UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the quarterly period ended March 31, 2000
Commission File No. 000-26111
COMTECH CONSOLIDATION GROUP, INC.
---------------------------------
(Name of small business issuer in its charter)
Delaware 76-0544385
-------- ----------
(State or jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
10497 Town & Country Way, Suite 460
Houston, TX 77024
713-554-2244
(Address, including zip code and telephone number, including area
code, of registrant's executive offices)
Common Stock
(Title of class)
Check whether the issuer (1) 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 Company was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes X NO
--- ---
24,308,634 shares of Common Stock, par value $.00967 per share, were outstanding
at March 31, 2000.
Documents Incorporated by Reference: None
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COMTECH CONSOLIDATION GROUP, INC.
FORM 10-QSB
Table of Content
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PART I - Financial Information
Item 1 - Financial Statements
Independent Accountants' Report
Consolidated Financial Statements (Reviewed)
Balance Sheets - March 31, 2000 and December 31, 1999 (Audited)
Statements of Operations - Three Months ended March 31, 2000 and 1999
Statements of Cash Flows - Three Months ended March 31, 2000 and 1999
Notes to Consolidated Financial Statements
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
PART II
Item 2 - Changes in Securities and Use of Proceeds
Item 4 - Submission of Matters to a Vote of Security Holders
Item 6 - Reports on Form 8-K
SIGNATURES
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PART I - FINANCIAL INFORMATION
ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS
R. E. BASSIE & CO., P.C.
CERTIFIED PUBLIC ACCOUNTANTS
A PROFESSIONAL CORPORATION
7171 Harwin Drive, Suite 306
Houston, Texas 77036-2197
Tel: (713) 266-0691
Fax: (713) 266-0692
E-Mail: [email protected]
INDEPENDENT ACCOUNTANTS' REPORT
-------------------------------
The Board of Directors
Comtech Consolidation Group, Inc.:
We have reviewed the accompanying condensed consolidated balance sheet of
Comtech Consolidation Group, Inc. and subsidiaries as of March 31, 2000, and the
related condensed consolidated statements of operations and cash flows for the
three-month periods ended March 31, 2000 and 1999. These financial statements
are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and of making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements for them to be in
conformity with generally accepted accounting principles.
The accompanying condensed financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 5 to the
condensed financial statements (and Note 13 to the annual financial statements
for the year ended December 31, 1999 (note presented herein), certain conditions
raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 5 (and
Note 13) to the respective financial statements.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of ComTech Consolidation Group, Inc.
and subsidiaries as of December 31, 1999, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the year then
ended (not presented herein); and in our report dated March 24, 2000, we
expressed an unqualified opinion on those consolidated financial statements and
included an explanatory paragraph concerning matters that raise substantial
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doubt about the Company's ability to continue as a going concern. In our
opinion, the information set forth in the accompanying condensed consolidated
balance sheet as of December 31, 1999 is fairly stated, in all material
respects, in relation to the consolidated balance sheet from which it has been
derived.
/s/ R. E. Bassie & Co., P.C.
Houston, Texas
May 13, 2000
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COMTECH CONSOLIDATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 2000 and December 31, 1999 (Audited)
(Unaudited - see accompanying accountants' review report)
Assets 2000 1999
- ------------------------------------------------------- ------------- --------------
(Audited)
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Current assets:
Cash. . . . . . . . . . . . . . . . . . . . . . . . . $ 64,082 $ 21,710
Accounts receivable, less allowances for contractual
adjustments and doubtful accounts of $1,000
in 2000 and 1999. . . . . . . . . . . . . . . . . . 272,578 110,007
Prepaid expenses. . . . . . . . . . . . . . . . . . . 66,000 -
------------- --------------
Total current assets. . . . . . . . . . . . . . . . 402,660 131,717
------------- --------------
Note receivable . . . . . . . . . . . . . . . . . . . . 20,000 20,000
Property and equipment, net of accumulated
depreciation and amortization . . . . . . . . . . . . 134,285 146,014
Excess of cost over net assets of businesses
acquired, less accumulated amortization of
$38,250 in 2000 and $34,000 in 1999 . . . . . . . . . 641,750 646,000
Other assets. . . . . . . . . . . . . . . . . . . . . . 4,340 4,340
------------- --------------
Total assets. . . . . . . . . . . . . . . . . . . . $ 1,203,035 $ 948,071
============= ==============
Liabilities and Stockholders' Equity
- -------------------------------------------------------
Current liabilities:
Accounts payable and accrued expenses . . . . . . . . 499,580 617,392
Accrued salaries and related liabilities. . . . . . . 144,598 131,686
Loans payable to shareholders . . . . . . . . . . . . 42,482 42,482
Notes payable . . . . . . . . . . . . . . . . . . . . 8,250 10,000
Current installments of long-term debt. . . . . . . . 308,754 63,220
------------- --------------
Total current liabilities . . . . . . . . . . . . . 1,003,664 864,780
Long-term debt, less current installments . . . . . . . 294,014 545,114
------------- --------------
Total liabilities . . . . . . . . . . . . . . . . . 1,297,678 1,409,894
------------- --------------
Stockholders' equity:
Preferred stock, $.01 par value. Authorized
1,000,000 shares: issued and outstanding,
31,562 shares in 2000 and 31,028 shares in 1999 . . 316 310
Common stock, $.00967 par value. Authorized
30,000,000 shares: issued and outstanding,
24,308,634 shares in 2000 and 22,077,072
shares in 1999. . . . . . . . . . . . . . . . . . . 235,064 213,485
Additional paid-in capital. . . . . . . . . . . . . . 2,351,071 2,024,806
Retained earnings (deficit) . . . . . . . . . . . . . (2,681,094) (2,700,424)
------------- --------------
Total stockholders' equity (deficit). . . . . . . . (94,643) (461,823)
Commitments and contingent liabilities
Total liabilities and stockholders' equity. . . . . $ 1,203,035 $ 948,071
============= ==============
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See accompanying notes to consolidated financial statements.
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COMTECH CONSOLIDATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended March 31, 2000 and 1999
(Unaudited - see accompanying accountants' review report)
2000 1999
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Revenues:
Patient service revenue, net $ 355,978 $ 4,815,313
Internet service revenue . . 169,184 159,295
------------------ -------------------
Total revenues . . . . . 525,162 4,974,608
------------------ -------------------
Operating expenses:
Health care operations . . . 243,547 3,979,773
Internet operations. . . . . 147,006 141,939
Corporate operations . . . . 99,239 76,697
Amortization . . . . . . . . 4,250 8,175
Depreciation . . . . . . . . 11,729 16,631
------------------ -------------------
Total operating expenses . 505,771 4,223,215
------------------ -------------------
Operating income . . . . . 19,391 751,393
Other income (expenses):
Interest income. . . . . . . - 18
Interest expense . . . . . . (61) (3,532)
------------------ -------------------
Net earnings . . . . . . . $ 19,330 $ 747,879
================== ===================
Net earnings per share . . . . $ 0.00 $ 0.04
================== ===================
Weighted average common shares 22,521,890 17,726,000
================== ===================
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See accompanying notes to consolidated financial statements.
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COMTECH CONSOLIDATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended March 31, 2000 and 1999
(Unaudited - see accompanying accountants' review report)
2000 1999
---------------- ------------------
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Cash flows from operating activities:
Net earnings . . . . . . . . . . . . . . . . . . . . . . $ 19,330 $ 747,879
Adjustments to reconcile net earnings to net
cash used in operating activities:
Depreciation and amortization of property
and equipment. . . . . . . . . . . . . . . . . . . 11,729 16,631
Amortization of excess of cost over net
assets of businesses acquired. . . . . . . . . . . 4,250 8,175
Increase in accounts receivable. . . . . . . . . . . (162,571) (1,303,762)
Increase in prepaid expenses . . . . . . . . . . . . (66,000) (29,178)
Decrease in other assets . . . . . . . . . . . . . . - 2,207
Increase in accounts payable and accrued
expenses . . . . . . . . . . . . . . . . . . . . . 31,788 264,188
Increase in accrued salaries and related
liabilities. . . . . . . . . . . . . . . . . . . . 12,912 246,201
Decrease in amount due to third-party payors . . . . - (24,811)
---------------- ------------------
Net cash used in operating activities. . . . . . (148,562) (72,470)
---------------- ------------------
Cash flows from investing activities:
Purchase of property and equipment . . . . . . . . . . . - (13,916)
---------------- ------------------
Net cash used in investing activities. . . . . . - (13,916)
---------------- ------------------
Cash flows from financing activities:
Principal payments on long-term debt . . . . . . . . . . (5,566) (17,678)
Repayment of short-term note payable . . . . . . . . . . (3,500) -
Proceeds from issuance of shares under private placement 200,000 104,000
---------------- ------------------
Net cash provided by operating activities. . . . 190,934 86,322
---------------- ------------------
Net increase (decrease) in cash. . . . . . . . . 42,372 (64)
Cash at beginning of year. . . . . . . . . . . . . . . . . 21,710 150,624
---------------- ------------------
Cash at end of period. . . . . . . . . . . . . . . . . . . $ 64,082 $ 150,560
================ ==================
Supplemental schedule of cash flow information:
Interest paid. . . . . . . . . . . . . . . . . . . . . . $ 61 $ -
================ ==================
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See accompanying notes to consolidated financial statements.
<PAGE>
COMTECH CONSOLIDATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) GENERAL
Comtech Consolidation Group, Inc. (Comtech or the Company) is a Houston, Texas
based consolidation Company that is focused on acquiring and building businesses
through acquisitions, with an emphasis toward technology. The Company currently
has technology operations in Houston, Texas operating under the name Networks
On-line, Inc. and healthcare operations in Louisiana, operating under the name
A-1 Bayou. All acquired companies become the direct property of Comtech and are
run as wholly owned subsidiaries. Comtech directly manage the financial and
administrative functions of all of its subsidiaries.
The unaudited consolidated financial statements have been prepared on the same
basis as the audited consolidated financial statements and, in the opinion of
management, reflect all adjustments (consisting of normal recurring adjustments)
necessary for a fair presentation for each of the periods presented. The
results of operations for interim periods are not necessarily indicative of
results to be achieved for full fiscal years.
As contemplated by the Securities and Exchange Commission (SEC) under Rule 10-01
of Regulation S-X, the accompanying consolidated financial statements and
related footnotes have been condensed and do not contain certain information
that will be included in the Company's annual consolidated financial statements
and footnotes thereto. For further information, refer to the Company's 1999
audited consolidated financial statements and related footnotes.
(2) PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows at March 31, 2000 and December
31, 1999:
2000 1999
---------- ----------
Equipment $ 240,317 $ 240,317
Furniture and fixtures 1,600 1,600
---------- ----------
Total property and equipment 241,917 241,917
Less accumulated depreciation 107,632 95,903
---------- ----------
Net property and equipment $ 134,285 $ 146,014
========== ==========
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(3) LONG-TERM DEBT
Long-term debt at March 31, 2000 and December 31, 1999 are as follows:
2000 1999
---------- ----------
Long-term debt $ 602,768 $ 608,334
Less current installments 308,754 63,220
---------- ----------
$ 294,014 $ 545,114
========== ==========
(4) FEDERAL INCOME TAX EXPENSE
The estimated federal income tax expense for the three-month periods ended March
31, 2000 and 1999 is eliminated by net operating loss carryforwards.
(5) OPERATIONAL STATUS
At March 31, 2000, current liabilities exceeded current assets by $601,004. At
March 31, 2000, the Company primarily had two operational subsidiaries: one
Internet Service Provider located in Houston, Texas and one healthcare
subsidiary located in Louisiana. The net income from these operations is not
sufficient to support corporate expenses and pay current liabilities. However,
a new Board was elected in late January 2000, which hired a new management team.
The new management installed management practices, which resulted in a
substantial reduction of corporate expenses. New management also negotiated
settlements on a substantial portion of corporate debt, decreasing debt by over
$112,000 in the first quarter. To overcome the shortfall in operating expenses,
management has raised over $250,000 in operating capital through private
placements of preferred stock. Total assets at March 31, 2000 increased by
$274,964 compared to December 31, 1999.
Management believes that actions presently being taken to obtain additional
equity financing through a secondary offering will provide adequate working
capital over the next 12 months, without creating new debt. Acquisitions and
increasing sales in the technology sector will provide the opportunity for the
Company to continue as a going concern. A more complete profile of management
plans is shown in the 1st quarter 10QSB, Item 2.
<PAGE>
(6) SUBSEQUENT EVENTS
On May 12, 2000, the shareholders voted to increase the number of authorized
shares of the Company's common stock from 30,000,000 shares to 100,000,000
shares. In addition, the shareholders also approved a performance based stock
option plan for the Company. The Board of Directors gave authorization for
management to proceed with the preparation of SEC Form SB-2 to register a
certain number of shares of common stock to be sold to obtain funds for working
capital, retire debt and for use in making acquisitions of technology related
entities, some of which the Company has already signed letters of intent to
purchase. An investment banking firm has been engaged to assist with this
placement of stock.
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ITEM 2- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
THE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
Total revenues for the three months ended March 31, 2000 and 1999 were $525,162
and $4,974,608, respectively, which is a decrease of $4,449,446 or approximately
89%. This decrease was primarily attributable to the disposal of the majority
of the Company's healthcare facilities, which represented approximately 96% of
the revenues for the three-month period ended March 31, 1999.
Net earnings for the three months ended March 31, 2000 and 1999 was $19,330 and
$747,879 respectively, which represents a decrease of $728,549, or 97%. The
decrease in net earnings for this period is primarily attributable to the
disposal of the majority of the Company's healthcare facilities, which
represented approximately 96% of the net earnings for the three-month period
ended March 31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
During February and March 2000, the Company raised $200,000 through a private
placement. The Company sold 2,000 shares of its Class E preferred stock at $100
per share. The funds were used to pay for corporate operations. The Company is
currently in negotiations with a current investor to raise additional equity
capital for the Company. The Company also plans to obtain additional equity
financing through a secondary offering within the next sixty days. There can be
no assurance that the Company will be successful in these efforts.
SUBSIDIARY OVERVIEW
NETWORKS ON-LINE, INC. (NOL) is a wholly owned subsidiary of Comtech whose
primary business is providing high speed Internet Access, Video Conferencing,
Web Hosting and other bundled Internet Services. Management's goal is to build
the revenue base of Networks On-line, Inc. from its current base of
approximately $550,000 annually, to over $2 million annually during the next
twelve months. To accomplish this task, management will hire an experienced ISP
operator whose compensation will be performance based and incentive laden to
promote achievement of Company's goals. Comtech will also seek to grow NOL
through acquisitions and groom NOL for a potential spin-off to increase
shareholder value.
A1-BAYOU is a wholly owned subsidiary of Comtech. A-1 Bayou operates in the
home health care industry. A-1 Bayou has grown its current operations to
<PAGE>
generate annual revenues of approximately $1.5 million. Last year the company
opened a second office in the Jeanerette, Louisiana area. A-1 Bayou is managed
and operated by Karvett Queen. Ms. Queen is responsible for the growth of A-1
Bayou, having opened the second branch office last year and continues to manage
the day-to-day operations of A-1 Bayou.
E-MEDICAL/HME-DME DIVISION (E-MEDICAL) - Comtech currently has an outstanding
letter of Intent to acquire all the operating assets of Gold Cross Medical and
affiliated web sites. E-Medical will concentrate its efforts on the development
of Independenceworld.com and Drynight.com. E-Medical will seek to build
independenceworld.com into the Web's most successful healthcare superstore,
taking a "clicks and bricks" approach to the business. A chain of retail
facilities located strategically as necessary will support both sites. The Web
superstore currently offers thousands of name brand products for sales in a
secure environment. Shoppers can view products' detailed photos, descriptions
and pricing information from the Web's superstore 24 hours a day, seven day's a
week. This subsidiary has the potential to contribute tremendous revenue growth
to ComTech's bottom line.
MARKETING ANALYSIS
Comtech subsidiaries operate in two basic market segments: technology and
healthcare. Each segment is highly fragmented with the major players putting
tremendous pressure on the smaller companies to complete. As a Micro-cap
company, Comtech is always searching for under served or niche sectors of the
market. By identifying these opportunities, Comtech seeks to provide the
consumer with superior service while also partnering with the smaller retailers
nationally, giving them a competitive edge as they compete for market share
against the larger companies.
One such sector management has identified is the e-medical sector. This sector
has been slow to see the value of the New Economies convergence of "clicks and
bricks." Due to the tremendous pressure e-commerce only companies are currently
experiencing management feels that the predictable revenue stream the retail
locations will provide should help offset those net-only challenges. This
strategy will also give Comtech a national distribution channel for the Web
sites.
Comtech mission in the e-medical sector is to provide the consumer with the
benefits of the Internet without losing the personal service touch and local
feel of the business.
The expertise of the professionals in the field will be an invaluable resource
to the success of the Web superstore. Comtech will build a national support
channel of retail DME/HME retail locations to support the Web e - medical
superstore through organic growth as well as acquisitions.
<PAGE>
Management will also build out a business-to-business opportunity by providing
smaller DME/HME facilities with the ability to auction off used equipment or
excess inventory to other operators nationally. In addition to the auction
capabilities of the site, Comtech will buy and sell used and excess inventory as
needed. The site will also provide customers with valuable regional content
targeted at the problems facing today's senior population.
MARKETING PLAN
NETWORKS ON-LINE, INC.
The Company intends to increase marketing efforts across the board for all
subsidiaries in a cost-effective manner. Management will develop a defined and
targeted marketing campaign for Networks On-Line, Inc. through a variety of
print and media advertising and marketing programs. These programs will be
designed to grow the subscriber base of NOL, while seeking to develop added
revenue streams available to the company.
E-MEDICAL DIVISION
Comtech will seek to market this division mainly through the Internet and
targeted Media. As this division develops into an e-medical portal site,
Comtech will implement marketing programs and partnerships designed to drive
significant Internet traffic to these sites. The company is currently planning
to leverage the talent of Web developer and Internet marketing firm
Interlucent.com in addition to Networks On-Line, Inc. to complete an overhaul of
the current sites and implement an Internet marketing strategy.
FINANCIAL PLAN
Management's goals are to increase revenues to $10 to $12 million dollars over
the next 12-month period, with revenues increasing to over $20 million dollars
in 24 months. The company plans to grow revenue through internal growth and
acquisitions, with the acquisitions financed primarily through the issuance of
restricted common shares or preferred stock. Management plans to complete a
private placement of common stock to properly fund the operations of the parent
company.
The increase in profits generated by acquiring profitable companies and
providing superior, cost effective management and back office functions will
provide Comtech with the necessary capital to grow the company.
CONCLUSION
By successfully executing the company's business plan Comtech will be able to
grow the company into a valuable profitable entity. With the tremendous
<PAGE>
consolidation and spin-off opportunities available to the Company and its
shareholders, Comtech will play a major role in revolutionizing the e-medical
industry and at the same time provide its customers the best service and content
in the industry.
PART II - OTHER INFORMATION
ITEM 2 - CHANGES IN SECURITIES AND USES OF PROCEEDS
On February 23, 2000, the Company sold 2,000 shares of its Class E preferred
stock to a current shareholder (Jim Thuney) for a price of $100 per share for
gross proceeds of $200,000. Each share of the Class E preferred stock has an
annual cumulative dividend equal to 8%, with a term of 12 months, and is
convertible into 650 shares of the Company's common stock. At March 31, 2000,
the Company has used approximately $58,000 of the proceeds for legal services,
$54,000 for auditing services, $55,000 for salaries and the remaining $33,000
for operating purposes.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The meeting was an annual shareholders meeting and was held on Friday,
May 12, 2000.
(b) The following directors were elected at the meeting:
Walter D. Davis, Chairman, President and Chief Executive Officer
Lamont Waddell, Director and Chief Financial Officer
Vincent E. Alexander, Director and Chair of the Audit Committee
Beatrice Beasley, Director, Secretary and Chair of the Compensation
Committee
Jessee Funchess, Director
(c) The following matters were submitted to a vote of shareholders during
this quarter through the solicitation of proxies:
1. Election of members of the Board of Directors
Results of election: For: 16,445,647, Against: -0-, Abstentions:
2,012,705
2. Increase in the number of authorized common shares
Results of election: For: 15,917,000, Against: 594,891, Abstentions:
148,334
3. Approval of a performance based employee stock option plan
Results of election: For: 13,001,367, Against: 484,190, Abstentions:
71,250
<PAGE>
4. Approval of R.E. Bassie & Co., P.C. as the Company's independent public
accountants for 2000
Results of election: For: 16,487,997, Against: 132,505, Abstentions: 39,923
ITEM 6 REPORTS ON FORM 8-K
(a) Exhibits - Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K - One report on Form 8-K was filed during the
quarter.
The Company filed Form 8-K on February 11, 2000 to announce the resignation of
Joel B. Flowers from the Company's Board of Directors.
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, thereunto duly authorized.
/s/ Lamont Waddell
- --------------------
Lamont Waddell,
Chief Financial Officer
<PAGE>
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