U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year ended December 31, 2002
Commission File Number 33-11795
RECOM MANAGED SYSTEMS, INC.
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(Exact name of small business issuer as specified in its charter)
Delaware 87-0441351
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4705 Laurel Canyon Boulevard, Suite 203, Studio City, CA 91607
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(Address of principal executive offices)
(818) 432-4560
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(Registrant's telephone number including area code)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: None
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act 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.
[ X ] Yes [ ] No
As of March 24, 2003, the Registrant had 10,416,948 shares of Common Stock,
$.001 Par Value, outstanding, and the aggregate market value of the shares
held by non-affiliates on that date was approximately $10,730,322.
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB: [X]
State issuer's revenues for its most recent fiscal year: $0
Documents incorporated by reference: None
ISSUERS INVOLVED IN BANKRUPTCY PROCEEDING DURING THE PAST FIVE YEARS
Check whether the issuer has 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. [X] Yes [ ] No
PART I
This Annual Report on Form 10-KSB contains forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995. The
statements regarding Recom Managed Systems, Inc. contained in this report that
are not historical in nature, particularly those that utilize terminology such
as "may," "will," "should," "likely," "expects," "anticipates," "estimates,"
"believes" or "plans," or comparable terminology, are forward-looking
statements based on current expectations and assumptions, and entail various
risks and uncertainties that could cause actual results to differ materially
from those expressed in such forward-looking statements.
Important factors known to us that could cause such material differences are
identified in this report and in our "RISK FACTORS" in Item 1. We undertake no
obligation to correct or update any forward-looking statements, whether as a
result of new information, future events or otherwise. You are advised,
however, to consult any future disclosures we make on related subjects in
future reports to the SEC.
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
RECOM Managed Systems, Inc. ("Recom" or the "Company") was formed to
develop, service and manage commercial computer networks both on-site and
remotely via the Internet. Prior to June 26, 2000, the Company provided
services including developing, hosting and supporting Internet-based
applications for electronic business. The Company also became an Application
Service Provider for small and mid-size companies. As a result of the
Company's reorganization in 2000, and the acquisition of certain technology
during September 2002, the Company's new business focuses on researching and
developing technologies that allow for the monitoring and detection of changes
in physiological signals in order to prevent medical complications and
diseases that impact an individual's health.
REORGANIZATION DUE TO BANKRUPTCY
On June 26, 2000, the Company filed a Voluntary Petition for
Reorganization Under Chapter 11 of the Federal Bankruptcy Code in the Eastern
District of California, Sacramento Division. The Company continued to manage
its business as debtor-in-possession subject to the control and supervision of
the Federal Bankruptcy Court for the Eastern District of California (the
"Bankruptcy Court"). Due to the lack of operating capital, the Company
released all of its employees, except for its President, Jack Epperson, and
significantly reduced its business operation.
On September 20, 2000, the Company submitted a Proposed Plan of
Reorganization and Proposed Disclosure Statement to the Bankruptcy Court. On
September 26, 2000, the Company's Plan of Reorganization received preliminary
approval by the Bankruptcy Court and was mailed to all creditors and
shareholders for their approval. Prior to the filing of the Proposed Plan of
Reorganization, a line of credit in the amount of $200,000 plus accrued
interest owed by the Company to Comerica Bank was paid by Recom Technologies,
Inc., a related company that had signed as Guarantor on the line of credit.
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The Plan of Reorganization (referred to as the "Plan") provided for the
treatment of the pre-petition claims by creditors and the interests of
shareholders by dividing them into two classes. The general unsecured
creditors, as Class 1, would share, on a pro rata basis, in any cash assets
available for distribution to creditors. Creditors could elect to receive $500
cash in liquidation of their entire claim. Creditors not electing the $500
payment, would be paid a pro rata share of the net cash assets of the Company
and be issued shares of the Company's common stock pro rata, based upon the
amount of each creditor's claim remaining unpaid after all cash assets had
been disbursed. The maximum number of shares issuable to Class 1 creditors in
recognition of their unpaid claims was 60,000 shares. These shares, when
issued, represented approximately 4.3% of the then outstanding shares of the
Company's common stock.
The Plan also provided for the issuance of 1,200,000 shares of common
stock to Vanguard West LLC in exchange for a $100,000 payment made into the
bankruptcy estate by Vanguard West LLC. This amount of shares represented
approximately 87% of the then outstanding shares of Recom's common stock.
The Class 2 group consisted of shareholders of the Company. As part of
the Plan, all existing outstanding shares of Recom's common stock were reverse
split, whereby 28.74 shares of outstanding common stock were consolidated into
one share of post-reverse split common stock. However, no shareholder received
less than one share of the post-split common stock, and no shareholder
received any cash distribution in their capacity as a shareholder. The reverse
stock split was effective on November 9, 2000, pursuant to which the 3,448,986
shares of then outstanding common stock were consolidated into approximately
120,000 shares of stock. As of December 31, 2000, 1,379,928 shares of Recom's
common stock were outstanding as a result of the full implementation of the
Plan.
The Plan also provided for a total discharge of the Company and its
officers and directors from all pre-petition debts, expenses and legal causes
of action which may have existed on or before the filing of the bankruptcy on
June 26, 2000.
The Plan also provided for the payment of administrative costs and
professional fees with the remainder of any cash assets to be distributed on a
pro rata basis to Class 1 creditors.
As a result of the Company's solicitation for approval of the Plan, all
the votes received from creditors and shareholders were in favor of acceptance
of the Plan as proposed.
The Plan was confirmed by the Bankruptcy Court on October 26, 2000. The
confirmation order became final on November 7, 2000 with the effective date of
the Plan occurring on November 13, 2000.
Pursuant to the confirmed Plan, on December 30, 2000, the Disbursing
Agent distributed $64,806 and 60,000 shares of the Company's common stock to
30 Class 1 creditors.
The Disbursing Agent also paid $38,350 of administrative and professional
fees related to the bankruptcy. The Disbursing Agent filed a final Post
Confirmation Report with the Bankruptcy Court on February 13, 2001. A Final
Decree and Order Closing Case was issued on March 13, 2001, at which time the
Company's bankruptcy case was closed without objection.
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The Company was required to adopt fresh-start reporting because the
holders of the existing voting shares immediately prior to filing and
confirmation of the Plan received less than 50% of the voting shares of the
emerging entity and its reorganization value was less than the total of its
post-petition liabilities and allowed claims.
Under fresh-start accounting, all assets and liabilities are restated to
reflect their reorganization value, which approximates fair value at November
7, 2000. The Company's management determined that, based on the fact that the
Company has historically incurred losses from operations and has projected
minimal future operating profits, the reorganization value of the Company (the
fair value of the Company before considering liabilities) was equivalent to
the fair value of the Company's tangible assets and that no other intrinsic
value existed above the amount paid for common stock by Vanguard West LLC as
part of the Plan of Reorganization. As a result, all assets and liabilities
were stated at their fair value.
REORGANIZATION DUE TO CHANGE IN CONTROL
On September 19, 2002, Recom acquired certain know how, trade secrets and
other intellectual property from ARC Finance Group LLC ("ARC") (collectively
referred to as the "Technology") in exchange for seven million eight hundred
thousand (7,800,000) shares of common stock in the Company (the "Shares").
The Shares represent approximately 85% of the issued and outstanding common
stock. The Technology was valued at $7,800.
The Technology relates to certain proprietary methods, processes and
ideas concerning devices and services which, if successfully developed, may be
capable of
* accurately measuring heart functions
* automatically and remotely evaluating these functions over the
telephone, the Internet, or other wireless transmissions systems
* providing the patient and the patient's physician(s) with vital
heart and other data on a real time basis to provide early warnings
about the patient's heart functions.
The acquisition of the Technology involved no operating business or tangible
assets of any kind.
This transaction is considered a reverse acquisition and as a capital
transaction that results in a capital reorganization. Accordingly, the
reorganized Company's assets have been reflected at fair value. In the
reorganization, the Predecessor Company's intangible asset, Reorganization
Value in Excess of Amount Allocated to Identifiable Assets (in the amount of
$76,667) and its accumulated deficit (in the amount of $164,947) were
eliminated against Additional Paid-in Capital. There has been no goodwill or
intangible assets recognized for this reorganization in the financial
statements. Since September 19, 2002 the Company's financial statements have
been prepared as if there is a new reporting entity and separate column
headings denote pre-reorganization operating results (the "Predecessor
Company") from post-reorganization operating results (the "Successor Company")
since they are not prepared on a comparable basis.
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OVERVIEW OF OUR BUSINESS
Recom is a development stage life sciences company focused on researching
and developing technologies that allow for the monitoring and detection of
changes in physiological signals in order to prevent medical complications and
diseases that impact an individual's health. Recom's patented technologies,
and certain patent-pending technologies constituting an extension and
broadening of the existing patent, have multiple applications and serve as the
core of the company's product development. Recom's initial development
efforts will focus on the ambulatory cardiac monitoring segment of the medical
device market.
DEVELOPMENT
Our current development is focused on applying our technology to the
monitoring and processing of cardiological signals in an ambulatory setting.
The Company's product development consists of three separate but integrated
components: hardware, software, and research.
HARDWARE
In September of 2002, the Company purchased certain technologies
including Patent No. 5,678,559 from ARC Financial Group, LLC. This patent
covers methods of discriminating different biomedical signals from a
background of ambient noise. In January of 2003 the Company filed a second
patent application, which was related to numerous specific technical
requirements for the Company to achieve its objectives to provide an
ambulatory monitor. Utilizing its technologies, including the above mentioned
patent and patent application, the Company is developing its first "proof of
concept model." This model is intended to demonstrate that cardiac signals
(ECGs) can be acquired and processed in an ambulatory setting and then
transmitted wirelessly via the internet to a host computer at a remote
location. If successful in developing and testing such proof of concept
model, the Company intends to commence repackaging of the device including,
but not limited to: design of the application specific integrated circuits
(ASICS); and miniaturization of the electronic unit; all in order to produce a
prototype device and undertake FDA testing and approval via 510k submittal, as
well as any other testing and approval required by law.
SOFTWARE AND ALGORITHAMS
The Company is currently in the process of developing software for the
operation of the device hardware and algorithms for the recognition and
categorization of different cardiological signals and their correlation to
different cardiac diseases. The software will compare the user's ECG to a
known database of ECG anomalies (and/or the user's historical "baseline" ECG
data) in order to assist the physician with his or her diagnosis.
RESEARCH
Preliminary research conducted by Recom's scientists and technology
development team, and supported by scientific literature, seems to indicate
that the continuous monitoring of an individual's biomedical signals may allow
for the ability to not only detect but also provide early warnings of the
progression of disease and potentially life threatening conditions if such
signals are compared against a patient's baseline. To that end, Recom's
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scientists are currently undertaking focused research studies to catagorize
biomedical baselines and their correlation to disease. If successful, this
would result in decreased medical expenses, reduced hospitalization and
less-incidence of death and disability.
MARKET
Cardiovascular disease is the leading cause of death in the
industrialized world. The American Heart Association estimates that
approximately 61 million people in the United States have one or more forms of
cardiovascular disease. This disease claimed approximately 950,000 lives in
the United States in 1999. Approximately one-sixth of all people in the United
States killed by cardiovascular disease are under the age of 65. The American
Heart Association estimated that in 2001 the direct healthcare cost of
cardiovascular disease in the United States equaled $181.8 billion.
With its first device in the early stage of development, Recom is
targeting the $6.5 billion U.S. cardiology medical device segment of the
medical device market. Rhythm management products account for approximately
40% of this segment. Standard & Poor estimates that the global cardiovascular
device market will expand by 13% annually through 2005. The heart monitoring
market in the United States which includes devices, service and other costs,
is presently estimated at greater than $50 billion. The Company is unaware of
any other effective and accurate ECG-measurment device that is both
non-invasive and ambulatory, meaning that the user will not have to "sit
quietly in his chair" during the monitoring process. The Company believes
that the person who discovers, develops and distributes solutions to the
"attack" portion of heart attack will save lives and healthcare expenses,
because heart attacks have proven such a devastating and costly adversary to
patients across the world. Through its research, through the advice of its
experienced Board, and through the research of its Senior Advisors, the
Company believes that the continual monitoring of patients involved in either
routine or vigorous ambulatory activities (e.g., gardening, tennis, jogging,
etc.) provides the highest possibility of making a significant dent against
the epidemic of heart attack that has historically plagued society.
According to the American Heart Association, the overall patient
population for which Recom's first products could potentially be appropriate
include patients who have suffered heart attacks (7.3 million), congestive
heart failure (4.7 million), arrhythmia (2.0 million) and angina (6.4
million). This creates a total patient market size of potentially 18.9
million patients who could benefit in some manner from cardiac monitoring.
Given the millions of new cases reported annually compared to mortality rates,
there appears to be an increasing stream of new candidates for cardiac
monitoring. Hence the prior use of the term "epidemic." Based on 1997 data,
ECG was one of the most often used diagnostic tests during patient visits to
physicians accounting for 23 million tests administered.
EMPLOYEES
The Company currently has three full-time employees and it also currently
uses five consultants on a part-time basis.
6
RISK FACTORS
WE ARE MERELY A DEVELOPMENT STAGE COMPANY WITH NO OPERATING HISTORY.
Recom is uncertain that it will be capable of completing the development
of any saleable products arising from its technology. Because of the
complexity of our planned attempts at developing and launching products
utilizing the Technology, it is not currently feasible to evaluate our
potential business. As a development stage company, we may fail completely in
developing any new products. It is further possible that any products Recom
may ultimately develop will be "behind the power curve" and will "lag behind"
the products of competitors. Further, at this stage of Recom's development,
i.e., inception, Recom may later discover that the ultimate market for our
products will be non-existent. While management views the Technology to have
substantial potential, no assurance of success in any field of endeavor
relating to the Technology or its commercialization can be given. As our
evaluation of developments progresses, management expects to release
information through press releases, web casts or demonstrations, conference
calls, mailings or other distribution techniques. Absent such dissemination,
it should be assumed that we have not reached a significant or conclusive
stage in our development efforts.
Recom's historical financial information is of no value in projecting
future operating results because we are only in the first stages of
development of a complex product in what may prove to be a difficult and
speculative market.
WE HAVE INCURRED AND WILL CONTINUE TO INCUR LOSSES.
We have had no operating business before acquiring the Technology.
Product development, efforts at obtaining regulatory approvals, product
launch, advertising, promotion and attempts at marketing, distribution and
market penetration all require substantial expenditures. We further expect
the need to make significant investments in hiring, training and retaining
qualified staff and infrastructure. As a result for the foreseeable future, we
expect to incur significant losses, including expenses for the following:
- funding operating expenses;
- developing additional infrastructure;
- retaining financial consultants;
- retaining medical and regulatory consultants; and
- ultimately, bringing to market our products, if development efforts
are successful.
We cannot give any assurance that Recom can ever achieve revenues. Even
if revenues can be achieved Recom can give no assurance that it will ever be
profitable.
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WE INTEND TO RELY ON STRATEGIC RELATIONSHIPS.
Recom currently intends to establish and maintain strategic relationships
with leaders in a number of health care industry segments, including the
health care services, health care devices and other areas of health care and
technology industries. Recom currently believes that these relationships may
have a material impact on its ability to
- raise capital;
- acquire additional technologies beyond those acquired from ARC
Finance;
- bring to market products and services;
- establish and/or enhance our brand; and
- generate revenue.
No assurance can be given that Recom will be able to enter into any
strategic relationship.
THE HEALTH CARE INDUSTRY MAY NOT ACCEPT ELECTRONIC HEART MONITORING
DEVICES OF THE KIND WE INTEND TO DEVELOP.
Even if we develop attractive, state of the art products, our business
could suffer dramatically if solutions we develop are not accepted or are not
perceived to be effective. Growth in demand for our applications and services
will depend on the adoption of our solutions by health care participants.
Health care participants must be willing to allow sensitive information to be
transmitted and evaluated electronically or in person over remote stations and
remote transmission devices.
WE FACE INTENSE COMPETITION, WHICH COULD HARM OUR BUSINESS.
The market for health care heart monitoring services is intensely
competitive, rapidly evolving, and subject to rapid technological change.
Substantially all of our existing competitors have greater financial,
technical, product development, marketing, and other resources than we do.
These organizations may be better known and are all likely to have more
customers, money, products and systems today than we intend to develop over
the next two years. Our development may not even be completed in that time
frame, but even if it is, we will likely lag behind the competition. We may be
unable to compete successfully against current and future competitors, and
competitive pressures may seriously harm or even destroy our business.
CHANGES IN THE HEALTH CARE INDUSTRY COULD ADVERSELY AFFECT OUR BUSINESS.
The health care industry is subject to changing political, economic, and
regulatory influences. These factors affect the purchasing practices and
operations of health care organizations. Changes in current health care
financing and reimbursement systems could cause us to make unplanned
enhancements of applications or services, or result in delays or cancellations
of orders, or in the revocation of endorsement of our applications and
services by health care participants. Federal and state legislatures have
periodically considered programs to reform or amend the U.S. health care
system at both the federal and state level. Such programs may increase
8
governmental involvement in health care, lower reimbursement rates, or
otherwise change the environment in which health care industry participants
operate. Health care industry participants may respond by reducing their
investments or postponing investment decisions, including investments in our
applications and services.
Many health care industry participants are consolidating to create
integrated health care delivery systems with greater market power. As the
health care industry consolidates, competition to provide products and
services to industry participants will become even more intense, as will the
importance of establishing a relationship with each industry participant.
These industry participants may try to use their market power to negotiate
price reductions for our products and services. If we were forced to reduce
our prices, our operating results could suffer as a result if we cannot
achieve corresponding reductions in our expenses.
GOVERNMENT REGULATION OF THE HEALTH CARE INDUSTRY COULD ADVERSELY AFFECT
OUR BUSINESS.
We will be subject to significant regulation and approval processes with
respect to what may ultimately amount to various branches of the State and
Federal government, including, but not limited to, the Food and Drug
Administration. Such regulation may result in significant delays in the
commercialization of any products we may ultimately develop (if any).
WE MAY BE ADVERSELY AFFECTED BY PRODUCT-RELATED LIABILITIES.
If we are successful in developing any new products, we will face the
potential for product liability claims once we start marketing such products.
Before marketing any products we will attempt to obtain product liability
insurance. Such insurance is likely to be very expensive, and there is no
assurance that we will be able to obtain any insurance. If we do, it may not
be sufficient to cover large claims.
WE MAY FACE INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS FROM THIRD PARTIES.
We could be subject to intellectual property infringement claims as the
number of competitors grows and the functionality of our applications overlaps
with competitive offerings. These claims, even if not meritorious, could be
expensive to resolve and divert management's attention from operating the
business. If we become liable to others for infringing their intellectual
property rights, we could be required to pay a substantial damage award. Such
a judgment would have a material adverse effect on our business, financial
condition, and results of operations. In addition, we may be unable to develop
non-infringing technology or obtain a license on commercially reasonable
terms.
WE MAY NOT BE ABLE TO PROTECT OUR PROPRIETARY RIGHTS.
Our future success and ability to compete in the health care information
services business may be dependent in part upon our proprietary rights to
products and services that we develop. We expect to rely on a combination of
patent, copyrights, trademark, and trade secret laws and contractual
restrictions to protect our proprietary technology and to rely on similar
proprietary rights of any of our content and technology providers. We intend
9
to acquire, perfect or file patent applications to protect certain of our
proprietary technology. Recom can provide no assurance that such applications
for patents will be approved or, if approved, will be effective in protecting
technology that we believe is proprietary. We may enter into confidentiality
agreements with our employees, as well as with our clients and potential
clients seeking proprietary information, and limit access to and distribution
of our methods, processes, software, documentation, and other proprietary
information. We cannot assure that the steps we take or the steps such
providers take would be adequate to prevent misappropriation of our
proprietary rights.
THE INABILITY TO HIRE OR RETAIN QUALIFIED PERSONNEL COULD ADVERSELY
AFFECT OUR BUSINESS.
Our operations are dependent on obtaining qualified personnel to oversee
and implement our development and business plans, to raise money to pay for
negative cash flow and to otherwise supervise continued improvements and
enhancements to the Technology. If we are unable to attract and retain
qualified management and other employees, our business and prospects could be
adversely affected. Our success is also dependent to a significant degree on
our ability to attract, motivate, and retain highly skilled sales, marketing,
and technical personnel. Competition for such personnel in the device,
software and information services industries is intense. The loss of key
personnel or the inability to hire or retain qualified personnel is likely to
have a material adverse effect on our business.
WE WILL NEED TO OBTAIN SUBSTANTIAL ADDITIONAL CAPITAL IN THE FUTURE.
To date, Recom has financed its operations through direct investments
made by its existing shareholders. There is no assurance that Recom's
existing shareholders will continue to invest or if they do that their
investment will be sufficient to the Company to continue operating. In order
to complete its planned product development and research, Recom will need to
raise additional financing to become fully operational. We will seek to raise
funds by selling debt or equity securities, by entering into strategic
relationships, or through other arrangements. We may be unable to raise any
additional amounts on reasonable terms, or at all, when they are needed and in
that event it is likely that we will fail.
ITEM 2. DESCRIPTION OF PROPERTY
The Company has occupied office and laboratory space at 4705 Laurel
Canyon Blvd, Studio City, California 91607 since September of 2002. Since
September of 2002, the Company has sequentially added additional space on an
as needed basis so that it now occupies approximately 3500 square feet at an
approximate gross rental rate (including parking for employees) of $8,000.00
per month. The Company is in negotiations with the owner of the building to
finalize a lease for the premises that will extend through August of 2005.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) PRINCIPAL MARKET OR MARKETS.
The Company's Common Stock is traded on the OTC Bulletin Board under the
symbol "RECM." The following table sets forth the range for the high and low
bid quotations for the Company's securities as reported by the OTC Bulletin
Board. These prices are believed to be representative inter-dealer quotations,
without retail markup, markdown or commissions, and may not represent actual
transactions.
Bid
Quarter Ended High Low
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March 31, 2001 $ 6.50 $0.45
June 30, 2001 5.00 1.45
September 30, 2001 5.00 1.50
December 31, 2001 5.00 0.51
March 31, 2002 1.00 0.25
June 30, 2002 1.00 0.25
September 30, 2002 1.00 0.25
December 31, 2002 19.50 3.75
(b) APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK.
The number of record holders of the Company's $.001 par value Common
Stock at March 15, 2003 was 315. This does not include shareholders that hold
their stock in accounts in street name with broker/dealers.
(c) DIVIDENDS.
Holders of the Common Stock are entitled to receive such dividends as may
be declared by the Company's Board of Directors. No dividends have been paid
with respect to the Company's Common or Preferred Stock and none are
anticipated in the foreseeable future.
(d) RECENT SALES OF UNREGISTERED SECURITIES.
COMMON STOCK
During the three months ended December 31, 2002, the Company had the
following transactions of its unregistered securities:
On October 12, 2002, the Company agreed to issue a total of 700,000
shares of its common stock to Marvin H. Fink pursuant to a four-year
employment agreement whereby Mr. Fink will serve as the Company's Chief
Executive Officer and Chairman of the Board of Directors. The shares vest at
the rate of 8.33% or 58,333 shares per quarter with the first 58,333 shares
vesting on January 12, 2003.
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On October 15, 2002, the Company agreed to issue a total of 200,000
shares of its common stock to B World Technologies, Inc. (a company owned by
Budimir Drakulic) pursuant to a Loanout Agreement with Budimir S. Drakulic and
B World Technologies, Inc. whereby Dr. Drakulic will work as an independent
contractor for the Company and serve as Vice President and Chief Technology
Officer for a term of ten years. The shares vest at the rate of 5% or 10,000
shares per quarter with the first 10,000 shares vesting on January 15, 2003.
On November 1, 2002, the Company agreed to issue a total of 75,000 shares
of its common stock to Ellsworth Roston pursuant to a two-year consulting
agreement whereby Mr. Roston will consult with the Company with respect to the
engineering, development and refining of the Company's technologies. Mr.
Roston also agreed to join the Company's board of directors. The shares vest
at the rate of 9,375 shares per quarter with the first 9,375 shares vesting on
February 1, 2003. Mr. Roston was also issued a five-year warrant to purchase
150,000 shares of the Company's common stock at an exercise price of $5.00 per
share.
On October 30, 2002, Mr. Roston also purchased a total of 23,750 shares
of the Company's common stock for a purchase price of $190,000 or $8.00 per
share.
The securities issued in the four transactions above were issued pursuant
to the exemption provided by Section 4(2) of the Securities Act of 1933. The
persons to whom these securities were issued were officers or directors of the
Company, who made an informed investment decision and had access to material
information regarding the Company. The certificates representing such common
shares bear an appropriate legend restricting the transfer of such securities,
and stop transfer instructions have been provided to the Company's transfer
agent in accordance therewith.
During November 2002, the Company issued a total of 188,270 shares to
eleven persons who were minority shareholders of Advanced Heart Technologies,
Inc. ("AHT"). The shares were issued in connection with the Company securing
the services of Dr. Drakulic through a Loanout Agreement with B World
Technologies, Inc. The Company agreed to fulfill certain obligations in
connection with a settlement agreement which Dr. Drakulic entered into with a
number of minority shareholders of AHT. In connection with Dr. Drakulic's
settlement with the minority shareholders of AHT, the Company, on October 23,
2002 issued a five-year warrant to Stephen Verchick, who was one of the eleven
shareholders, to purchase 125,000 restricted shares of the Company's common
stock at an exercise price of $.02 per share.
The above securities were issued pursuant to the exemption provided by
Section 4(2) of the Securities Act of 1933. The eleven persons were provided
with information regarding the Company and they executed subscription
agreements in which they acknowledged that they were accredited investors and
that they had knowledge and experience in financial and business matters such
that they were capable of evaluating the merits and risks of the acquisition
of the Company's securities. The certificates representing the shares bear an
appropriate restrictive legend restricting the transfer of such securities,
and stop transfer instructions have been provided to the Company's transfer
agent.
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ITEM 6. MANAGEMENT'S PLAN OF OPERATION
The Company intends to further develop the technology described above in
Item 1. On September 19, 2002, the Company started with the $125,000 in cash
that had been received by the Company from the former President in exchange
for warrants. On October 30, 2002, the Company received an additional
$190,000 from the sale of common stock and warrants to Ellsworth Roston. The
Company's current cash on hand is estimated by management to be sufficient to
fund operations until mid-April, 2003. The Company will need to raise
substantial additional funds to become fully operational. Management is
currently exploring numerous opportunities for financing and has no assurance
that any of these will come to fruition, including a private equity offering
to raise up to $5 million. In the event the Company is not able to secure
financing, many adverse contingencies may result such as downsizing of the
Company's facilities and / or personnel, ceasing development efforts and / or
operations. Notwithstanding any of these activities, the Company believes it
is highly likely that it will not achieve any revenues or earnings during the
next twelve months, and for a significant period of time thereafter.
ITEM 7. FINANCIAL STATEMENTS
Please see pages F-1 through F-11.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The following table sets forth the names, ages and positions of the
officers and directors.
NAME AGE POSITION
----------------- --- ------------------------------------
Marvin H. Fink 66 Chairman and Chief Executive Officer
Budimir S. Drakulic 53 Chief Scientific Officer and Acting
Chief Technical Officer
Steven Sparks 56 Director
Brian Oxman 51 Director
Ellsworth Roston 80 Director
Robert Koblin 71 Director
Raul Silvestre 32 Secretary and Treasurer
13
There is no family relationship between any of the Directors or the
Executive Officers of the Company.
All directors will hold office until the next annual meeting of the
Shareholders.
The following sets forth biographical information as to the business
experience of each Officer and Director of the Company for at least the last
five years.
MARVIN H. FINK has served as Chief Executive Officer and Chairman of the
Board of the Company since October 2002. He has 45 years of experience in the
management of high technology programs from development stage through
production including projects for the Department of Defense, NASA, Teledyne
Systems, Litton Industries and Hughes Aircraft. He served as President of
Teledyne Electronic Technologies from 1993 until his retirement in August
2001. From 1986 until 1993, he served as President of Teledyne
Microelectronics. Mr. Fink serves on the board of R.F. Industries and is a
member of the California Bar Association.
STEVEN O. SPARKS has served as a director of the Company since September
2002. He has served as President and owner of Sparks Financial, a financial
services company since 1998. From 1995 through 1997 he served as the
Co-founder and President of Sherwood financial, a hedge fund. From 1973 until
1995 he was a securities broker with the last three years at Paine Webber. He
has also served on a number of boards of both public and private companies
over the past 15 years. Mr. Sparks received a Bachelor of Arts Degree in
Economics from the University of Kansas in 1970.
BRIAN OXMAN has served as a director of the Company since September 2002.
Mr. Oxman has practiced law in Southern California since 1976. He has also
served as a law professor at Western State University and he has served as a
Judge Pro Tem in the Orange County Superior and Downey Municipal Courts in
California. Mr. Oxman received a Bachelor of Science Degree from the
University of Southern California in 1973 and a Juris Doctorate Degree from
Loyola University School of Law in 1976.
ELLSWORTH ROSTON has served as a director of the Company since October
2002. Mr. Roston has practiced patent law since 1943, and he currently serves
as Of Counsel to the patent firm of Fulwider Patton Lee & Utecht. He has a
history of assisting technology companies during their development stages. He
was one of three founders of Brooktree Corporation and served on its board of
directors for 15 years, after which Brooktree was sold to Rockwell for several
hundred million dollars. Mr. Roston received his undergraduate degree and his
law degree from Yale University.
BUDIMIR S. DRAKULIC Ph.D has served as the Chief Scientific and acting
Chief Technology Officer of the Company since October 2002. Dr. Drakulic has
more than 25 years of experience in the design, development and integration of
hardware and software modules for biomedical microelectronics circuits and
systems. From approximately 1997 through Februrary of 2002, Dr. Drakulic was
involved directly and indirectly with AHT. Dr. Drakulic was the Consultant
and Chief Scientist, Medical Device Business Unit for Teledyne Electronic
Technologies from 1992 through 1997. Before that, he held numerous positions
14
affiliated with the University of California at Los Angeles, including
Visiting Assistant Professor with the Electrical Engineering Department and
Director of the Microelectronics Development Lab at the Crump Institute for
Medical Engineering. Mr. Drakulic filed for bankruptcy in the United States
Bankruptcy Court for the Central District of California in November 2001 and
the case was closed in March 2002. He holds a Bachelor of Science degree in
electrical engineering from the University of Belgrade, Yugoslavia. He also
hold a Masters degree and a Ph.D in Electronic and Biomedical Engineering from
the same university. Dr. Drakulic was the recipient of the Ralph and Marjorie
Crump Prize for Excellence in Medical Engineering from UCLA in 1985 and he was
a Research Fellow with the Crump Institute for Medical Engineering at UCLA.
ROBERT KOBLIN, M.D. has served as a director of the Company since
February 2003. Dr. Koblin, a cardiologist, has more than 30 years of medical
experience beginning during the time he served in the United States Army as a
medic and continuing most recently as a staff physician and instructor at the
Cedars-Sinai Medical Center in Los Angeles. He also serves as the Managing
Director of the Robertson Diagnostic Center in Beverly Hills, California, and
he is an assistant clinical professor of medicine at the University of
California, Los Angeles (UCLA).
RAUL SILVESTRE has served as Secretary and Treasurer of the Company since
October 2002. He has practiced law in Southern California since 1998. Mr.
Silvestre received a Bachelor of Science Degree in Business Administration
with an emphasis on finance and economics from University of Southern
California in 1995 and a Juris Doctorate Degree from Pepperdine University in
1997.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The Company is not subject to Section 16(a).
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth information regarding the executive
compensation for the Company's Chief Executive Officer for the years ended
December 31, 2002, December 2001, and December 2000, and each other executive
officer who had total annual salary and bonus in excess of $100,000 during
such years.
15
SUMMARY COMPENSATION TABLE
Long-Term Compensation
----------------------------
Annual Compensation Awards Payouts
--------------------- ---------------- -------
Securi-
ties
Re- Under- All
Name and stricted lying LTIP Other
Principal Stock Options/ Payout Compen-
Position Year Salary(1) Bonus(1) Awards SARs(#) ($) sation
---------------- ---- -------- -------- ------- --------- ------ -------
Marvin H. Fink, 2002 $ 1 -0- -0- -0- -0-
CEO
Sim Farar, CEO 2002 $ 0 -0- -0- -0- -0-
2001 $ 0 -0- -0- -0- -0-
2000 $ 0 -0- -0- -0- -0-
OPTION GRANTS IN LAST FISCAL YEAR
Individual Grants
Number of % of Total
Securities Options
Underlying Granted to Exercise or
Options Employees in Base Price Expiration
Name Granted(#) Fiscal Year ($/Share) Date
---------------- ---------- ------------ ------------ -----------
Marvin H. Fink -0- -- -- --
Sim Farar -0- -- -- --
AGGREGATE OPTION EXERCISES IN YEAR ENDED
DECEMBER 31, 2002 AND DECEMBER 31, 2001 OPTION VALUES
Securities Under- Value of Unexer-
lying Unexercised cised In-The-
Shares Options at Money Options at
Acquired on December 31, 2002 December 31, 2002
Exercise Value Exercisable/ Exercisable/
Name (Number) Realized Unexercisable Unexercisable
--------------- ----------- -------- ----------------- ----------------
Marvin H. Fink -0- -0- -0- -0-
16
EMPLOYMENT AGREEMENTS
On October 12, 2002, the Company entered into a four-year employment
agreement with Marvin H. Fink pursuant to which Mr. Fink is serving as the
Company's Chief Executive Officer and Chairman of the Board of Directors. His
compensation includes: (a) an annual base salary of $1.00; (b) a cash bonus
starting in the second year equal to ten percent of the Company's after tax
income excluding extraordinary expenses, and the percentage increases to
fifteen percent in the third and fourth years; (c) a restricted stock grant of
700,000 shares of the company's common stock where the stock vests at the rate
of 8.33% or 58,333 shares per quarter; (d) a monthly automobile allowance of
$1,200; and (e) other employee benefits provided to senior executives of the
Company. The agreement also includes an agreement to indemnify Mr. Fink, and
non-compete and non-solicit provisions.
On October 15, 2002, the Company entered into a Loanout Agreement with
Budimir Drakulic, B World and B Technologies (these 2 entities are referred to
as "World") pursuant to which Dr. Drakulic is working as an independent
contractor for the Company and serves as the Vice President and Chief
Technology Officer for a term of ten years. Dr. Drakulic is the inventor of
certain of the technologies acquired by the Company. The compensation paid to
World includes: (a) A one-time lump sum cash payment of $10,000; (b) a
restricted stock grant of 200,000 shares of the Company's common stock where
the stock vests at the rate of 5% or 10,000 shares per quarter; and (c)
$15,000 cash per month. Dr Drakulic also signed an agreement in which he
agreed, among other things, to assign to the Company all of his right, title
and interest in and to any and all inventions, discoveries, etc. which he
conceives or develops during the term of his agreement.
Commencing March 1, 2003, Dr. Drakulic is also paid an annual salary
directly by the Company of $7,500.
2002 STOCK PLAN
In November 2002, the Board of Directors approved the establishment of
the 2002 Stock Plan (the "Plan"). The Company intends to submit the Plan to
the shareholders for their approval at the next shareholders' meeting. The
Board of Directors believes that the Plan advances the interests of the
Company by encouraging and providing for the acquisition of an equity interest
in the Company by employees, officers, directors and consultants, and by
providing additional incentives and motivation toward superior performance.
The Board believes it will also enable us to attract and retain the services
of key employees, officers, directors and consultants upon whose judgment,
interest and special effort the successful conduct of its operations is
largely dependent.
The Plan allows the Board, or a committee established by the Board, to
award restricted stock and stock options from time to time to employees,
officers and directors and consultants to the Company. The Board has the
power to determine at the time an option is granted whether the option will be
an Incentive Stock Option (an option which qualifies under Section 422 of the
Internal Revenue Code of 1986) or an option which is not an Incentive Stock
Option. However, Incentive Stock Options may only be granted to persons who
are the Company's employees. Vesting provisions are determined by the Board
at the time options are granted.
17
The Plan also provides that the Board, or a committee established by the
Board, may issue restricted stock pursuant to restricted stock right
agreements which will contain such terms and conditions as the Board or
committee determines.
The total number of shares of Common Stock available for grant and
issuance under the Plan may not exceed 2,000,000, subject to adjustment in the
event of certain recapitalizations, reorganizations and similar transactions.
Options may be exercisable by the payment of cash or by other means as
authorized by the committee or the Board of Directors.
As of March 15, 2003, there were options outstanding under the Plan to
purchase an aggregate of 286,000 shares of Common Stock with exercise prices
ranging from $.02 to $5.00 per share.
2003 NONQUALIFIED STOCK OPTION AND STOCK PLAN
In March 2003, our board of directors approved the establishment of the
2003 Nonqualified Stock Option and Stock Plan. Our board of directors
believes that the 2003 Plan encourages employees, officers, directors and
consultants to acquire an equity interest in our company and by providing
additional incentives and awards and recognitions of their contribution to our
company's success and to encourage these persons to continue to promote the
best interest of our company.
The 2003 Plan allows our board of directors to grant stock options or
issue stock from time to time to our employees, officers, directors and
consultants. Options granted under the 2003 Plan will not qualify under
Section 422 of the Internal Revenue Code of 1986 as an incentive stock option.
The 2003 Plan also provides that our board of directors, or a committee,
may issue free-trading or restricted stock pursuant to stock right agreements
containing such terms and conditions as our board of directors deems
appropriate.
The total number of shares of common stock subject to our options and
grants of stock under the 2003 Plan may not exceed 500,000 shares, subject to
adjustment in the event of certain capitalizations, reorganizations, and
similar transactions. Options may be exercisable by the payment of cash or by
other means as authorized by the board of directors. As of the date of this
Report, no options have been granted under the 2003 Plan.
Our board of directors may amend the 2003 Plan at any time, provided that
the board of directors may not amend the 2003 Plan to adversely effect the
rights of participants under the 2003 Plan, without stockholder approval.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table set forth, as of March 15, 2003, the stock ownership
of each person known by the Company to be the beneficial owner of five percent
or more of the Company's Common Stock, each Officer and Director individually
and all Officers and Directors of the Company as a Group.
18
Amount of
Name of Beneficial Percentage
Beneficial Owner Ownership of Class
------------------ -------------- ----------
Marvin H. Fink 116,111 (1) 1.2%
4705 Laurel Canyon Blvd., #203
Studio City, CA 91607
Budimir Drakulic 20,000 (2) .2%
4705 Laurel Canyon Blvd., #203
Studio City, CA 91607
Raul Silvestre 0 0%
4705 Laurel Canyon Blvd., #203
Studio City, CA 91607
Steven Sparks 0 (3) 0%
4705 Laurel Canyon Blvd., #203
Studio City, CA 91607
Brian Oxman 0 (3) 0%
4705 Laurel Canyon Blvd., #203
Studio City, CA 91607
Ellsworth Roston 192,450 (4) 2.0%
4705 Laurel Canyon Blvd., #203
Studio City, CA 91607
Robert Koblin 0 (3) 0%
4705 Laurel Canyon Blvd., #203
Studio City, CA 91607
ARC Finance Group LLC 7,650,000 80.4%
23679 Calabasas Road, Suite 754
Calabasas, CA 91302
Vanguard West LLC 900,000 9.5%
914 Westwood Blvd., Suite 809
Los Angeles, CA 90024
All Officers and Directors 328,611 (1)(2) 3.4%
as a Group (7 persons) (3)(4)
__________________
(1) Mr. Fink's employment agreement provides that he was to be issued 700,000
shares of the Company's common stock which vests at the rate of 58,333 shares
per quarter with the first 58,333 vesting on January 12, 2003. The number of
shares reflects the 58,333 shares that have vested as of the date above plus
58,333 shares which will vest within 60 days of the date above. The number
does not include options to purchase 50,000 shares of common stock at a price
of $2.65 per share which were granted under the Company's 2002 Stock Option
Plan since the Plan has not yet been approved by the Company's shareholders.
19
(2) Represents shares held in the name of B. World Technologies, Inc. which
are beneficially owned by Dr. Drakulic. B. World has an agreement with the
Company which provides that it is to be issued 200,000 shares of the Company's
common stock which vest at the rate of 10,000 shares per quarter with the
first 10,000 vesting on January 15, 2003. The number of shares reflects the
10,000 shares that have vested as of the date above plus 10,000 shares that
will vest within 60 days of the date above.
(3) Does not include options to purchase 50,000 shares of common stock at a
price of $2.65 per share which were granted under the Company's 2002 Stock
Option Plan since the Plan has not yet been approved by the Company's
shareholders.
(4) Mr. Roston's consulting agreement provides that he is to be issued 75,000
shares of the Company's common stock which vests at the rate of 9,375 shares
per quarter with the first 9,375 vesting on February 1, 2003. The number of
shares includes the 9,375 shares that had vested as of the date above plus
9,375 shares which will vest within 90 days of the date above. Also included
are 23,700 shares owned directly and 150,000 shares underlying currently
exercisable warrants. The number does not include options to purchase 50,000
shares of common stock at a price of $2.65 per share which were granted under
the Company's 2002 Stock Option Plan since the Plan has not yet been approved
by the Company's shareholders.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the last two years certain officers, directors, and beneficial
owners entered into transactions with the Company as follows:
On September 19, 2002, the Company acquired certain know how, trade
secrets and other intellectual property from ARC Finance Group LLC ("ARC") in
exchange for seven million eight hundred thousand (7,800,000) shares of common
stock in the Company. The shares represented approximately 85% of the issued
and outstanding common stock of Recom.
To provide initial working capital, Sim Farar, the former President of
the Company delivered $125,000 to Recom during September 2002 and Recom issued
to him a warrant to purchase 200,000 shares of common stock at an exercise
price of $2.00 per share. The Warrant may no be exercised before September 1,
2003, expires in September 2006, and contains cashless exercise, certain
antidilution and other provisions.
On November 1, 2002, the Company agreed to add Ellsworth Roston to the
Company's Board of Directors and the Company entered into a two year
consulting agreement with Mr. Roston. Mr. Roston, an experienced patent
attorney, is assisting the Company in a management and advisory role with
respect to the engineering, development and refining of the Company's
technologies. As compensation, the Company issued 75,000 shares of common
stock to Mr. Roston and the shares vest at the rate of 9,375 shares per
quarter with the first 9,375 shares vesting on February 1, 2003. He was also
issued a five-year warrant to purchase 150,000 restricted shares of the
Company's common stock at an exercise price of $5.00 per share. In addition,
on October 30, 2002, Mr. Roston has purchased 23,700 restricted shares of the
Company's common stock at a price of $8.00 per share for a total of $190,000.
20
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit
Number Description Location
------- ----------- --------
2 Stock-for-Membership Interest Incorporated by reference to
Exchange Agreement exhibits previously filed on
Form 8-K filed on November 10,
1998
3.1 Amended Articles of Incorpora- Incorporated by reference to
tion dated May 10, 1999 exhibits previously filed on
Form 8-K filed on May 10, 1991
3.2 Bylaws dated May 10, 1991 Incorporated by reference to
exhibits previously filed on
Form SB-2 on July 26, 1999
3.3 Amended and Restated Certifi- Incorporated by reference to
cate of Incorporation dated Exhibit 3.3 to the Company's
November 6, 2000 Form 10-KSB for the year
ended December 31, 2001
3.4 Bylaws dated March 24, 2003 Filed herewith electronically
10.1 Shareholder Statement Incorporated by reference to
exhibits previously filed on
Form 10-QSB dated November 16,
1998
10.2 Majority Shareholder Consent Incorporated by reference to
Resolution exhibits previously filed on
Form 10-QSB dated November 16,
1998
10.3 1998 Stock Option Plan Incorporated by reference to
exhibits previously filed on
Form 10-KSB on March 30, 1999
10.4 Executive Employment Agreement Incorporated by reference to
between RECOM Managed Systems, exhibits previously filed on
Inc. and Mr. James P. Joyce Form 10-KSB on March 30, 1999
10.5 Executive Employment Agreement Incorporated by reference to
with John Epperson, Jr. exhibits previously filed on
Form 10-KSB on March 30, 1999
10.6 Stock Acquisition and Technology Incorporated by reference to
Transfer Agreement dated Exhibit 10 to the Company's
September 12, 2002 Form 8-K filed on September
25, 2002
21
10.7 Employment Agreement with Marvin Incorporated by reference to
H. Fink dated October 12, 2002 Exhibit 10.1 to the Company's
Form 10-QSB filed on November
12, 2002
10.8 Loanout Agreement involving Incorporated by reference to
Budimir Drakulic dated Exhibit 10.2 to the Company's
October 15, 2002 Form 10-QSB filed on November
12, 2002
10.9 Consulting Agreement with Incorporated by reference to
Ellsworth Roston dated Exhibit 10.3 to the Company's
November 1, 2002 Form 10-QSB filed on November
12, 2002
10.10 2002 Stock Plan Filed herewith electronically
10.11 2003 Nonqualified Stock Option Filed herewith electronically
and Stock Plan
16 Letter on change in certifying Incorporated by reference to
accountant exhibits previously filed on
Form 8-K on August 23, 1999
(b) Reports on Form 8-K. The Company filed the following Report on Form
8-K during the last quarter of the period covered by this Report:
1. Form 8-K dated September 19, 2002, which reported on Items 1,
2, 5 and 7.
22
INDEX TO FINANCIAL STATEMENTS
RECOM MANAGED SYSTEMS, INC.
PAGE
Report of Independent Certified Public Accountants . . . . . . . F-2
Financial Statements:
Consolidated Balance Sheet - December 31, 2002 . . . . . . . F-3
Consolidated Statements of Operations for the years
ended December 31, 2002 and December 31, 2001. . . . . . . F-4
Consolidated Statements of Changes in Stockholders'
Equity and Comprehensive Income for the years ended
December 31, 2002, and December 31, 2001 . . . . . . . . . F-5
Consolidated Statements of Cash Flows for the years
ended December 31, 2002 and December 31, 2001. . . . . . . F-6
Notes to the Consolidated Financial Statements . . . . . . . F-7 - F-11
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of RECOM Managed Systems, Inc.
We have audited the accompanying balance sheet of RECOM Managed Systems, Inc.
(a development stage company) as of December 31, 2002, and the related
statements of operations, changes in stockholders' equity and cash flows for
the periods of September 19, 2002 through December 31, 2002, January 1, 2002
through September 18, 2002 and the year ended December 31, 2001. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of RECOM Managed Systems, Inc.
(a development stage company) as of December 31, 2002, and the results of its
operations and its cash flows for the periods of September 19, 2002 through
December 31, 2002, January 1, 2002 through September 18, 2002 and the year
ended December 31, 2001 in conformity with accounting principles generally
accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 3 to the
financial statements, the Company has a very limited operating history, is in
the development stage, and, at December 31, 2002, has an accumulated net
deficit. These matters raise substantial doubt as to the Company's ability to
continue as a going concern. Management's plans in regard to these matters
are also described in Note 4. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
On September 19, 2002, RECOM Managed Systems, Inc. issued 7,800,000 shares of
common stock, which resulted in a change in control. As discussed in Note 2
RECOM Managed Systems, Inc. accounted for the reorganization as a reverse
acquisition. Thus, the financial statements for the period of January 1, 2002
through September 18, 2002 and the year ended December 31, 2001 are not
comparable to the pre-reorganization financial statements.
/s/ Burnett + Company LLP
Rancho Cordova, California
March 24, 2003
F-2
RECOM MANAGED SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
December 31, 2002
ASSETS
CURRENT ASSETS
Cash $ 148,689
LONG TERM ASSETS
Equipment, net of
accumulated depreciation of $693 28,348
Intangible technology 7,800
-------------
TOTAL ASSETS $ 184,837
=============
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accrued expenses $ 2,764
-------------
TOTAL LIABILITIES 2,764
STOCKHOLDERS' EQUITY - NOTE 2
Common stock, $.001 par value, authorized 50,000,000
shares, issued 10,416,948 and outstanding $ 10,417
Additional paid-in capital 330,930
Deficit accumulated during development stage (159,274)
-------------
TOTAL STOCKHOLDERS' EQUITY 182,073
-------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 184,837
=============
The accompanying notes are an integral part of this statement.
F-3
RECOM MANAGED SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
REORGANIZED COMPANY PREDECESSOR COMPANY
------------------------------- ------------------------------
Cumulative for
For the Period the Period For the Period
Sept 19, to Sept 19, to Jan 1 to Year ended
Dec 31, 2002 Dec 31, 2002 Sept 18, 2002 Dec 31, 2001
-------------- -------------- --------------- ------------
REVENUES: -0- -0- -0- 500
OPERATING EXPENSES:
General &
Administrative 159,274 159,274 54,921 82,827
--------- --------- -------- --------
OPERATING LOSS (159,274) (159,274) (54,921) (82,327)
--------- --------- -------- --------
NET LOSS $(159,274) $(159,274) $(54,921) $(82,327)
========= ========= ======== ========
Basic and diluted loss
Per share $ (.02) $ (.02) ** **
Basic and Diluted
Weighted average
Number of shares
Outstanding 10,026,058 10,026,058 ** **
** Per share amounts are not meaningful due to reorganization.
The accompanying notes are an integral part of this statement.
F-4
RECOM MANAGED SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Additional
Common Stock Paid-in Accumulated
Shares Amount Capital Deficit Total
---------- ------- --------- ----------- ---------
Balance at
December 31, 2000 1,379,928 $ 1,380 $ 133,620 $ (27,679) $ 107,321
Net loss - year
ended Dec 31, 2001 (82,327) (82,327)
Shares issued for
services 50,000 50 4,950 5,000
Capital contributed 45,000 45,000
---------- ------- --------- --------- ---------
Balance at
December 31, 2001 1,429,928 $ 1,430 $ 183,570 $(110,006) $ 74,994
Net loss - period
January 1 to
September 18, 2002 (54,941) (54,921)
Capital contributed 35,000 35,000
---------- ------- --------- --------- ---------
Balance at
September 18, 2002 1,429,928 $ 1,430 $ 218,570 $(164,947) $ 55,073
Issuance of common
stock 7,800,000 7,800 7,800
Reorganization
adjustments (241,614) 164,947 76,667
---------- ------- --------- --------- ---------
Balance at
September 19, 2002 9,229,928 $ 9,230 $ (23,044) $ -0- $ (13,814)
Capital contributed 21,400 21,400
Warrants issued 125,000 125,000
Common stock issued 1,187,020 1,187 207,574 208,761
Net loss period
September 19, 2002 to
December 31, 2002 (159,274) (159,274)
---------- ------- --------- --------- ---------
Balance at
December 31, 2002 10,416,948 $10,417 $ 330,930 $(159,274) $ 182,073
========== ======= ========= ========= =========
The accompanying notes are an integral part of this statement.
F-5
RECOM MANAGED SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
REORGANIZED COMPANY PREDECESSOR COMPANY
------------------------------- ------------------------------
Cumulative for
For the Period the Period For the Period
Sept 19, to Sept 19, to Jan 1 to Year ended
Dec 31, 2002 Dec 31, 2002 Sept 18, 2002 Dec 31, 2001
-------------- -------------- --------------- ------------
Cash flows from
operating activities:
Net loss $(159,274) $(159,274) $(54,921) $(82,327)
Depreciation 693 693 20,000
Services paid in stock 975 975 5,000
Expenses contributed 5,000
Change in assets &
liabilities:
Accrued expenses (19,271) (19,271) 12,080 5,505
--------- --------- -------- --------
Net cash used in
Operating Activities (176,877) (176,877) (42,841) (46,822)
Cash flows from investing
Activities:
Purchase of equipment (29,041) (29,041)
--------- --------- -------- --------
Net cash used in
Investing Activities (29,041) (29,041) -0- -0-
Cash flows from financing
Activities:
Capital contributions 21,400 21,400 35,000 40,000
Issuance of warrants 125,000 125,000
Issuance of stock 207,786 207,786
--------- --------- -------- --------
Net cash provided
by financing
activities 354,186 354,186 35,000 40,000
--------- --------- -------- --------
Net increase (decrease)
in cash $ 148,268 $ 148,268 $ (7,841) $ (6,822)
Cash at beginning of
period 421 421 8,262 15,084
--------- --------- -------- --------
Cash at end of period $ 148,689 $ 148,689 $ 421 $ 8,262
========= ========= ======== ========
Supplemental Disclosures
Cash paid for interest $ -0- $ -0- $ -0- $ -0-
========= ========= ======== ========
Cash paid for taxes $ -0- $ -0- $ -0- $ -0-
========= ========= ======== ========
The accompanying notes are an integral part of this statement.
F-6
RECOM MANAGED SYSTEMS, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
On June 26, 2000, the Company filed a Voluntary Petition for Reorganization
Under Chapter 11 of the Federal Bankruptcy Code and substantially curtained
operations. The plan of reorganization, which was confirmed on November 7,
2000, resulted in the post bankruptcy ownership group controlling
approximately 87% of the common stock and the elimination of the outstanding
liabilities and most assets.
On September 19, 2002, the Company issued 7,800,000 shares of stock in
exchange for intangible technology. The issuance of stock resulted in a
change of control, with the new ownership group controlling approximately 85%
of the outstanding stock. See Note 2.
A summary of significant accounting policies follows:
Use of Estimates - The preparation of financial statements in accordance with
accounting principles generally accepted in the United States and,
accordingly, require management to make estimates and assumptions that affect
the reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Development Stage Company - The Company is a development stage entity (see
Note 3). Due to the change in control, its inception is deemed to be September
19, 2002.
Cash - Cash consists of demand deposit accounts. At December 31, 2002, the
Company had cash balances on deposit with a financial institution in excess of
for FDIC insured limits.
Equipment - Equipment is recorded at historical cost. Maintenance and repairs
are expensed as incurred. Depreciation is provided by the straight-line method
over three to five years. For the period of September 19, 2002 through
December 31, 2002 depreciation expense amounted to $693.
Stock - Based Compensation - Accounting for stock options is in accordance
with the provisions of Accounting Principles Board (APB) No. 25, "Accounting
for Stock Issued to Employees," and comply with the disclosure provisions of
Statement of Financial Accounting Standard (SFAS) No 123, "Accounting for
Stock-Based Compensation". Under APB 25, compensation cost is recognized based
on the difference, if any, on the date of grant between the fair value of the
stock and the option price.
F-7
Intangibles - Reorganization Value in Excess of Amount Allocated to
Identifiable Assets was recorded as a result of the reorganization,
representing the portion of value of the reorganized company, which could not
be allocated to any identifiable assets. It is being amortized over a 60-month
period. Amortization amounted to $20,000 for the year ended December 31, 2001.
No amortization was recognized for the period of January 1, 2002 through
September 18, 2002, as the Company adopted SFAS 142, which requires annual
impairment testing of intangibles and provides for an indefinite life of
certain types of intangible assets.
Intangible Technology was recorded as a result of a stock issuance. The asset
does not have a definite life and will be accounted for using SFAS 142, which
requires annual impairment testing of intangibles and provides for an
indefinite life of certain types of intangibles assets.
Advertising - Advertising is expensed as incurred.
Income Taxes - Income taxes are recorded using the liability method. Under
this method, deferred taxes are determined by applying current tax rates to
the difference between the tax and financial reporting bases of assets and
liabilities. In estimating future tax consequences, all expected future events
are considered, except for potential income tax or rate changes.
Earnings Per Share - Basic net loss per share is computed on the weighted
average number of shares of common stock outstanding each period. Potentially
dilutive instruments, including stock options, are not included, because
losses have been reported for the periods presented.
2. REORGANIZATION
On September 19, 2002, the Company acquired from ARC Finance Group LLC
("ARC"), certain know how, trade secrets and other intellectual property
described below in exchange for 7,800,000 shares of the Company's common
stock. This technology was valued at $7,800. As a result of this
transaction, ARC acquired approximately 84.5% of the Company's outstanding
shares. This transaction is considered] a reverse acquisition and as a capital
transaction that results in a capital reorganization. Accordingly, the
reorganized Company's assets have been reflected at fair value. In the
reorganization, the Predecessor Company's intangible asset, Reorganization
Value in Excess of Amount Allocated to Identifiable Assets (in the amount of
$76,667) and its accumulated deficit (in the amount of $164,947) were
eliminated against Additional Paid-in Capital. There has been no goodwill or
intangible assets recognized for this reorganization in the financial
statements.
3. TECHNOLOGY
The technology relates to certain proprietary methods, processes and ideas
concerning devices and services, which, if successfully developed, may be
capable of:
* accurately measuring physiological signals and functions
* automatically and remotely evaluating these signals and / or
functions over the telephone, the Internet, or other wireless
transmission systems
F-8
* providing the patient and the patient's physician(s) with vital
information and other data on a real time basis to provide early
warnings about the patient's physical condition
No assurance can be given that commercial products or services will ever
result or that those products or services will be accepted by regulatory
agencies, physicians, patients or insurance providers.
4. POST-REORGANIZATION OPERATIONS
Upon the change in control, the Company began limited operations to begin
preliminary research and development into medical devices, which allow for the
ambulatory monitoring of physiological signals.
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. The Company is in the
development stage, has a limited operating history since its re-
capitalization, and has incurred losses since that date. 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
classification and recoverability of recorded asset amounts or the amount of
liabilities that may be incurred should the Company be unable to continue in
existence. Continuation as a going concern is dependent on obtaining funds
necessary to continue current activities and develop a marketable product.
There is no assurance that the necessary funds will be generated.
5. EQUITY TRANSACTIONS
During the year ended December 31, 2001, capital totaling $45,000 was
contributed by the Company's former President and former majority shareholder.
He also contributed capital of $35,000 and $21,400 for the periods of January
1, 2002 through September 18, 2002 and September 19, 2002 through December 31,
2002. These contributions were made for working capital purposes.
At September 19, 2002, the former President purchased a warrant for $125,000.
The warrant is to purchase 200,000 shares of common stock at an exercise price
of $2.00 per share. The warrant may not be exercised before September 1,
2003, expires in September 2006, contains cashless exercise options and
certain anti-dilution and other provisions.
During the three months ended December 31, 2002, the Company had the following
issuances of its unregistered securities:
On October 12, 2002, the Company agreed to issue a total of 700,000 shares of
its common stock to Marvin H. Fink pursuant to a four-year employment
agreement whereby Mr. Fink will serve as the Company's Chief Executive Officer
and Chairman of the Board of Directors. The shares were valued at par and
vest at the rate of 8.33% or 58,333 shares per quarter with the first 58,333
shares vesting on January 12, 2003.
F-9
On October 15, 2002, the Company agreed to issue (at par value) a total of
200,000 shares of its common stock to B World Technologies, Inc. (a company
owned by Budimir Drakulic) pursuant to a Loanout Agreement with Budimir
Drakulic and B World Technologies, Inc. whereby Dr. Drakulic will work as an
independent contractor for the Company and serve as Vice President and Chief
Technology Officer for a term of ten years. The shares vest at the rate of 5%
or 10,000 shares per quarter with the first 10,000 shares vesting on January
15, 2003.
On November 1, 2002, the Company agreed to issue (at par value) a total of
75,000 shares of its common stock to Ellsworth Roston pursuant to a two-year
consulting agreement whereby Mr. Roston will consult with the Company with
respect to the engineering, development and refining of the Company's
technologies. Mr. Roston also agreed to join the Company's board of
directors. The shares vest at the rate of 9,375 shares per quarter with the
first 9,375 shares vesting on February 1, 2003. Mr. Roston was also issued a
five-year warrant to purchase 150,000 shares of the Company's common stock at
an exercise price of $5.00 per share.
On October 30, 2002, Mr. Roston also purchased a total of 23,750 shares of the
Company's common stock for a purchase price of $190,000 or $8.00 per share.
During November 2002, the Company issued a total of 188,270 shares in exchange
for $17,786 to eleven persons who were minority shareholders of Advanced Heart
Technologies, Inc. ("AHT"). The shares were issued in connection with the
Company's agreements with Dr. Drakulic in which he assigned to the Company his
rights in certain technology. The Company agreed to fulfill certain
obligations in connection with a settlement agreement, which Dr. Drakulic
entered into with a number of minority shareholders of AHT. In connection
with Dr. Drakulic's settlement with the minority shareholders of AHT, the
Company, on October 23, 2002 issued a five-year warrant to Stephen Verchick,
who was one of the eleven shareholders, to purchase 125,000 restricted shares
of the Company's common stock at an exercise price of $.02 per share.
6. INCOME TAXES
All prior net operating loss carryovers were eliminated due to change of
ownership in September 2002. The cumulative losses since that time are of
$159,664, are available for carryover and, if not used, expires in 2022. A
valuation allowance has been provided for the deferred tax benefit resulting
from the net operating loss carryover. We have recorded a valuation allowance
for the full amount of the deferred tax asset resulting from the net operating
loss carryover due to the reorganized Company's limited operating history.
7. STOCK OPTIONS
In November 2002, our Board of Directors approved the establishment of the
2002 Stock Plan (the "Plan"). The Company intends to submit the Plan to the
shareholders for their approval at the next shareholders' meeting. The total
number of shares of Common Stock available for grant and issuance under the
Plan may not exceed 2,000,000, subject to adjustment in the event of certain
recapitalizations, reorganizations and similar transactions. Options may be
exercisable by the payment of cash or by other means as authorized by the
committee or the Board of Directors. At December 31, 2002 no options had been
granted, as the Plan, had not been approved by the shareholders.
F-10
8. SUPPLEMENTAL DISCLOSURES REGARDING CASH FLOW
During the year ended December 31, 2001, the Company issued 50,000 shares of
common stock in exchange for services valued at $5,000. Further, the majority
stockholder contributed $5,000 in marketing expenses as contributed capital.
During the period of September 19, 2002 to December 31, 2002 the Company
issued 975,000 shares of common stock in exchange for services valued at $975.
9. SUBSEQUENT EVENT
In March 2003, the Company's Board of Directors approved the establishment of
the 2003 Nonqualified Stock Option and Stock Plan. The Board of Directors
believes that the 2003 Plan encourages employees, officers, directors and
consultants to acquire an equity interest in the Company and by providing
additional incentives and awards and recognitions of their contribution to our
company's success and to encourage these persons to continue to promote the
best interest of the Company.
The 2003 Plan allows the Board of Directors to grant stock options or
issue stock from time to time to our employees, officers, directors and
consultants. Options granted under the 2003 Plan will not qualify under
Section 422 of the Internal Revenue Code of 1986 as an incentive stock option.
The 2003 Plan also provides that the Board of Directors, or a committee,
may issue free-trading or restricted stock pursuant to stock right agreements
containing such terms and conditions as the Board of Directors deems
appropriate.
The total number of shares of common stock subject to options and grants
of stock under the 2003 Plan may not exceed 500,000 shares, subject to
adjustment in the event of certain capitalizations, reorganizations, and
similar transactions. Options may be exercisable by the payment of cash or by
other means as authorized by the Board of Directors.
The Board of Directors may amend the 2003 Plan at any time, provided that
the Board of Directors may not amend the 2003 Plan to adversely effect the
rights of participants under the 2003 Plan, without stockholder approval.
F-11
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned thereunder duly authorized.
RECOM MANAGED SYSTEMS, INC.
Dated: March 21, 2003 By:/s/ Marvin H. Fink
Marvin H. Fink, Chief Executive
Officer
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
Signature Title Date
/s/ Marvin H. Fink
Marvin H. Fink Chairman of the Board and March 21, 2003
Chief Executive Officer
And Acting Chief Financial
Officer
/s/ Budimir S. Drakulic
Budimir S. Drakulic Chief Scientific Officer March 21, 2003
/s/ Steven Sparks
Steven Sparks Director March 21, 2003
/s/ Brian Oxman
Brian Oxman Director March 21, 2003
/s/ Ellsworth Roston
Ellsworth Roston Director March 21, 2003
/s/ Robert Koblin
Robert Koblin Director March 21, 2003
/s/ Raul Silvestre
Raul Silvestre Secretary and Treasurer March 21, 2003
CERTIFICATIONS
I, Marvin H. Fink, certify that:
1. I have reviewed this annual on Form 10-KSB of Recom Managed
Systems, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this annual
report;
4. I am responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is being
prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. I have disclosed, based on my most recent evaluation, to the
registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for
the registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Dated: March 21, 2003
/s/ Marvin H. Fink
Marvin H. Fink
President
(Principal Executive Officer)
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
OF
RECOM MANAGED SYSTEMS, INC.
PURSUANT TO 18 U.S.C. SECTION 1350
I certify that, to the best of my knowledge, the Annual Report on Form
10-KSB of Recom Managed Systems, Inc. for the period ending December 31, 2002:
(1) complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all
material aspects, the financial condition and results of operations of Recom
Managed Systems, Inc.
/s/ Marvin Fink
Marvin Fink
Chief Executive Officer
March 21, 2003
CERTIFICATION OF CHIEF FINANCIAL OFFICER
OF
RECOM MANAGED SYSTEMS, INC.
PURSUANT TO 18 U.S.C. SECTION 1350
I certify that, to the best of my knowledge, the Annual Report on Form
10-KSB of Recom Managed Systems, Inc. for the period ending December 31, 2002:
(1) complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all
material aspects, the financial condition and results of operations of Recom
Managed Systems, Inc.
/s/ Marvin Fink
Marvin Fink
Principal Financial Officer
March 21, 2003