorganization plan has been approved by the Bankruptcy Court. As a
result of the reorganization plans, the Company does not expect to carry on any
business related to its former activities.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: None
(b) Reports on Form 8-K:
(i) The Company filed a Form 8-K for April 28, 2000 reporting an Item
5 event regarding its intention to file for bankruptcy.
(ii) The Company filed a Form 8-K for June 26, 2000 reporting an Item
3 event regarding filing for bankruptcy protection under Chapter
11 of the U.S. Bankruptcy Code.
<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: August 10, 2000
/s/ JOHN EPPERSON, JR.
-------------------------------------
John Epperson, Jr.
President and Chief Financial Officer
