SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
---------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
Commission file number 0-21907
Racom Systems, Inc.
------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 84-1182875
- --------------------------------- -------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
16 W. 32nd Street, Suite 801, New York, NY 100017
- -------------------------------------------- ------------
(Address of Principal Executive Offices) (Zip Code)
(212) 643-2080
--------------
(Registrant's Telephone Number
Including Area Code)
Indicate by check mark whether the Registrant: (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
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes: X No: ___
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of June 30, 1999:
Class Number of Shares Outstanding
- ----- ----------------------------
Common Stock, .01 par value 19,987,230
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<TABLE>
<CAPTION>
INDEX
<S> <C> <C>
Part I Financial Information Page
----
Item 1. Condensed Balance Sheets as of 2
December 31, 1998 and June 30, 1999
Condensed Statements of Operations 3
for the three and six months ended
June 30, 1998 and 1999
Condensed Statements of Cash Flows 4
for the six months ended June 30,
1997 and 1998
Notes to Condensed Financial Statements 5
Item 2. Management's Discussion and Analysis of 6
Financial Condition and Results of Operations
Part II Other Information and Signatures 9
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
RACOM SYSTEM, INC.
BALANCE SHEETS
(Unaudited)
ASSETS June 30, December 31,
1999 1998
------------- -------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 80,303 $ 383,866
Accounts receivable-trade 100,000 34,947
Accounts receivable-related parties - 1,027
Inventory, net of reserve of $199,615 in 1998 - 4,176
Prepaid expense & other - 40,675
------------- -------------
Total Current Assets 180,303 464,691
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
TOTAL ASSSETS 180,303 505,224
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable and accrued liabilities 337,111 247,532
Accounts payable - related parties - 72,800
Capital leaase obligation 12,734 13,341
------------- -------------
Total current liabilities 349,845 333,673
------------- -------------
STOCKHOLDERS' EQUITY
Common stock, $.01 par value, 40,000,000 shares 13,325 1,991
authorized, 1,332,482 shares issued and outstanding
Preferred stock, no par value, 10,000,000 shares - -
authorized in 1999, no shares issued and outstanding
Additional paid-in capital 17,396,843 17,238,177
Accumulated deficit (17,579,710) (17,068,617)
------------- -------------
Total shareholders' equity (169,542) 171,551
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 180,303 $ 505,224
============= =============
</TABLE>
The accompanying notes are an integral part of these
condensed financial statements.
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<PAGE>
<TABLE>
<CAPTION>
RACOM SYSTEMS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended June 30, Six months ended June 30,
1998 1999 1998 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUES
Product Sales $ 65,969 $ - $ 93,147 $ 23,086
Product Sales - related party 6,814 - 44,141 -
License revenues 500,000 - 1,500,000 -
------------- ------------- ------------- -------------
572,783 - 1,637,288 23,086
COST OF REVENUES 39,846 31,711 76,044 38,510
------------- ------------- ------------- -------------
GROSS MARGIN 532,937 (31,711) 1,561,244 (15,424)
OPERATING EXPENSES
Research and development 217,319 - 484,067 128,117
General and administrative 302,896 19,933 618,502 410,403
Sales and marketing 220,611 - 466,584 -
Amortization expense 39,411 - 78,822 -
------------- ------------- ------------- -------------
780,237 19,933 1,647,975 538,520
LOSS FROM OPERATIONS (247,300) (51,644) (86,731) (553,944)
OTHER INCOME (EXPENSE)
Interest expense (482) - (1,195) (215)
Interest income 16,807 - 34,529 1,044
Other (82) - 898 42,022
------------- ------------- ------------- -------------
16,243 - 34,232 42,851
NET LOSS $ (231,057) $ (51,644) $ (52,499) $ (511,093)
============= ============= ============= =============
NET LOSS PER SHARE - BASIC AND DILUTED $ (1.18) $ (0.09) $ (0.27) $ (1.32)
============= ============= ============= =============
WEIGHTED AVERAGE SHARES OUTSTANDING 196,192 576,926 196,192 388,038
------------- ------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these
condensed financial statements.
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<PAGE>
<TABLE>
<CAPTION>
RACOM SYSTEMS, INC.
CONDENSED STATEMENT OF CASH FLOWS
(Unaudited)
ix months ended June 30,
998 1999
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<S> <C> <C>
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net Loss $ (52,499) $ (511,093)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 117,703 12,533
Reserve for uncollectible accounts 8,810
Decrease (increase) in:
Prepaid expenses and other (327) 40,675
Accounts receivables-trade 14,743 27,164
Accounts receivables-related parties 19,136 -
Inventory (21,911) 4,176
Increase (decrease) in:
Accounts payable and accrued liabilities (56,896) 16,779
Accounts payable-related party (20,780) -
---------- ----------
NET CASH USED IN OPERATING ACTIVITIES (831) (400,956)
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of fixed assets (52,171) -
Proceeds from sale of fixed assets - 28,000
---------- ----------
NET CASH FLOWS USED IN INVESTING ACTIVITIES (52,171) 28,000
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 220,000 170,000
Payments on capital lease obligation (1,792) (607)
---------- ----------
NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES 218,208 169,393
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 165,206 (203,563)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,198,567 383,866
---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $1,363,773 $180,303
========== ==========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest 1,195 -
Income taxes - -
</TABLE>
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<PAGE>
RACOM SYSTEMS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 1999
Note 1 - Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared
without audit pursuant to the rules and regulations of the Securities and
Exchange Commission. The condensed financial statements reflect all adjustments
(consisting of only normal recurring accruals) which, in the opinion of
management, are necessary to present fairly the financial position, results of
operations and cash flows or Racom Systems, Inc. as of June 30, 1999 and 1998
and for the periods then ended. Operating results for the three and six month
periods ended June 30, 1999 are not necessarily indicative of the results that
may be expected for the year ended December 31, 1999.
The unaudited condensed 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.
Note 2 - Nasdaq Listing
In October 1998, the Company received notification from Nasdaq regarding the
continuing 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 was 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 and per share
data 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, preference, rights, limitations and restrictions of each
series.
Note 5- Subsequent Events
On July 12, 1999 the Company effected a reverse stock split of the Company's
common stock on the basis of one share for each fifteen shares. The outstanding
and weighted average number of shares of common stock and per share data in
these financial statements have been adjusted to reflect the impact of the stock
split for all period presented. The authorized number of shares was not split.
After the July 12, 1999 reverse split, two investment entities each beneficially
owned 566,666 shares of the Company's common stock, representing in the
aggregate, approximately 85% of the Company's total issued and outstanding
common stock. No other shareholder owned greater than 10% of the Company's total
issued and outstanding shares of common stock.
On July 20, 1999, the Company acquired approximately 99.6% (4,958,000 shares) of
the issued and outstanding capital stock of NewState Capital Co., Ltd., a Korean
corporation ("NewState Capital") which was formerly a subsidiary of NewState
Capital Corp., a New York corporation ("NewState"), in exchange for issuing
8,000,000 shares of the Company's common stock, representing approximately 80%
of the Company's total issued and outstanding shares of common stock, to
NewState. The Company also assumed a $5,000,000 liability of NewState to a bank.
The terms and conditions of the acquisition are more fully set forth in the
Agreement and Plan of Reorganization, dated as of July 14, 1999 (the
"Acquisition Agreement"), by and among the Company, NewState, NewState Capital
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<PAGE>
and a newly formed wholly-owned subsidiary of the Company, NSK Holdings, Inc., a
Delaware corporation ("NSK"), which is incorporated herein by reference to the
Company's Form 8-K filed with the Commission on July 21, 1999. As a result of
the Acquisition Agreement, (i) NewState Capital has become a subsidiary of NSK,
(ii) several new investors acquired 667,000 shares of Racom for $1,000,000
($1.50 per share) pursuant to the terms and conditions of the Common Stock
Purchase Agreement dated July 14, 1999 by and among the Company, Ocean Strategic
Holdings Limited and Zebra Strategic Holdings Limited which is incorporated
herein by reference to the Company's Form 8-K filed with the Commission on July
21, 1999, and (iii) NewState owns 80% of the common stock in the Company.
Accordingly, following the consummation of the Acquisition, NewState controls
the 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 products 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 JUNE 30, 1999 COMPARED TO THE
THREE MONTHS ENDED JUNE 30, 1998
REVENUES. Revenues decreased from $572,783 for the three months ended June 30,
1998 to zero for the three months ended June 30, 1999. In March 1999, the
Company furloughed most of its employees for an indefinite period of time. The
Company received no royalty or license revenues during the second quarter of
1999.
COST OF REVENUES AND GROSS MARGIN. The Company's cost of revenues was $31,711 in
second quarter of 1999, down 20% from $39,846 in second quarter of 1998. As a
percentage of revenues, gross margin was negative in second quarter 1999,
compared to 93.0% in second quarter 1998.
RESEARCH AND DEVELOPMENT EXPENSE ("R&D"). As a result of the Company's
furloughing all of the development personnel in March 1999, the Company incurred
no R&D in second quarter 1999, compared to $217,319 in second quarter 1998.
GENERAL AND ADMINISTRATIVE EXPENSES ("G&A"). G&A expenses decreased $282,963
from $302,896 in the second quarter 1998 to $19,933 in the second quarter 1999.
The decrease is primarily due to the Company's furloughing most of its employees
in March 1999.
SALES AND MARKETING EXPENSES. Sales and marketing expenses decreased from
$220,611 to zero in the second 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
licensed 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 second quarter of 1999.
OTHER INCOME (EXPENSE). The Company received no other income and incurred no
other expense in the second quarter of 1999. In the second quarter of 1998, the
Company received $16,242 in other income, comprising mostly of interest income.
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<PAGE>
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO THE SIX
MONTHS ENDED JUNE 30, 1998
REVENUES. Revenues decreased 99% to $23,086 for the six months ending June 30,
1999 ("Interim 1999") from $1,637,288 for the six months ending June 30, 1998
("Interim 1998"). In March 1999, the Company furloughed most of its employees
for an indefinite period of time. During Interim 1998 the Company received
$1,500,000 in license revenues. The Company received no royalty or license
revenues during Interim 1999.
COST OF REVENUES AND GROSS MARGIN. As a percentage of revenues, gross margin is
negative in Interim 1999 compared to 95% in Interim 1998. During Interim 1998,
the license revenues of $1,500,000 have no associated direct costs.
RESEARCH AND DEVELOPMENT EXPENSE ("R&D"). As a result of the Company's
furloughing all of the development personnel in March 1999, R&D decreased from
$484,067 in Interim 1998 to $128,117 in Interim 1999.
GENERAL AND ADMINISTRATIVE EXPENSES ("G&A"). G&A expenses decreased $208,099
from $618,502 in Interim 1998 to $410,403 in Interim 1999. The decrease is
primarily due to the Company's furloughing most of its employees in March 1999.
SALES AND MARKETING EXPENSES. Sales and marketing expenses decreased from
$466,584 to zero in Interim 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
licensed 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 Interim 1999.
OTHER INCOME (EXPENSE). During Interim 1999, the Company earned $1,044 of
interest income compared to $34,529 of interest income in Interim 1998. This
reduction is a direct result of less funds available for investment. Other
income of $42,000 in Interim 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 June 30, 1999, the Company has entered into 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 and to complete existing contracts. There
can be no assurance that royalties will become due in the future.
On May 17, 1999, the Company's Board of Directors approved entering into a
letter of intent and a common stock purchase agreement (the "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.
The Agreement provided for the sale of an aggregate of 17,000,000 shares of
common stock to two investment entities for a purchase price of $170,000. The
Agreement further provided that (i) four of the six members of the Board of
Directors of the Company would resign, (ii) the size of the Board of Directors
would be reduced to five members, and (ii) three nominees of the two investment
entities would be appointed to the Board of Directors in order to complete the
remaining terms of the resigning directors. The transactions contemplated by the
Agreement was closed on June 17, 1999.
CASH FLOW
The Company had cash and cash equivalents of $383,866 and $80,303 as of December
31, 1998 and June 30, 1999, respectively. During Interim 1999, the Company's
primary source of cash was from the sales of fixed assets and the sale of
17,000,000 shares of restricted common stock at $0.01 per share.
CAPITALIZATION
The Company's capitalization of $171,551 as of December 31, 1998 was comprised
entirely of stockholders' equity, as compared to a deficit of $169,542 of
stockholders' equity as of June 30, 1999. The decrease is attributable to the
net loss of $511,093 during Interim 1999, offset by the sale of 17,000,000
shares of restricted common stock at $0.01 per share.
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<PAGE>
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 June 30, 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 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.
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.
-8-
<PAGE>
PART II. Other Information
Item 1. Legal Proceedings
----------------------
None
Item 2. Changes in Securities and Use of Proceeds
----------------------------------------------------
On June 17, 1999, the Company issued 17,000,000 shares of its
common stock, $0.01 par value per share, at a price of $0.01 per share, to two
investment entities, pursuant to an exemption from registration under the
Securities Act provided by Section 4(2) thereunder. Proceeds of the offering,
aggregating $170,000, were used for the payment of outstanding liabilities and
for general overhead expenses.
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 July 12, 1999. The
following proposal was 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 fifteen shares outstanding.
FOR AGAINST ABSTAIN
--- ------- -------
17,084,741 95,643 2,347
Item 5. Other Information
----------------------
None
Item 6. Exhibits and Reports on Form 8-K
-----------------------------------------
(a) Exhibits:
27 Financial Data Schedule
(b) Reports on Form 8-K
* Filed July 21, 1999 - - The Company announced that it had
acquired approximately 99.6% of the issued and outstanding
capital stock of Newstate Capital Co., Ltd., a Korean
corporation, in exchange for issuing 8,000,000 shares of its
common stock, representing approximately 80% of its total
issued and outstanding shares of common stock, to Newstate
Capital Corp., a New York corporation.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
RACOM SYSTEMS, INC.
By: ________________________________
Alexander T. Shang, Treasurer and
Chief Financial Officer
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<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Appendix A to item 601(c) of Regulation S-K
Commercial and Industrial Companies
Article 5 of Regulation S-X
(in thousands, except per share data)
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 80,303
<SECURITIES> 0
<RECEIVABLES> 100,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 180,303
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 180,303
<CURRENT-LIABILITIES> 349,845
<BONDS> 0
0
0
<COMMON> 13,325
<OTHER-SE> (182,867)
<TOTAL-LIABILITY-AND-EQUITY> 180,303
<SALES> 23,086
<TOTAL-REVENUES> 23,086
<CGS> 38,510
<TOTAL-COSTS> 577,030
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 215
<INCOME-PRETAX> (511,093)
<INCOME-TAX> 0
<INCOME-CONTINUING> (511,093)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (511,093)
<EPS-BASIC> (1.32)
<EPS-DILUTED> (1.32)
</TABLE>
