<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(Mark One)
[X] Quarterly Report pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934
For the Quarterly period ended March 31, 1999
or
[ ] Transition Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from _______ to _______
Commission file number 000-21907
RACOM SYSTEMS, INC.
(Exact name of small business issuer as specified in its charter)
DELAWARE 84-1182875
-------- ----------
State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
P. O. BOX 3224, BOULDER, COLORADO 80307-3224
--------------------------------------------
(Address of principal executive offices)
(303) 771-2077
--------------
(Issuer's telephone number)
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.
Yes X No
There are 2,987,230 shares of the registrant's common stock, $.01 par value
outstanding as of May 14, 1999.
<PAGE>
RACOM SYSTEMS, INC.
FORM 10-QSB
INDEX
<TABLE>
Part I Financial Information Page
<S> <C>
Item 1. Balance Sheets as of March 31, 1999 and December 31, 1998 3
Statements of Operations for the three months ended
March 31, 1999 and 1998 4
Statements of Cash Flows for the three months ended
March 31, 1999 and 1998 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
Part II Other Information and Signatures 9
</TABLE>
2
<PAGE>
RACOM SYSTEMS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---------------- ----------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 33,733 $ 383,866
Accounts receivable-trade -- 34,947
Accounts receivable-related parties -- 1,027
Inventory -- 4,176
Prepaid expenses and other -- 40,675
--------------- ---------------
Total current assets 33,733 464,691
--------------- ---------------
PROPERTY AND EQUIPMENT:
Machinery and equipment -- 467,448
Furniture and fixtures -- 58,227
Leasehold improvements -- 3,328
--------------- ---------------
-- 529,003
Less-Accumulated depreciation -- (488,470)
--------------- ---------------
-- 40,533
--------------- ---------------
TECHNOLOGY LICENSE, from related party, net of accumulated
amortization and loss from impairment of $2,400,000 as of
March 31, 1999 and December 31, 1998 -- --
--------------- ---------------
33,733 505,224
--------------- ---------------
--------------- ---------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities 236,097 247,532
Accounts payable-related parties 72,800 72,800
Capital lease obligation 12,734 13,341
--------------- ---------------
321,631 333,673
--------------- ---------------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 40,000,000 shares authorized,
2,987,230 shares issued and outstanding 29,872 29,872
Preferred stock, $.01 par value, 10,000,000 authorized in 1999,
no shares issued and outstanding -- --
Additional paid-in capital 17,210,296 17,210,296
Accumulated deficit (17,528,066) (17,068,617)
--------------- ---------------
Total stockholders' equity (287,898) 171,551
--------------- ---------------
Total liabilities and stockholders' equity $ 33,733 $ 505,224
--------------- ---------------
--------------- ---------------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
3
<PAGE>
RACOM SYSTEMS, INC.
STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
--------------- ---------------
<S> <C> <C>
REVENUES
Product sales $ 23,086 $ 27,178
Product sales-related parties -- 37,327
License revenues -- 1,000,000
-------------- --------------
23,086 1,064,505
COST OF REVENUES 6,799 36,198
-------------- --------------
GROSS MARGIN 16,287 1,028,307
-------------- --------------
OPERATING EXPENSES
Research and development 128,117 266,748
General and administrative 390,470 315,606
Sales and marketing -- 245,973
Amortization expense -- 39,411
-------------- --------------
518,587 867,738
-------------- --------------
INCOME (LOSS) FROM OPERATIONS (502,300) 160,569
OTHER INCOME (EXPENSE)
Interest expense (215) (713)
Interest income 1,044 17,722
Other 42,022 980
-------------- --------------
NET INCOME (LOSS) $ (459,449) $ 178,558
-------------- --------------
-------------- --------------
NET (LOSS) INCOME PER SHARE - BASIC AND DILUTED $ (0.15) $ 0.06
-------------- --------------
-------------- --------------
WEIGHTED AVERAGE SHARES OUTSTANDING 2,987,230 2,944,019
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
RACOM SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
---------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (459,449) $ 178,558
Adjustments to reconcile net loss to net cash used in operating activities-
Depreciation and amortization 12,533 58,559
Reserve for uncollectible accounts 4,810 --
Decrease (increase) in-
Accounts receivable 31,164 (8,438)
Inventory 4,176 (31,509)
Prepaid expenses and other 40,675 (22,678)
Increase (decrease) in-
Accounts payable and accrued liabilities (11,435) (19,798)
Accounts payable-related parties -- (20,675)
--------------- ---------------
Net cash provided by (used in) operating activities (377,526) 134,019
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment -- (34,976)
Proceeds from sale of property and equipment 28,000 --
--------------- ---------------
Net cash used in investing activities 28,000 (34,976)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock -- 60,000
Payments on capital lease obligation (607) (943)
--------------- ---------------
Net cash provided by (used in) financing activities: (607) 59,057
--------------- ---------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (350,133) 158,100
CASH AND CASH EQUIVALENTS, beginning of period 383,866 1,198,567
--------------- ---------------
CASH AND CASH EQUIVALENTS, end of period $ 33,733 $ 1,356,667
--------------- ---------------
--------------- ---------------
Supplemental disclosure of cash flow information:
Cash paid during the period for-
Interest $ 215 $ 713
--------------- ---------------
--------------- ---------------
Income taxes $ -- $ --
--------------- ---------------
--------------- ---------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
RACOM SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1999
Note 1 - Basis of Presentation
The accompanying unaudited financial statements have been prepared without
audit pursuant to the rules and regulations of the Securities and Exchange
Commission. The financial statements reflect all adjustments which, in the
opinion of management, are necessary to present fairly the financial
position, results of operations and cash flows of Racom Systems, Inc. as of
March 31, 1999 and 1998 and for the periods then ended. Operating results for
the three month period ended March 31, 1999 are not necessarily indicative of
the results that may be expected for the year ended December 31, 1999.
The unaudited financial statements should be read with the complete financial
statements and footnotes thereto included in the Company's Form 10-KSB for
the year ended December 31, 1998 previously filed with the Securities and
Exchange Commission.
As reflected in the accompanying financial statements, the Company has
generated substantial operating losses since inception and has not generated
sufficient revenues to fund its operations. During 1998, the Company
experienced significant cash flow deficits and liquidity shortages and funded
its operations through the sale of a non-exclusive sublicense of its
technology and a capital contribution from Ramtron International Corporation
("Ramtron"), one of the Company's principal stockholders, which was received
in consideration of the Company reconveying to Ramtron its rights to
sublicense the ferroelectric technology to two additional licensees. In March
1999, the Company announced that it was unable to continue funding operations
and that most of its employees had been furloughed for an indefinite period
of time. As of March 31, 1999, the Company has entered a period whereby its
primary function will be to collect future royalties, if and when receivable,
pursuant to the Company's existing RFID technology licenses to three
multinational semiconductor companies, to collect license fees from
sublicenses of the Company's technology to be sold by Ramtron, and to
complete existing contracts. There can be no assurance that royalties will
become due in the future or that Ramtron will be able to sell additional
sublicenses of the Company's technology. These factors, among others, raise
substantial doubt about the ability of the Company to continue as a going
concern.
Note 2 - Nasdaq Listing
In October 1998, the Company received notification from Nasdaq regarding the
continued listing of its stock because the Company's common stock failed to
maintain a closing bid price greater than or equal to $1.00. On March 8,
1999, the Company received another notification from Nasdaq regarding its
continued listing because the Company failed to maintain the minimum required
market value of the public float of $1,000,000. On April 16, 1999, the
Company's common stock was delisted from The Nasdaq SmallCap Market and since
that date has traded on the OTC Bulletin Board.
Note 3 - Stock Split
On March 1, 1999, the Company effected a reverse stock split of the Company's
common stock on the basis of one share for each four and one-half shares. The
outstanding and weighted average number of shares of common stock, per share
data and warrant amounts in the financial statements have been adjusted to
reflect the impact of the stock split for all periods presented. The
authorized number of shares was not split.
Note 4 - Preferred Stock
On January 29, 1999, the stockholders of the Company approved an amendment to
the Company's Certificate of Incorporation authorizing the Board of Directors
to issue up to 10,000,000 shares of preferred stock, $0.01 par value per
share. The Board of Directors is authorized to issue the preferred stock in
series, establish the number of shares in each series and fix the
designation, voting power, other powers, preferences, rights, limitations and
restrictions of each series.
6
<PAGE>
Note 5 - Warrants
In December 1996, the Company issued 57,778 warrants to purchase common stock
at $26.73 per share in connection with bridge financing. In March 1997, the
Company issued 333,333 warrants to purchase common stock at $26.73 per share
in connection with the Company's initial public offering. These warrants
could be exercised for a two-year period after March 12, 1997, the effective
date of the initial public offering. The warrants expired on May 12, 1999 and
may no longer be exercised.
Note 6 - Subsequent Events
On May 17, 1999, the Company's Board of Directors approved entering into a
letter of intent and a common stock purchase agreement, subject to certain
contingencies, for the sale of Racom common stock in anticipation of the spin
out of the net assets of Racom from the public company.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Statements contained in this Report which are not historical in nature are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements can be
identified by the use of forward-looking terminology such as "believes,"
"expects," "may," "should," or "anticipates" or the negative thereof or other
variations thereon or comparable terminology, or by discussions of strategy.
Such forward-looking statements involve certain risks and uncertainties that
could cause actual results to differ materially from anticipated results.
These risks and uncertainties include regulatory constraints, changes in laws
or regulations governing the Company's products and international trade, the
ability of the Company to market successfully its products in an increasingly
competitive worldwide market, changes in the Company's operating strategy,
failure to consummate or successfully integrate product developments, the
general economy of the United States and the specific global markets in which
the Company competes, the availability of financing from internal and
external sources and other factors as may be identified from time to time in
the Company's filings with the Securities and Exchange Commission or in the
Company's press releases. No assurance can be given that the future results
covered by the forward-looking statements will be achieved. Other factors
could also cause actual results to vary materially from the future results
covered in such forward-looking statements.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO
THE THREE MONTHS ENDED MARCH 31, 1998
REVENUES. Revenues decreased 98% to $23,000 for the three months ended March
31, 1999 from $1,065,000 for the three months ended March 31, 1998. In the
first quarter 1998, the Company received $1,000,000 of license revenues from
signing a sublicense agreement with Hitachi. No such revenue was received in
the first quarter 1999.
COST OF REVENUES AND GROSS MARGIN. As a percentage of revenues, gross margin
decreased to 70% in the first quarter 1999 from 97% in the first quarter
1998. During the first quarter 1998, the license revenues of $1,000,000 have
no associated direct costs.
RESEARCH AND DEVELOPMENT EXPENSES ("R&D"). R&D decreased $139,000 from
$267,000 in the first quarter 1998 to $128,000 in the first quarter 1999. The
decrease is primarily due to a reduction of personnel in the fourth quarter
of 1998 and to the Company's furloughing all of the development personnel in
March 1999.
GENERAL AND ADMINISTRATIVE EXPENSES ("G&A"). G&A expenses increased $74,000
from $316,000 in the first quarter 1998 to $390,000 in the first quarter
1999. The increase is primarily due to fees paid in the first quarter of 1999
7
<PAGE>
to investment banking firms and consultants who were assisting the Company in
locating debt or equity financing and a potential strategic merger partner.
SALES AND MARKETING EXPENSES. Sales and marketing expenses decreased $246,000
to zero in the first quarter of 1999 due to the layoff of all sales and
marketing personnel during the fourth quarter of 1998.
AMORTIZATION EXPENSE. The Company's primary asset is a technology license
related to the design and manufacture of its Smart card products. In the
fourth quarter of 1998, the Company determined that its investment in the
technology license was impaired due to the Company's current financial
position and its inability to fund operations. Therefore, the Company wrote
off the remaining book value of the technology license in December 1998 and,
accordingly, no amortization expense was recorded in the first quarter 1999.
OTHER INCOME (EXPENSE). During the first quarter 1999, the Company earned
$1,000 of interest income compared to $18,000 of interest income in the first
quarter 1998. This reduction is a direct result of less funds available for
investment. Other income of $42,000 in the first quarter 1999 results from
the reversal of an accrual for warranty work.
LIQUIDITY AND CAPITAL RESOURCES
In March 1999, the Company announced that it was unable to continue funding
operations and that most of its employees had been furloughed for an
indefinite period of time. As of March 31, 1999, the Company has entered a
period whereby its primary function will be to collect future royalties if
and when receivable pursuant to the Company's existing RFID technology
licenses to three multinational semiconductor companies, to collect license
fees from sublicenses of the Company's technology to be sold by Ramtron, one
of the Company's principal stockholders, and to complete existing contracts..
There can be no assurance that royalties will become due in the future or
that Ramtron will be able to sell additional sublicenses of the Company's
technology.
On May 17, 1999, the Company's Board of Directors approved entering into a
letter of intent and a common stock purchase agreement, subject to certain
contingencies, for the sale of Racom common stock in anticipation of the spin
out of the net assets of Racom from the public company. There can be no
assurance that the agreements will be signed or that the sale of stock will
be successfully concluded.
In addition to the above proposed transaction, the Company is currently
pursuing business opportunities with companies utilizing the Company's core
ferroelectric memory and radio frequency technologies. If another transaction
is completed it would provide the Company with additional product sales
and/or license income; however, there can be no assurance that any of these
opportunities will be successfully consummated.
These factors, among others, raise substantial doubt about the ability of the
Company to continue as a going concern.
YEAR 2000 DISCLOSURE
The Year 2000 issue exists because many computer systems and applications
currently use two-digit fields to designate a year. As the century date
change occurs, date-sensitive systems will recognize the year 2000 as 1900,
or not at all. This inability to recognize or properly treat the Year 2000
may cause systems to process critical financial and operational information
incorrectly. The Company has completed an internal study to determine the
full scope and related costs to insure that the Company's systems continue to
meet its internal needs and those of its customers. The results of the
internal study indicate that its products are not affected by the Year 2000
issue. As of March 31, 1999, the major system utilized by the Company is its
personal computer accounting system. The Company does not believe that the
Year 2000 issue will have a material effect on this system.
The Company believes that there is a greater risk that its vendors and
customers will be affected by the Year 2000 issue. The Company is currently
unable to assess, and may be unable to accurately determine, the magnitude of
any Year 2000 problems that may reside in the computer and information
systems of its vendors and customers, or the impact that any such problems
could have on the products and services provided by the Company to such
customers.
8
<PAGE>
The Company believes, based upon the progress to date, that its suppliers and
customers are either Year 2000 compliant, or are themselves in an assessment
phase. However, there can be no assurance that all such problems will be
resolved. The occurrence of Year 2000 related failures in the computer and
information systems of any of the Company's significant customers or vendors
could have a material adverse effect on the business, results of operations
and financial position of the Company.
9
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A Special Meeting of Stockholders was held on January 29, 1999. The
following proposals were approved by the stockholders.
Proposal #1 -To amend the Company's Certificate of Incorporation to
reverse split the Company's Common Stock on the basis of one share for
each four and one-half shares outstanding.
<TABLE>
<CAPTION>
For Against Abstain
--- ------- -------
<S> <C> <C>
10,207,782 3,900 200
</TABLE>
Proposal #2--To amend the Company's Certificate of Incorporation to
authorize up to 10,000,000 shares of Preferred Stock of the Company,
par value $0.01 per share, issuable in one or more series.
<TABLE>
<CAPTION>
For Against Abstain Not Voted
--- ------- ------- ---------
<S> <C> <C> <C>
10,185,432 10,000 1,600 14,850
</TABLE>
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a.) Exhibits:
<TABLE>
<CAPTION>
Exhibit No. Title
----------- ---------
<S> <C>
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
Filed March 3, 1999--The Company issued a press release announcing
the completion of a reverse stock split as of March 1, 1999 on the basis of
one share for each four and one-half shares and announcing that, on January
29, 1999, the shareholders of the Company authorized issuance of up to
10,000,000 shares of $0.01 par value per share preferred stock.
Filed March 15, 1999--The Company announced that it was unable to
continue to fund operations, that most of its employees had been furloughed
for an indefinite period of time and that it will enter a period whereby its
primary function will be to collect future royalties if and when receivable
pursuant to existing technology licenses with three semiconductor companies.
10
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
Racom Systems, Inc.
/s/ Arthur B. Rancis
- -------------------------------------- Date: May 21, 1999
Arthur B. Rancis
President, Chief Executive Officer and
Chief Financial Officer
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 33,733
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 33,733
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 33,733
<CURRENT-LIABILITIES> 321,631
<BONDS> 0
0
0
<COMMON> 29,872
<OTHER-SE> (317,770)
<TOTAL-LIABILITY-AND-EQUITY> 33,733
<SALES> 23,086
<TOTAL-REVENUES> 23,086
<CGS> 16,287
<TOTAL-COSTS> 518,587
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 215
<INCOME-PRETAX> (459,449)
<INCOME-TAX> 0
<INCOME-CONTINUING> (459,449)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (459,449)
<EPS-BASIC> (.15)
<EPS-DILUTED> (.15)
</TABLE>
