As filed with the Securities and Exchange Commission on August 30, 2000.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB-2/A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
(AMENDMENT NO. 1)
COMTECH CONSOLIDATION GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 7375; 8082 76-0544385
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
Copies to:
Comtech Consolidation Group, Inc. T. Deon Warner
10497 Town & Country Way Warner & Washington L.L.P.
Suite 460 4410 Montrose Blvd.
Houston, Texas 77024 Houston, Texas 77006
(713) 554-2244 (713) 807-1007
Approximate date of proposed sale to the public: As soon as practicable
after this Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ].
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ].
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ].
If delivery of the prospectus is expected to be made pursuant to Rule 434
check the following box. [ ]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
<S> <C> <C> <C> <C>
Proposed Proposed
Amount Maximum Maximum Amount of
Title of Each Class of Securities To Be Offering Price Aggregate Registration
To be Registered Registered Per Unit Offering Price Fee (2)
--------------------------------- ---------- ---------------- --------------- --------------
Common Stock 26,245,082 $ 0.15 (1) $ 3,936,762 $ 1,069.20
<FN>
1. The proposed offering price is estimated solely for the purpose of calculating the
registration fee. Pursuant to Rule 457(c) the registration fee is based on $0.15 per share for
the Common Stock, the average of the high and low prices of the Common Stock reported on NASDAQ
on July 7, 2000.
2. Previously paid on July 12, 2000.
</TABLE>
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECRURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICIATION OR SALE WOULD BE UNLAWFUL PRIOR TO
REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS FO ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION DATED AUGUST 30, 2000
PROPSECTUS
COMTECH CONSOLIDATION GROUP, INC.
--------------------------------------------------------------------------------
SECURITIES TO BE ISSUED BY THE COMPANY:
23,000,000 SHARES OF COMMON STOCK
SECURITIES TO BE OFFERED BY SELLING SHAREHOLDERS:
3,245,082 SHARES OF COMMON STOCK
--------------------------------------------------------------------------------
Comtech Consolidation Group, Inc., a Delaware corporation (the "Company" or
"Comtech"), is offering, upon the terms and conditions set forth herein,
23,000,000 shares of Common Stock, par value $.00967 per share ("Common Stock"),
of the Company. In addition, nineteen shareholders of the Company are offering
up to 3,245,082 shares of Common Stock to the public. For detailed information
on who is selling their shares look on page 33 below under the Section entitled
"Selling Security Holders."
The Company's Common Stock is listed for trading on the NASDAQ Small Cap
Market under the symbol "CCGI".
The Company and the nineteen shareholders intend to sell the shares into
the public market from time to time. The Company and the shareholders will
negotiate with the market makers for the Company's Common Stock to determine the
prices for each sale. They expect each sale price to be near to the market
price at the time of sale.
Purchase of Comtech's Common Stock involves risk. Please see the section
below entitled "Risk Factors," which begins on page 6.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this Prospectus. Any representation to the contrary is
a criminal offense.
All prospective purchasers receiving this Prospectus are urged to read this
Prospectus carefully.
THE DATE OF THIS PROSPECTUS IS AUGUST ____, 2000
2
<PAGE>
TABLE OF CONTENTS
PROSPECTUS SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
SUMMARY FINANCIAL INFORMATION. . . . . . . . . . . . . . . . . . . . . . 5
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
YOU SHOULD NOT RELY ON
FORWARD LOOKING STATEMENTS. . . . . . . . . . . . . . . . . . . . . 8
USE OF PROCEEDS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
DIVIDEND POLICY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
CAPITALIZATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS. . . . . . . . . . . . . . 11
DESCRIPTION OF BUSINESS. . . . . . . . . . . . . . . . . . . . . . . . . 17
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
PRINCIPAL SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . 28
DESCRIPTION OF OUR SECURITIES. . . . . . . . . . . . . . . . . . . . . . 29
INTEREST OF NAMED EXPERTS AND COUNSEL. . . . . . . . . . . . . . . . . . 31
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES . . . . . . . . . . . . . . . . . . . . . 31
RELATED PARTY TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . 31
SELLING SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . 32
PLAN OF DISTRIBUTION . . . . . . . . . . . . . . . . . . . . . . . . . . 33
LEGAL MATTERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
EXPERTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
ADDITIONAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . 33
INDEX TO FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . . . 34
3
<PAGE>
PROSPECTUS SUMMARY
Comtech Consolidation Group, Inc.
Comtech Consolidation Group, Inc., f/k/a Vending Group, Inc. ("Comtech" or
the "Company") was incorporated on July 13, 1987 under the laws of the State of
Delaware. Comtech is engaged in the acquisition and consolidation of business
operations of small companies. Comtech currently operates A-1 Bayou, a home
health care agency located in Jeanerette, Louisiana and owns EISP Corporation
("EISP"), a provider of high speed Internet access and other enhanced Internet
services such as teleconferencing and broadcast faxing, and Networks On-Line,
Inc. ("NOL"), a network integrator and internet service provider.
Comtech has two leased offices, the main office is located at 10497 Town &
Country Way, Suite 460, Houston, Texas, 77024 and the health care office is
located at 9884 Greenwell Spring Road, Suite C, Baton Rouge, Louisiana 70814.
Our main telephone number is (713) 554-2244.
The Selling Shareholders
Nineteen Shareholders are using this Prospectus to sell shares of Comtech
Common Stock to the public. Ten shareholders acquired their shares in exchange
for professional services rendered on behalf of Comtech. Seven shareholders
acquired their shares as a result of a private financing of Comtech's Common
Stock and convertible Preferred Stock in 2000. One shareholder acquired its
shares in exchange for past due employee wages accrued in 1998. 200,000 shares
of Common Stock are being registered as part of the CCGI Settlement, a
litigation settlement with various prior holders of Comtech's Preferred Stock.
Such holders alleged they had rights to past due dividends and to convert their
Preferred Stock holdings into 1,900,000 shares of Common Stock and Comtech
disputed such rights. Both Comtech and the holders settled their disputes for
the issuance and registration, when possible, of 1,900,000 shares of Common
Stock for the holders.
Outstanding Shares
Comtech has issued two classes of stock: Common Stock and Preferred Stock.
As of August 30, 2000, there were 28,341,714 shares of Common Stock outstanding
and 9,839 shares of Preferred Stock outstanding. In addition, there are options
and contract rights outstanding that could lead to additional shares of Common
Stock being issued. We cannot determine at this time the number of additional
shares that could be issued, because some of the contract rights are based on
the future market price of our Common Stock.
4
<PAGE>
SUMMARY FINANCIAL INFORMATION
The Information for years 1999 and 1998 and the six months periods ended
June 30, 2000 and 1999 is derived from the financial statements included at the
end of this prospectus. The information for the six-month periods ended June
30, 2000 and 1999 have not been audited, but in our opinion, we have made all
adjustments necessary for a fair presentation of the financial results for those
quarters. Results for the six-month period ended June 30, 2000 are not
indicative of the results that can be expected for the year.
<TABLE>
<CAPTION>
STATEMENT OF JUNE 30 JUNE 30
OPERATIONS YEAR ENDED YEAR ENDED 2000 1999
12/31/99 12/31/98 (UNAUDITED) (UNAUDITED)
------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 1,576,011 $ 751,558 $ 973,160 $ 883,415
Operating Expenses 2,752,600 1,057,866 931,512 857,134
------------------ ------------ ------------ ------------
Operating Income
(Loss) (1,176,589) (306,308) 41,648 26,281
Other Income (Loss) (4,617) (27,925) (67) (1,862)
Income (Loss) from
Discontinued Operations (1,910,372) 1,049,818 -- 1,613,719
------------------ ------------ ------------ ------------
NetIncome/(Loss) $ (3,091,578) $ 715,585 $ 41,581 $ 1,638,138
============================================================
NetIncome/(Loss)
Per Share $(0.13) $0.04 $ 0.00 $ 0.08
============================================================
Weighted Average
Number of Shares
Outstanding 24,634,045 16,312,361 27,684,379 19,641,600
BALANCE SHEET JUNE 30 JUNE 30
DATA YEAR ENDED YEAR ENDED 2000 1999
12/31/99 12/31/98 (UNAUDITED) (UNAUDITED)
------------------------------------------------------------
Working Capital $ 21,710 $ 40,505 $ 41,696 $ 21,710
Total Assets 948,071 2,683,897 1,341,254 948,071
Long-term Liabilities 545,114 417,136 294,014 545,114
Total Liabilities 1,409,894 1,042,128 1,366,326 1,409,894
Shareholders'
Equity (461,823) 1,641,769 (25,072) (461,823)
</TABLE>
5
<PAGE>
RISK FACTORS
You should carefully consider the risks described below before buying our
Common Stock. If any of the risks described below actually occurs, that event
could cause the trading price of our Common Stock to decline, and you could lose
all or part of your investment
We may not become profitable
From inception though June 30, 2000, we had a capital deficit of $25,072.
From June 30, 1999 to June 30, 2000, our working capital increased from $21,710
to $41,696. Unless our revenues increase significantly, we will increase our
capital deficit.
Our Accountants' have included a paragraph in their opinion expressing some
doubt about the Company's ability to continue to operate
The Company's independent certified public accountants included an
explanatory paragraph in their opinion with respect to the Company's financial
statements to reflect the recurring losses from operations have raised
substantial doubt about the ability of the Company to continue as a going
concern. The Company's internally generated cash flows from operations have
historically been, and continue to be, insufficient for cash needs. The Company
has, therefore, relied upon external equity financing to continue its
operations.
We have a need for additional cash
Our efforts to develop and grow our Internet service business has required,
and will continue to require, us to invest in infrastructure and systems
development. In addition, in our health care business, our reliance on
government programs such as Medicare and Medicaid to fund our healthcare
operations puts our prospective revenues at risk due to the delays in payment
and potential for those agencies to hold back payments and seek repayment of
previously paid revenues. The Company has incurred substantial losses since
inception and expects to continue to incur losses through the fourth quarter of
2000. Also, we expect to need additional investment money in the future.
Currently, we do not have sufficient capital to meet our projected cash
requirements over the next 6 months. The Company expects to satisfy its cash
shortages with (i) the sale of additional shares of Common Stock pursuant to
private financed investments, (ii) the proceeds of the sale of the securities in
this prospectus and (iii) the proceeds of a bank line of credit, which the
Company is presently seeking to obtain. If we experience greater than
anticipated cash needs, or if the implementation of our operating strategy fails
to produce the revenue growth and cash flows we expected or if additional
sources of cash are needed earlier than currently anticipated, we may not be
able to continue operations. To understand our cash needs, see the section
below entitled "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources."
There is risk in growing to fast; we also have risk due to the recent management
changes
The Company's growth has placed, and is expected to continue to place, a
significant strain on the Company's limited management. We do not have enough
money to hire additional administrative, operational, financial and technical
people to assist the current management with operating Comtech. Comtech has had
recent changes in its chief executive officer and chief financial officer over
the past two years and the current chief executive officer and chief financial
officer have worked together since December 1999. The Company believes it will
need, both in the short term and the long term, to hire additional qualified
administrative and management employees to assist with its operations. If we
are unable to find qualified employees or to retain them, our growth could be
negatively affected.
Our core businesses are highly competitive and we may not be able to compete
with others in our industries.
If our computer systems should break, our revenues from that business could
drop and therefore any profits that we expected to make would also drop.
6
<PAGE>
Lack of Long-Term Customer Contracts
The majority of our Internet services are performed pursuant to purchase
orders from customers and not though long-term contracts. Because our contracts
are short-term, we could lose a significant number of them at any one time and
therefore end up with less revenue.
The Pricing for Internet Services is Uncertain
Prices for Internet services continue to fall each year. We expect these
prices to continue to fall. As a result, we have to constantly update our
pricing schedules to compete for customers. If we do not keep our pricing
schedule competitive, we could lose business.
The technology in our businesses (especially the Internet business) change every
year
Any new technological changes that we do not keep up with could hurt our
ability to compete. Because of our lack of operating cash, we may not be able
to keep up with the new technology in our industries.
The Company uses the Internet to conduct most of its EISP and NOL business.
If the Internet is shut down or if the government begins taxing transmissions on
the Internet, then the Company's revenues from the Internet could either stop or
significantly be reduced. The Company's future success will depend on its
ability to route its customers' traffic through the Internet and through
dedicated and/or partially dedicated data network lines. The Company depends on
the existence and use of the Internet and other methods of transmission to
generate revenues from its customers.
The Company does not have any patents or other protected rights in its
names, software or equipment.
Part of the Company's strategy is to acquire customer databases from other
businesses. The Company also plans to get access to the other databases by
entering into strategic alliances with companies that have large customer
databases, switching capabilities or existing networks. Comtech will finance
any future acquisitions, investments or strategic alliances with either
additional shares of Comtech's Common Stock or through the issuance by Comtech
of debt securities. There are many risks associated with issuing equity or debt
for acquisitions, including, but not limited to, (i) the difficulty of
identifying appropriate acquisition candidates, (ii) the difficulty of
assimilating the operations and personnel of the respective entities, (iii) the
potential disruption of the Company's ongoing business, (iv) the inability of
management to capitalize on the opportunities presented by acquisitions,
investments, strategic alliances or related efforts, (v) the failure to
successfully incorporate licensed or acquired technology and rights into the
Company's services, (vi) the inability of Comtech to maintain uniform standards,
controls, procedures and policies between its operations and the acquired
company's operations and (vii) the relationships problems among employees and
customers as a result of changes in management.
Both of the Comtech's business units are subject to government regulation
and oversight. Comtech's EISP and NOL divisions are subject to regulation by
the Federal Communications Commission (the "FCC"), by various state public
service and public utility commissions and by various international regulatory
authorities. Generally, the FCC has chosen not to closely regulate the charges
or practices of non-dominant carriers. The FCC also has the power to impose
more stringent regulatory requirements on the Company and to change its
regulatory classification. If this happens, it could cost Comtech more dollars
to operate and therefore decrease Comtech's revenues. Comtech's EISP and NOL
businesses are also subject to federal and state laws regulating the unsolicited
transmission of e-mail transmissions for advertisement purposes. Comtech has
adopted a policy to refrain from transmitting e-mail advertisements except to
the Company's own customers and other recipients who have expressed an interest
in receiving the transmitted information or otherwise have given their
permission to receive such transmissions.
The Company's healthcare division is also subject to various state and
federal laws that regulate the relationships between patients and the providers
of health care services. These laws include the fraud and abuse provisions of
the Social Security Act, which include "anti-kickback" and "anti-referral"
laws. The "anti-kickback" laws prohibit the solicitation, payment, receipt, or
offering of any direct or indirect remuneration for the referral of Medicare or
Medicaid patients or for the ordering or providing of Medicare or Medicaid
covered services, items or equipment. The "anti-referral" laws impose
7
<PAGE>
restrictions on physicians' referrals for designated health services to entities
with which they have financial relationships. Violations of these laws may
result in substantial civil or criminal penalties for individuals or entities,
including large civil monetary penalties and exclusion from participation in the
Medicare and Medicaid programs. Such exclusion, if applied to Comtech's
healthcare division, could result in significant loss of reimbursement.
Reimbursement; Trends and Cost Containment
Comtech's healthcare business is subject to the same cost cutting trend
that the rest of the healthcare industry is experiencing. Comtech's management
believes that these trends will continue to result in a reduction of revenues.
There is no market maker providing strong support for our Common Stock. As
a result, our Common Stock is low-priced, thinly traded, and subject to
relatively wide swings in price. The public trading market for the Company's
Common Stock has a minimal trading volume (approximately 200,000 shares per day)
and there can be no assurance that the trading market will improve. For the
past year, with the decline in Comtech's business results and the closing of
many of its operating subsidiaries, interest in Comtech's Common Stock within
the investment community has waned. Unless interest in the Common Stock and a
thriving market for the Common Stock emerges, you may find it impossible to sell
Comtech shares at a profit, and may find it difficult to sell them at all.
The shares of Comtech Preferred Stock will be converted into large numbers
of shares of Common Stock, which will dilute the value of your shares. In
addition, any additional sells of shares of Common Stock may dilute the value of
your shares.
Comtech has issued and outstanding 6,355 shares of Class B Preferred Stock
with a face value of $100.00 per share. The Preferred Stock (plus an 8% annual
accrual) will be converted into Common Stock at a rate equal to 80% of the then
current market price of the Common Stock. Assuming a price of $0.15, the
conversion of all of the Class B Preferred Stock would convert into 5,295,833
shares of Common Stock.
Comtech has issued and outstanding 3,484 shares of Class E Preferred Stock
with a face value of $100.00 per share. The Preferred Stock (plus an 8% annual
accrual) will be converted into Common Stock at a rate of 650 shares of Common
Stock for each 1 share of Preferred Stock. If all of the Class E Preferred
Stock were converted into Common Stock, it would convert into 2,264,600 shares
of Common Stock.
Comtech's management has the authority to issue up to 1,000,000 shares of
preferred stock and up to an additional 71,658,296 shares of Common Stock.
YOU SHOULD NOT RELY ON FORWARD LOOKING STATEMENTS
This Prospectus contains forward-looking statements, including statements
regarding Comtech's future plans and growth strategies and anticipated trends in
the industry. Among the forward-looking statements are descriptions of our
plans to acquire other companies, to increase our revenues and to raise
additional capital. These forward-looking statements are a true statement of
our present intentions, but are neither predictions of the future nor assurances
that any of our intentions will be fulfilled. Many factors beyond our control
could act to thwart Comtech in its efforts to develop and market its services,
including factors discussed in the section above entitled "Risk Factors," above,
as well as factors we have not foreseen. In addition, changing circumstances
may cause us to determine that a change in plans will be in the best interests
of Comtech.
8
<PAGE>
USE OF PROCEEDS
Management of the Company expects the net proceeds from the Offering to be
approximately $3,350,000 after deducting estimated expenses assuming 23,000,000
shares of Common Stock registered hereunder are sold at a price per share of
$.15 and the Company's offering expenses do not exceed $100,000. The Company
will use the proceeds, if any, from the sale of the shares of Common Stock (i)
to retire vendor payables and other debt of the Company, (ii) to pay expenses
associated with registering shares for the selling shareholders and (iii) for
general corporate purposes. The Company's current vendor payables and other
debt approximate $1,277,997 and its general corporate needs for the period July
2000 thru June 2001 are expected to be $1,397,893.
DIVIDEND POLICY
Comtech has never declared or paid any dividends on its Common Stock to
date. The current policy of the Board of Directors is to retain earnings, if
any, to provide funds for operating and expansion of the Company's business.
The Company is required to pay dividends on all outstanding classes of Preferred
Stock prior to payments, if any, of dividends on its Common Stock. As of June
30, 2000, the Company had accrued, but unpaid, dividends of $74,318 on its
Preferred Stock.
CAPITALIZATION
As of August 30, 2000, there were 28,341,714 shares of Common Stock
outstanding and other securities of Comtech convertible into shares of Common
Stock.
The following table identifies the other securities convertible into shares
of Common Stock as of August 30, 2000.
<TABLE>
<CAPTION>
Number of Shares of Number of Shares
Derivative Securities Preferred Stock Of Common Stock Isssuable
--------------------- ------------------- -------------------------
<S> <C> <C>
Class B Preferred Stock (1) 6,355 5,295,833
Class E Preferred Stock (2) 3,484 2,264,600
Incentive Stock Options
Exercisable at $0.33 - 966,500
Incentive Stock Options
Exercisable at $0.195 - 1,265,831
Other Stock Options
Exercisable at $0.16 100,000
Total:
Common Stock currently outstanding 28,341,714
----------
Total: 38,234,478
--------------------
<FN>
1. Based on a conversion price of $0.15 per share of Common Stock.
2. Based on a conversion rate of 650 shares of Common Stock for each share of Class E Preferred Stock.
</TABLE>
9
<PAGE>
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the OTC Bulletin Board under the
symbol "CCGI." The Company' authorized capital stock consist of 100,000,000
shares of common stock, $.00967 par value, of which 28,341,714 shares were
issued and outstanding as of August 30, 2000 and 1,000,000 shares of preferred
stock, $.01 par value, of which 9,839 shares were issued and outstanding as of
August 30, 2000.
As of June 30, 2000, the approximate number of holders of record of the
common stock of the Company was [3,600].
The Company has never paid any cash dividends in the past and anticipates
that for the foreseeable future all earnings, if any, will be retained to
finance growth and to meet working capital requirements.
The Common Stock is traded over the counter on the National Association of
Securities Dealers Automated Quotation System ("NASDAQ"). The high and low of
the sales price for the Common Stock for the past four quarters is as follows:
DATE HI SALES PRICE LOW SALES PRICE
-------------------- -------------- ---------------
THIRD QUARTER 1999 .1.02 .375
FOURTH QUARTER 1999 .65 .25
FIRST QUARTER 2000 .85 .28
SECOND QUARTER 2000 .19 .28
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following is a discussion of the financial condition and results of
operations of the Company for the years ended December 31, 1999 and 1998 and the
six months ended June 30, 2000 and 1999. It should be read in conjunction with
the financial statements and the notes thereto included elsewhere in this
Prospectus. The following information contains forward-looking statements. For
a discussion of certain limitations inherent in such statements, see "Risk
Factors - Forward Looking Statements."
OVERVIEW
STATE OF THE COMPANY AT THE CHANGE OF MANAGEMENT
A change of management occurred in the first quarter of 2000. It included
the appointment of three independent board members and the election of Walter
Davis as Chief Executive Officer and Lamont Waddell as Chief Financial Officer.
At that point in time morale was low, stock values were in decline and the
company was in poor financial condition due to significant management problems
and in part to the closure of most of its healthcare subsidiaries.
NEW MANAGEMENT'S PHILOSOPHIES
The new management team of Comtech decided to redirect the Company to take
advantage of the growth of the Internet industry. Management intends to refocus
the Company's operations to technology and technology related aspects of the
Internet industry. Management made several changes to help meet its Capital
needs and to hold unto key employees. First, we established relationships with
investment-banking firms to assist us with our capital needs. Second, we
recently submitted a proposal to our shareholders to prepare an employee stock
option plan so we might compensate our key executives and the board. Because we
believe the Company's best area of growth is in the Internet, we are channeling
our hiring, joint ventures ad other operational plans toward EISP and NOL-our
subsidiaries in that industry.
FUTURE PLANS AND PROSPECTS
The Company intends to acquire Internet related companies by issuing
shares of the Company's stock. As of the date of this report, management has
begun seeking discussions with potential merger and acquisition candidates, but
there are no definitive agreements between the Company and any merger
candidates. Current management recognizes that some of the Company's prior
acquisitions negatively impacted the Company. As a result, we have established
a due diligence team to Assist us with our review of acquisition candidates.
CERTAIN ACCOUNTING POLICIES
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards board issued Statement of
Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 is effective for fiscal years
beginning after June 15, 2000. SFAS No. 133 established standards for
accounting and reporting of derivative financial instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. The accounting for changes in fair value of a derivative depends
on the intended use of the derivative and the resulting designation. Management
is currently in the process of assessing the impact of SFAS No. 133 to the
Company.
In December 1998, the AICPA issued Statement of Position (SOP) No. 98-9,
Modification of SOP 97-2, Software Revenue Recognition, with Respect to Certain
Transactions. SOP No. 98-9 requires recognition of revenue using the "residual
method" in a multiple-element software arrangement when fair value does not
exist for one or more of the delivered elements in the arrangement. Under the
"residual method", the total fair value of the undelivered elements is deferred
and recognized in accordance with SOP No. 97-2. The Company will be required to
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implement SOP No. 98-9 for the year beginning Jan. 1, 1999. SOP No. 98-9 also
extends the deferral of the application of SOP No. 97-2 to certain other
multiple element software arrangements until the date SOP 98-9 becomes
effective. The Company does not expect a material change to its accounting for
revenues as a result of the provisions of SOP 98-9.
Summary of Significant Accounting Policies
(a) Revenue Recognition
The Company recognizes revenue in accordance with Statement of Position No.
97-2, Internet Revenue Recognition. Internet license revenue is recognized when
all of the following criteria have been met: there is an executed license
agreement, software has been shipped to the customer, no significant vendor
obligations remain, the license fee is fixed and payable within a month and
collection is deemed probable. Maintenance revenues are recognized ratably over
the term of the contract, typically 3 - 12 months. Consulting and other
revenues are recognized when services are performed.
Deferred revenue represents payment received or amounts in advance of
services to be performed.
(b) Software Development Costs
Software development costs are expensed as incurred until technological
feasibility is established. Software development costs incurred subsequent to
establishing technological feasibility are capitalized and amortized over their
estimated useful lives. During 1999 and 1998, no software development costs
were capitalized.
(c) Comprehensive Income
Comprehensive income represents the change in stockholders' deficit
resulting from other than stockholder investments and distributions.
Accumulated other comprehensive income (loss) in the consolidated statements of
stockholders' deficit is solely comprised of the accumulated foreign currency
translation adjustment.
(d) Net loss per Share
Basic loss per share is computed by dividing net loss available to common
stockholders by the weighted-average number of share outstanding during the
period. Diluted earning per share recognizes the potential dilution caused by
stock options and warrants determined by the treasury stock method and the
effects of convertible debt.
(e) Stock-based Compensation
The Company uses the intrinsic value-based method prescribed by Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees,
and related interpretations in accounting for employee stock options. Under the
intrinsic value method, compensation expense is recorded only to the extent that
the market price of the common stock exceeds the exercise price of the stock
option on the date of grant.
(f) Income Taxes
The Company accounts for income taxes using the asset and liability method.
Under the asset and liability method, deferred tax assets and liabilities are
recognized at the enacted rates for the future tax consequences attributable to
differences between financial statement carrying amounts of existing tax assets
and liabilities and their respective tax basis. The effect on deferred tax
assets and liabilities of a change in tax rate is recognized in income in the
period that includes the enactment date. Valuation allowances are established
when necessary to reduce deferred tax assets to the amounts expected to be
realized.
(g) Fair Value of Financial Instruments
The carrying value of the Company's financial assets and liabilities,
because of their short-term nature, approximates fair value. The carrying value
of notes payable and long-term debt approximates fair value because the current
rates approximate market rates available on similar instruments.
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(h) Cash and Cash Equivalents
Cash equivalents consist of highly liquid money market accounts carried at
cost plus accrued interest, which approximates market value. All cash
equivalents have remaining maturities of 90 days or less.
(i) Stock Subscription Receivable
Stock subscription receivables that are paid in full by the subscriber
prior to the date the financial statements are issued are reflected as a current
asset.
(j) Property and Equipment, Net
Property and equipment consists of property, equipment, furniture and
computers and are stated at cost less accumulated depreciation. Depreciation is
calculated using the straight-line method over the estimated useful lives of the
respective assets, which generally range from three to seven years.
(k) Advertising Costs
Advertising costs are expensed as incurred. Advertising costs totaled
approximately $156,000 and $130,000 for the years ended December 31, 1999 and
1998, respectively.
(l) Business and Credit Concentrations
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist primarily of trade accounts receivable.
The Company sells principally to resellers and end users in the United States,
Australia, and Europe. The Company performs ongoing credit evaluations of its
customers and has not experienced significant credit losses in the past.
(m) Impairment of Long-lived Assets and Assets to be Disposed Of
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net undiscounted cash flows expected to be generate by the amount by
which the carrying amount of the assets exceeds the fair value of the assets.
Assets to be disposed of are reported at the lower of the carrying amount or
fair value less costs to sell.
(n) Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of those assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. A change in the facts and circumstances surrounding these
estimates could result in a change to the estimates and impact future operating
results.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
Total revenues for the six months ended June 30, 2000 and 1999 were
$973,160 and $883,415, respectively, which is an increase of $89,745 or
approximately %10. This increase was primarily attributable to an increase in
healthcare revenues from the current operating entities.
Net earnings for the six months ended June 30, 2000 and 1999 were $41,581
and $1,638,138, respectively, which represents a decrease of $1,596,557, or
97.5%. The decrease in net earnings for this period is primarily due to (i) the
disposal of the majority of the Company's healthcare facilities in 1999 which
resulted in a significant loss in revenues in 2000 and (ii) $837,839 of earnings
posted in the first two quarters of 1999 from the discontinued healthcare
operations.
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YEAR END DECEMBER 31, 1999 COMPARED TO DECEMBER 31, 1998
Total revenues for 1999 of $1,576,011 represents an increase of $824,453 or
109% increase from revenues of $751,558 in 1998. This increase was primarily
due to increased revenues from the Company's health care facilities in 1999,
acquisition of new health care facilities in 1999 and an aggregate five-month
operating period for the Company's health care facilities in 1998.
The Company reported a net loss of $3,091,578 in 1999 as compared to net
income of $715,585 in 1998. The amount of the net loss in 1999 from 1998 is
primarily due to (i) higher operating expenses in 1999, (ii) an increase of
$969,396 in corporate expenses in 1999 and (iii) losses in 1999 aggregating
$1,910,372 from the discontinued health care operations. The increase in
corporate expenses is due to the accrual of approximately $400,000 in expenses
related to settled and pending litigation, $71,000 in legal expenses, $374,000
in expenses for investor relations paid in stock, $86,000 in bad debts related
to loans to subsidiaries, and $113,000 in compensation to officers.
LIQUIDITY AND CAPITAL RESOURCES
During the first two quarters of this year, the Company raised $240,500
through private sales of the Company's Class E Preferred Stock and Common Stock.
The Company sold 2,118 shares of its Class E preferred stock at $100 per share
and 549,526 shares of its Common Stock. The funds were used to pay for
corporate operations. The Company is currently in negotiations with an investor
to raise additional private equity capital for the Company. The Company has
immediate cash requirements that will require it to raise additional capital
immediately.
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. All of the operations of EISP (which are not significant)
are captured in the financial and other information for NOL.
Networks On-Line has several different types of clients, each on
month-to-month contracts. Either party may cancel these contracts at the end of
the current month. As of May 10, 2000, approximately 15 of NOL's accounts were
co-located, Ethernet, or T-1 accounts. These accounts generate approximately
$6,000 in monthly billings. NOL also provides ISDN services. The company has
over 100 clients receiving ISDN service. These accounts generate nearly $13,000
in monthly billings. Some of the accounts that NOL has are billed on a
quarterly or semi-annual basis, but these amounts have been averaged in to the
above calculations for simplicity.
The loss of one or two clients would not decrease NOL's revenues
significantly. NOL has a sufficiently diverse client base that it would
survive. However, with the levels of competition in this marketplace, NOL will
need to develop a strong marketing team to expand its client base and generate
additional income.
A-ONE BAYOU is a wholly owned subsidiary of Comtech. A-One Bayou operates
in the home health care industry. A-One Bayou has grown its current operations
to generate annual revenues of approximately $1.5 million. Last year the
company opened a second office in the Jeanerette, Louisiana area. A-One Bayou
is managed and operated by Karvett Queen. Ms. Queen is responsible for the
growth of A-One Bayou, having opened the second branch office last year and
continues to manage the day-to-day operations of A-One Bayou.
The Company's health care subsidiaries have agreements with third-party
payers (primarily Medicare and Medicaid programs) that provide for payments to
the Company at amounts different from its established rate for services and
supplies. Payment arrangements include prospectively determined rates,
reimbursed costs, discounted charges, and other arrangements. Patient service
revenue is reported at the estimated net realizable amounts from patients,
third-party payers, and others for services rendered, including estimated
retroactive adjustments under reimbursement agreements with third-party payers.
Retroactive adjustments are recorded on an estimated basis in the period the
services are rendered and adjusted in the future periods, as final settlements
with the payers are determined.
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No agency should be 100% dependent upon a program such as Medicare or
Medicaid. Home health care agencies must be diverse enough to attract revenue
from private sources as well as the federal government. A-One is seeking
private sources such as private insurance companies. In order to qualify with
the larger insurance companies such as Blue Cross or Prudential, the agency must
be JACHO certified and presently, A-One holds this certification.
Referrals are generated by physicians. It is imperative that A-One
continue to be able to attract and consult with the doctors in its service area
to generate referrals. Due to the Company's current cash flow difficulties,
A-One is not able to attract the physicians with the larger patient base within
its service area.
As outlined below, A-One provides a variety of services that are billed at
varying rates.
Services Cost
RN $18.30/ visit
LPN 15.30/visit
HHA 12.00/visit
Medical Social Worker 45.00/visit
Physical/Occupational Therapist 45.00/visit
Medical Directors 750.00/month
MARKETING ANALYSIS
Currently, our 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
mentioned above, we are phasing out the purely healthcare segment of our
business and moving it toward ecommerce &healthcare ecommerce. As a thinly
capitalized 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 the
Internet (or "clicks and bricks"). We hope to merge our healthcare experience
with our Internet experience to find ecommerce business opportunities in
healthcare.
Management seeks to exploit business-to-business opportunities by providing
smaller healthcare facilities with the ability to utilize the Internet to
conduct business.
MARKETING PLAN
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 expand the subscriber base of NOL, while generating additional
revenue streams for the company. Additional, experienced marketing personnel
will be brought on board to assist in implementing this marketing plan.
In addition, we plan to market our move to healthcare business-to-business
Internet opportunities. Currently, we do not have any such opportunities,
however, we believe that opportunities do exist in the market.
FINANCIAL PLAN
Management's goals are to increase revenues to $5 to $10 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.
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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, we believe that the
Company will be able to grow into a profitable entity. With the tremendous
consolidation and spin-off opportunities available to the Company, we
EXTRAORDINARY LOSSES
During 1999, a number of the health care facilities (6) in Louisiana owned
by the Company's subsidiary, Professional Management Providers, Inc. were
operating under Chapter 11 of the U.S. Bankruptcy Code. As a result of several
disputes and lawsuits with former management of the subsidiary, the Trustee in
bankruptcy closed the six subsidiary corporations of Home Care Center, Inc. in
July 1999. Thereafter, the Company closed three of the remaining four
facilities in Louisiana, and transferred ownership of the remaining one to the
parent company. The one remaining facility was still in operation at December
31, 1999.
In addition, the Company made several acquisitions during 1999 through its
Unique Dawning, Inc. (UDI) subsidiary without board approval or corporate
involvement. These facilities proved unmanageable, and as a result, Unique
Dawning, Inc. was placed in Chapter 11 of the Bankruptcy Code in September 1999.
Subsequently, the Trustee transferred the filing to Chapter 7, which provides
for liquidation. The Chief Financial Officer at the time and most of management
disagreed with a two-member Board decision to place Unique Dawning, Inc into
bankruptcy. The Board not only placed UDI into bankruptcy, the interim
President asked the bankruptcy count to appoint a trustee to manage the
operations of UDI. UDI was placed into bankruptcy based on an internal conflict
between two board members. Once the trustee was appointed, UDI doctors
transferred the patients to other health care facilities; therefore, the trustee
was forced to close the facility.
As a result of these events, the Company recognized losses on the closing
and disposal of the twelve facilities (nine under Professional Management
Providers, Inc. and three under Unique Dawning, Inc.). The losses were as
follows:
Professional Management Providers, Inc. $2,088,367
Unique Dawning, Inc. 639,273
----------
$2,727,640
==========
The current management of the Company is certain that controls are in place
that will assure shareholders that sound business practices will be used in the
future.
LIQUIDITY
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 private placement within the next sixty days. There
can be no assurance that the Company will be successful in these efforts.
CAPITAL RESOURCES
The Company's current assets represented 15% of current liabilities at
December 31, 1999 as compared to 74% at December 31, 1998. Current liabilities
exceeded current liabilities by $733,063 at December 31, 1999. At December 31,
1999, the Company primarily had two operational subsidiaries: one health care
subsidiary located in Louisiana and one Internet Service Provider located in
Houston, Texas. The net income from these operations is not sufficient to
support corporate expenses and pay current liabilities. Based on this liquidity
problem, the Company's external auditors' report on the 1999 consolidated
financial statements included a fourth paragraph noting a going concern problem.
Based on discussions with the external auditors, if the Company is able to
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resolve this problem by obtaining additional equity funding, the auditors are
willing to review the Company's current situation and, if conditions have
improved, the firm is willing to reissue their report without noting the going
concern problem.
Management believes that actions presently being taken to obtain additional
equity financing through a private placement and pursuing acquisitions and
increasing sales in the technology sector will provide the Company with the
opportunity to continue as a going concern.
RESULTS OF OPERATIONS BEFORE DISCONTINUED OPERATIONS: 1999 COMPARED TO 1998
Total revenues for 1999 of $1,576,011 represents an increase of $824,453 or
109.7% increase from revenues of $751,558 in 1998. This increase is due to
revenue from health care facilities being reported for twelve months in 1999 as
compared to five months in 1998.
The Company reported a net loss before extraordinary items of $1,181,206 in
1999 as compared to net loss of $334,233 in 1998. The $846,973 decrease from
1998 is primarily due to an increase in operating expenses, including and
increase of $969,396 in corporate expenses. The increase in corporate expenses
is due to the accrual of approximately $400,000 in expenses related to settled
and pending litigation, $71,000 in legal expenses, $374,000 in expenses for
investor relations paid in stock, $86,000 in bad debts related to loans to
subsidiaries, $113,000 in compensation to officers.
FUTURE OPERATIONS
As noted in the description of the business section of the document, management
has changed the focus of the Company to pursue the technology industry with
emphasis on Internet related businesses. The Company intends to acquire
Internet related companies by issuing shares of the Company's stock after stock
registration. As of the date of this report, management of the Company has had
preliminary discussions with potential merger or acquisition candidates, but
there is no definitive agreement between the Company and any merger candidates.
In the event the Company does enter into an agreement with such a third party,
the new Board of Directors does intend to obtain certain assurances of the value
of the target entity assets prior to consummating such a transaction. Current
management has established a due diligence team to prevent the type of
transactions that have negatively impacted the Company in the past.
DESCRIPTION OF THE BUSINESS
Our Company was initially incorporated on July 13, 1987 under the laws of
the State of Delaware. The Company was in the development stage from inception
until August 12, 1997, at which time it acquired all of the capital stock of
Networks On-Line, Inc. ("NOL"), a network integrator and Internet service
provider and began operations.
Comtech was originally in the business of growing sales revenues and
earnings through consolidation (acquisition) of privately held operating
entities under its two tier corporate holding structure. As acquisitions were
made, the Company formed a Subsidiary Holding Company, specifically structured
as a financing vehicle to fund ongoing expansion around the business initially
acquired. This two tier corporate holding structure was established to provide
a means of raising operating capital without dilution to the Company
shareholders. It also allowed the Subsidiary Holding Company to develop its own
market identity, separate and apart from that of the Company. The objective of
this system was to continue to grow the business of its Subsidiary Holding
Company, thereby increasing sales revenue and earnings.
To date the Company has acquired or consolidated with five businesses: two
in the Internet industry and three in the healthcare industry.
In February of 1998, the Company acquired Professional Management
Providers, Inc. (PMP), a Baton Rouge, Louisiana based corporation. PMP is a
management consulting company for home health care providers, with customers
located in Texas and Louisiana. PMP was established as a subsidiary holding
company for acquisitions of home health care agencies.
In April 1998, the Company acquired Unique Dawning, Inc. (UDI), a Texas
Corporation. UDI, headquartered in Houston, operated specialized health care
center (partial hospitals) providing services to outpatients, with centers
located in Texas and Louisiana. UDI was established as a subsidiary holding
company for acquisitions of partial hospitals.
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From February 1998 through June 1999, PMP acquired a number of healthcare
businesses.
In second quarter of 1999, Comtech decided to abandon the Subsidiary
Holding Company concept because of its lack of control over the Subsidiary
Holding Companies. The Company did not realize how much control it had actually
lost until it tried to change its method of managing the day-to-day operations
of the subsidiaries. In doing so, the Company lost a significant amount of
operations in the health care division.
In July 1999, the Company lost seven of the eight operating health care
facilities of PMP. The only surviving operating health care entity of PMP was
A-1 Bayou, a home health care agency located in Jeanerette, Louisiana. In
December 1999, the Company transferred the ownership of A-1 Bayou directly to
Comtech.
In September 1999, the Company closed four of the five operating health
care facilities of UDI.
As of December 1999, Comtech has only three operating subsidiaries, A-1
Bayou, engaged in health care, and NOL and EISP both engaged in Internet related
businesses.
Due to the significant management problems noted in 1999, the Company has
changed its method of managing it subsidiaries. Comtech, the holding company,
now directly manages the financial and administrative operations of all of its
subsidiaries.
In early 2000, the new management team of Comtech decided to refocus the
Company to capitalize on the tremendous growth of the Internet. The fact that
Comtech already owns NOL and EISP (Internet service providers) facilitates this
refocus. Comtech will play a major role in the technology arena and will
attempt to grow rapidly through acquisitions. Management feels that by changing
the direction of the Company to focus more fully on technology related
companies, Comtech will be opening the door to numerous business possibilities.
Along with NOL, the Company acquired EISP Corporation (Enhanced Internet
Service Provider), a Texas corporation. EISP's mission was to develop market
enhanced Internet services, i.e. video teleconferencing, faxing to be bundled
with its standard Internet services. The Company operations from EISP have been
immaterial and many of the operations that EISP was to conduct have been
preformed by NOL.
Networks On-Line/EISP - 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 Online during the next eighteen months. To
accomplish this task, management hired an experienced ISP operator whose
compensation is performance-based and incentive-laden to promote achievement of
company goals. Comtech will also seek to build NOL through acquisitions and
groom the company for a potential spin-off to increase shareholder value.
A-One Bayou Home Health 2000, Inc. - A-One Bayou is a wholly owned
subsidiary of Comtech. A-One Bayou operates in the home health care industry.
A-One Bayou has grown its current operations. Last year, the company opened a
second office in the Jeanerette, Louisiana area. A-One Bayou is managed and
operated by a seasoned health care professional with more than ten years'
managerial experience. This professional is responsible for the growth of A-One
Bayou, opening the second office last year, and continues to manage the
day-to-day operations of A-One Bayou.
A-One Bayou is the only home health agency located in Jeanerette,
Louisiana. A-One Bayou specializes in providing quality health care in the home
environment. A-One Bayou has a second branch located in Morgan City, Louisiana,
which is located directly across from Lakewood Hospital. There are two other
home health care agencies in Morgan City.
A-One Bayou provides the following services: RN, LPN, Home Health Aides
(HHA), Medical Social Services, Physical and Occupational Therapist. A-One
Bayou specializes in providing Psychiatric and Pediatric Nursing.
Since its acquisition in October of 1998, revenue for A-One Bayou increased
to $2.2 million in 1999 and Comtech anticipates even greater results in the year
2000.
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MARKET ANALYSIS
The multi-billion dollar U.S. Internet industry is currently going through
a massive restructuring, which is creating virtually unlimited acquisition and
merger possibilities. Opportunities for Internet and technology firms abound,
and Comtech's Internet companies will be key to its growth and expansion in
technology related industries.
Technology Market Trends- A May 2000 study by eTForecasts, a market
research and consulting firm, estimates that by the end of 2000, there will be
375 million Internet users. This will be an increase of almost 100 million
since 1999, when 276 million users worldwide accessed the Internet. eTForecasts
reports that although the US continues to be the leading Internet country, the
rest of the world is getting online as well.
Other Internet research firms have similar high estimates for the number of
Internet users. These include the Computer Industry Almanac, which places the
number at 349 million, while International Data Corporation (IDC) and Internet
Industry Almanac both estimate 327 million users. eMarketer projects a more
modest 191 million Internet users worldwide for 2000.
The growing number of Internet users has created a tremendous demand for
Internet service providers (ISAPs). Coming off a spectacular 67% increase in
1999, revenues in the U.S. Internet services market are predicted to increase
another 29% in 2000 and approach the $23 billion mark. According to
International Data Corporation, AOL and UUNet will lead the market's drive.
These two ISPs have a commanding lead over the competitors in their market
segments.
Individual users are not the only ones flocking to the Internet in growing
numbers. The huge online population has created an enormous potential market
for businesses. Businesses on the Internet serve both other business clients as
well as the general consumer market. IDC expects the number of U.S. small
businesses engaged in e-commerce to increase from 400,000 at the end of 1998 to
almost 2.8 million by the end of 2003 - an annual increase of 47.1%. Leading
research firms project that the Business-to-Business (B2B) market will reach
between $2.7 and $7.3 trillion by the year 2004 (CNET News.com.) That figure
compares with the $131 billion generated by business-to-business companies in
1999. On the other side of the coin, Forrester Research projects that the
Business to Consumer market will generate $184.5 billion in 2004, up from $20.3
billion in 1999.
According to IDC, the consumer segment will maintain the largest share of
the market's revenues until 2002, when the value-added services segment will
grab the lead. Value-added services are expected to grow faster than the other
segments as Web-hosting revenues skyrocket, free Internet service providers
build their subscriber bases, and corporations and consumers utilize services
other than just access from ISPs. IDC predicts that growth in the consumer
segment will moderate due to market saturation, but that the number of daily
users in this segment will increase as will the length of time they remain
online.
Business-to-Business companies generally focus on infrastructure, software,
online exchanges, as well as industrial and commercial items that allow their
clients to operate more effectively in the modern marketplace.
Business-to-Business companies make it possible for other firms to decrease the
cost of doing business and increase their profits. Typically,
business-to-business technology partners provide expertise, consulting, and
technical knowledge that the client firms do not possess in-house and don't
require on a permanent, full time basis.
The growth of small business Internet, home page, and e-commerce activity
has been dramatic. During 1998, more than 1 million small businesses added
Internet capability. During 1999, over 800,000 small businesses implemented
their own Web sites. At the same time, the number of small businesses actively
selling on the Internet has doubled each year. IDC believes that number will
approach 1.6 million in 2000.
An increasing number of companies are turning to hosting service providers
to implement and manage their Web sites, and in response, the Web hosting
services market is growing at a torrid pace. According to International Data
Corporation (IDC), this segment is one of the fastest-growing markets in the
information technology industry and the Internet economy in general. IDC expects
revenues of U.S.-based Web hosting companies to grow by almost $1 billion in
1999 alone, bringing them to over $1.8 billion.
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Looking farther ahead, IDC expects the number of small businesses
implementing e-commerce to reach over 2.9 million by 2003. Although the
annualized growth rate will not match that seen prior to 2000, the number of
small firms adding e-commerce capabilities is still expected to be increase
22.5% between 2000 and 2003.
The Internet is changing the way companies do business, and small
businesses (fewer than 100 employees) are no exception. According to results
from IDC's 1999 U.S. Small Business Survey, the percentage of small businesses
accessing the Internet surpassed 52% in 1999, and that number is expected to
climb to over 70% by 2003. Once confined by geographical constraints, small
businesses are now leveraging the Internet to expand beyond local boundaries.
In addition to accessing the wealth of information the Web has to offer, a
number of small businesses have recognized the benefit of promoting themselves
via the Web. In 1999, 2.1 million U.S. small businesses had a home page or Web
site. That number is expected to increase 30% to 2.7 million in 2000. IDC
stated that although more small businesses are experimenting with Web promotion
of their products and services, the market is far from saturated, and there is
still plenty of room to grow. Almost 13% of U.S. small businesses have yet to
invest in a PC, never mind add Internet capability.
At this point, e-commerce presents the most significant growth opportunity
for a wide range of U.S. small businesses. The number of these companies selling
goods and services online is expected to grow from 850,000 at the end of 1999 to
2.9 million in 2003. By 2003 nearly half of online small businesses are
expected to sell over the Internet, according to IDC.
Yet another change which will have a major impact on the Internet market is
high-speed wireless Internet access that is currently available in many markets
for residential and business customers. The advantage in this technology is that
it is relatively inexpensive to acquire and maintain. End-user installation is
accomplished very quickly because this type of service bypasses local telephone
company lines and equipment. One of the primary advantages of wireless access is
that security becomes much less of an issue because each connection is
transmitted using spread-spectrum technology - using many frequencies to
transmit information rather than one, easy to tap frequency. Security will
become almost a non-issue. As wireless technology matures, the prices will fall,
increasing the potential market for such services. With these key features,
wireless technology will provide tremendous possibilities for growth in the
business-to-business marketplace. NOL intends to begin pursuing these
opportunities in the current calendar year.
Once wireless Internet access becomes a more widespread alternative, it
will prove an attractive option for businesses since it is faster and less
expensive than the current choices. Wireless access promises to provide faster
speeds than current DSL, in areas where DSL technologies are not available, and
at a very cost-effective price. NOL fully intends to be a part of this emerging
market.
Equipment and Bandwidth -- Network On-Line began in 1994 as a small ISP
offering unlimited dial-up access to the Internet, web site hosting, and email,
primarily to individual accounts. As the business grew, better equipment was
necessary and was acquired to fulfill customer demands. As the business
continues to grow today, some of the equipment has become outdated, unreliable,
and inappropriate for its intended use. NOL has been very successful in its
ability to maintain its client base despite this shortcoming, but at the cost of
a tarnished reputation and ability to sustain growth.
To maintain its quality-of-service commitments to present and future
clients, NOL must lease of purchase additional equipment and bandwidth. It is
estimated that within the next six to twelve month period, at least four
additional servers and three additional workstations will be needed. The total
cost of these machines will be in the $40,000 to $50,000 range. That price will
include the appropriate operating system and installed programs necessary for
the tasks to be performed.
Additionally, as a Southwest Bell ADSL Partner (one of the few ISPs in
Houston to be so designated), NOL must purchase bandwidth, in the form of T1 ATM
circuits from SWB in order to provide ADSL to customers, whether residential or
business. ADSL has proven to be "the better mousetrap" because it provides very
fast bandwidth at an inexpensive price. ADSL offers huge growth potential
because of this. In order to continue offering ADSL to its subscribers, NOL
will need to implement additional T1 ATM circuits along with a router for each
circuit. The initial cost of implementing one circuit is approximately $3,000
and the monthly recurring cost is approximately $650.00. NOL currently needs
two additional circuits to balance current ADSL loads and provide for the
immediate needs of pending customers. The Company projections show that NOL
will need another two to four routers within the next 12 months.
20
<PAGE>
Technology Trends for Past Three Years -- The dominant trend in all
Internet sectors for the past three years has been the continued phenomenal
growth. In April 1999. IDC, a top Internet research firm stated that the value
of the US ISP market would generate $15.1 billion in that year. This is an
increase of 41% from the 10.7 billion produced in 1998. IDC further reported
that the US market for ISPs would continue its growth, generating a projected
$37.4 billion in 2003. This translates to a compound annual growth rate of 28
percent.
Growth in ISPs is projected to slow in 2001, however demand for value-added
services are expected to make up the deficit. IDC predicts that the value-added
service market will overtake the individual access market by 2003.
America Online (AOL) currently occupies the dominant position in the ISP
market, with a 23% market share. MCIWorldCom is second, with 17 percent,
according to IDC. These two companies dominate the overall ISP market with AOL
holding the key position in individual and value-added ISP markets, and the
latter leading in business and wholesale markets.
Internet usage continues to grow at an unprecedented rate as new
technologies create additional opportunities for revenue generation, especially
in the business-to-business venue. A recent trend in the business-to-business
segment is the growth of Application Service Providers (ASPs). An ASP rents
software to be used online by businesses for a monthly fee. The software is a
value-added service rented from the ISP. Due to the nature of the
infrastructure required to deliver the ASP to the businesses, most ASPs are also
ISPs. The software is provided at a cost that is low enough to justify the
monthly expense and, in the long run the business client saves money by not
being required to purchase multiple licenses or multiple copies of the same
software. Some of the services typically provided by ASPs include Microsoft
Word, Excel, Access, Peachtree Accounting packages, and others.
High-speed wireless Internet access is currently available in many markets
for residential and business customers. This wireless access promises to be
faster than the current DSL, as well as less expensive. This will make
high-speed wireless access attractive to businesses. The advantage to this
technology is that it is relatively inexpensive to acquire and maintain.
End-user installation can be accomplished quickly as this type of service
bypasses local telephone company lines and equipment.
One of the primary advantages of wireless access is that security becomes
much less of an issue because each "connection" is transmitted using
spread-spectrum technology - using many frequencies to transmit information than
just one, easy-to-tap frequency. With high-speed access, security becomes
almost a non-issue, making it very attractive to business users. As this
wireless technology matures, prices will drop, increasing the potential market
for such services. This relatively new technology is expected to provide a
boost in revenues across the board for the business-to-business segment of the
market.
COMTECH'S INDUSTRIES
Health Care Industry - According to a report by the Health Care Financing
Administration (HCFA), total health care spending increased by 5.6% in 1998,
compared with 4.7 percent in 1997. The $1.1 trillion spent on health care in
1998 amounted to an average of $4,094 per person, compared with $3,912 per
person in 1997. In contrast to the public spending decline, private health care
spending increased 6.9 percent in 1998, compared with 4.8 percent in 1997.
According to the HCFA report, the private sector spending growth in 1998 was
primarily the result of an 8.2 percent increase in private health insurance
premiums, which is more than twice the rate of the past couple of years.
In 1999, there were 32 million older Americans and 5 million disabled
people enrolled in SMI (Supplementary Medical Insurance -- Medicare Part B); 87
percent received services covered under the program. Medicare was the dominant
payer source, representing nearly one-third of industry revenue, according to
Health Industry Distributors' Association's 1999 Home Care Financial Performance
Survey.
The aging American population and the growing desire among older citizens
to remain in their own homes as long as possible, have created a revolution in
the home health care industry. More and more seniors remain in their own homes,
or family residences, than in past years. Other factors affecting the growth in
the home health care segment include: the emphasis on preventive medicine
increases in self-treatment, earlier hospital releases, and the expansion of
senior residential facilities.
21
<PAGE>
Together, these changes have created a rising demand for products and
supplies needed to care for these patients. Total demand for disposable medical
supplies is expected to expand 5.3 percent annually through 2004 to nearly $56
billion -- and home health care will be the fastest-growing market, according to
a report entitled U.S. Disposable Medical Supplies, compiled by the
Cleveland-based Freedonia Group.
According to the Freedonia report, sales in the home care segment will
reach $8.6 billion by 2004, up 6.5 percent annually from 1999. Despite such
growth, however, home uses of disposable medical supplies will be concentrated
in only a few product groups. Favorable growth opportunities are anticipated for
IV administration kits, enteral feeding sets, oxygen delivery accessories,
prefilled and empty hypodermic syringe systems, dialysis sets, adhesive tapes,
and general patient utensils, such as bedpans and basins.
On the consumer side, trends promoting self-care will increase the demand
for first-aid kits, bandages and dressings, diabetes monitoring products and
home medical test kits. A growing incidence of incontinence experienced by an
aging population will boost sales of related products.
Future Trends in Home Health Care -- A study by the White House National
Economic Council and Domestic Policy Council yielded some interesting findings,
particularly in reference to Medicare's future enrollment. According to the
study, by 2025, elderly individuals will compose at least one-fifth of the
population in 30 states. Currently there are no states with that high a
percentage of elderly. This means that some 62 million Americans will have
reached that age 65 or greater within 25 years, more than double the current
mark of 35 million.
Since more than half the individuals currently receiving home health care
services are seniors, there will be an increase in the demand for such services.
Providing professional medical services in the senior's own home is economically
advantageous. It costs less to provide quality medical care in the home than in
an institution or hospital environment.
Patients also feel more comfortable in their own surroundings and, in many
cases, family members assist with the care of their loved ones. Currently, the
federal government enacting serious costs cuts for nursing home services. Many
nursing facilities have been forced to cease operations and their patients have
been moved back to their own or relatives' homes. This trend will also create
additional potential revenue for home health care agencies.
Trends in health care industry for past three years -- In the mid-1990s,
home health care was a lucrative business in the US. Lacking stringent rules
and regulations, many agencies were started by owners and operators with little
or no experience. Then the government imposed more strict regulations with
vigorous policies and procedures, hiring additional auditors, revamping the
payment system, and researching the implementation of a surety bond. The
government places a moratorium on home health agencies in most states and that
limitation is still in place in the state of Louisiana, due to the number of
agencies that had started up.
Most agencies that began operations on or before October 30, 1993 are
considered base year agencies. Base year agencies are reimbursed at a higher
rate by the government, even though the services provided and overhead rates are
identical to established home health operations.
Health Care Financing Administration (HCFA) implemented an interim payment
system in which agencies were operating in the blind. HCFA reimbursed agencies
based upon their assigned interim rate. Six months later, HCFA adjusted the
agencies' rates with a retroactive date. HCFA withheld payment based on their
calculations. This lack of funds forced many agencies to cease operations.
HFCA is once again in the process of implementing a new plan with an
effective date of October 1, 2000. The new program is the Prospective Payment
System (PPS). Under PPS, reimbursement will be based on diagnosis codes for a
three-month certification period. At present, HCFA has not announced nor
published the reimbursement rates.
MARKETING PLAN
The Company intends to implement a cost-effective marketing strategy by
developing a public relations campaign to announce its concentration solely on
technology.
22
<PAGE>
FINANCIAL PLAN
Management's goals are to increase revenues and shareholder value through
acquisitions. The Company will principally use its Common Stock to fund the
Acquisitions. Comtech will attempt to secure relationships with investment
banking firms to assist with future capital needs.
COMPETITION
The market for the company's Internet products is highly competitive, and
Comtech expects this competition to increase. Many of the Company's competitors
have significantly greater research and development, marketing and financial
resources than the Company, and therefore maybe able to reach markets which the
Company cannot reach. The Company believes that the primary competitive factors
in the market for the Company's services are price, performance, and technical
support.
EISP/Networks On-Line's (NOL) competition -- As an Internet Service
Provider, or EISP, NOL competes with such well-known companies as America
Online, MCIWorldCom, Earthlink, Microsoft Network, Sprint, and many others. In
addition to the major names in the ISP industry, there are numerous smaller
entities that derive their revenues by providing Internet access. AOL and the
majority of other ISPs have focused on the individual Internet user and, up to
this point, Networks On-Line has as well. However, the individual Internet
users market is one that produces a small profit margin. One trouble call from
an individual user whose telephone line isn't working properly literally
eliminates the profit from that account for the month. Providing services to
business Internet users is a far more lucrative market.
NOL will focus on the business Internet user. These users have much higher
levels of expectation for their ISP. They want fast, easy, trouble-free
Internet and they are willing to pay premium rates to assure these features.
Internet services for business are becoming more "mission-critical" than ever
before. Services such as web hosting and email are simply expected from their
ISP. A ISPs ability to provide value-added services is critical to its
long-term success and growth. Web site design, web site hosting, applications
services, high-speed connections, customized email packages, e-commerce, and the
ability to successful bring these elements together on a consistent, reliable
basis will all but assure an ISP's success in the marketplace.
Quality-of-service issues are of paramount importance to business users.
An ISP must be fast, friendly, and reliable to succeed, and business Internet
users are generally willing to pay more than individual subscribers for that
service. Business both need and demand higher bandwidth connectivity in the
form of ADSL, T1, or DS3 circuits that an individual has no need for.
Businesses also need and demand fast, friendly, and competent customer service
and are adept at finding those ISPs that can provide it. Upon completion of the
anticipated financing, NOL will upgrade its infrastructure and equipment, and
hire marketing personnel, allowing the Company to target this more highly
selective business user audience.
The Company believes that the primary competitive factors in the market for
the Company's services are price, performance and technical support and
Comtech's ISP divisions will continue to provide these features to their
clients.
A-One Bayou's Competition -- A-One Bayou Home Health 2000, Inc. (A-One) is
the only home health agency located in Jeanerette, Louisiana. A-One specializes
in providing quality health care in the home environment. A-One has a second
branch located in Morgan City, Louisiana that is located directly across from
Lakewood Hospital. There are two other home health care agencies in Morgan
City.
Home Medical Equipment companies will serve this burgeoning senior
population in increasing numbers. The average HME provider is a small "Mom and
Pop" operation with fewer than 20 employees and less than $3 million in annual
revenue. Small businesses of this nature spend a disproportionate amount of
their time and revenue on administrative functions and costs. By acquiring
numerous small operations and centralizing the administrative functions within
the parent corporation, Comtech creates a more cost-effective business and
streamlines operations.
DESCRIPTION OF PROPERTY
The Company leases a total of approximately 3,000 square feet of office
space for the Company's headquarters and Internet operations. The Company's
headquarters is located at 10497 Town & Country Way, Suite 460, Houston, Texas.
23
<PAGE>
In addition, the Company leases approximately 2,000 square feet of space for its
health care operations in Louisiana. The operating lease at the Company's
headquarters expires on May 31, 2001.
LEGAL PROCEEDINGS
The following cases reflect the status of legal proceedings in which the
Company is involved.
Comtech is a Defendant/Third Party Plaintiff in a cause in the 356th
District Court of Hardin County, Texas. Comtech is one of three defendants sued
by former owners of a home health care agency acquired by a subsidiary of
Comtech. Settlement discussions are in progress.
Comtech is a Plaintiff in a cause in the 11th District Court of Harris
County, Texas. Comtech filed suit against this former subsidiary in order to
rescind the share exchange agreement. Judgment for the Company is anticipated.
Home Care Center, Inc., a discontinued subsidiary of Comtech, is a
Defendant in a civil action in the United States District Court, Middle District
of Louisiana. Home Care Center is one of ten firms sued by the Department of
Labor relative to pension funds transferred to the former owners. Attorneys
representing the Department of Labor have negotiated a settlement with the
former owners that should result in no loss to the Company.
Comtech is a Defendant in a cause in the 60th District Court of Jefferson
County, Texas. Comtech is one of three Defendants in a suit brought by former
employees of Comtech subsidiaries. It is presently anticipated that the liquid
assets of the two other defendants in this matter will satisfy the plaintiffs'
demands without loss to Comtech.
Comtech is a defendant in two causes in the 58th District of Jefferson
County, Texas. These suits were brought by former employees of a health care
agency acquired by a subsidiary of Comtech. The Plaintiffs do not have privity
of contract with Comtech and favorable outcome is expected without loss to the
Company.
EMPLOYEES
The Company and its subsidiaries have 27 employees of which 20 are full
time.
24
<PAGE>
MANAGEMENT
The following table sets forth information concerning executive officers
and directors of the Company, including their ages and positions with the
Company as of August 9, 2000.
Name Age Position
---- --- --------
Walter D. Davis 49 Chairman of the Board, President, Chief Executive
Officer and Director
Lamont Waddell 58 Chief Financial Officer and Director
Vincent E. Alexander 38 Director and Chairman of the Audit Committee
Beatrice Beasley 55 Director and Chairman of the
Compensation Committee
Jesse Funchess 69 Director
Walter D. Davis, 49, has been chairman of the board and the chief executive
officer/president of CCGI since 1/20/00. He served as the chief financial
officer from 9/1/99-1/20/00. He also serves as trustee on the Houston Municipal
Pension Board.
Lamont Waddell, 58, is a director and has been the Chief Financial Officer since
1/20/00. He formerly served as Controller of CCGI from October 1, 1999 to
January 20, 2000, and prior to that he was the Vice President of Finance/Human
Resource/Controller of the Faro Pharmaceutical Corp.
Vincent E. Alexander, 38, serves as director and chair of the audit committee.
He was elected to the board in 12/99. He is a financial officer of the Infinity
Brokerage Corporation. He is also a member of the greater Houston partnership.
Dr. Beatrice Beasley, 55, has been a member of the board since 1/20/00 and the
chair of the compensation committee. She is a tenured professor at Texas
Southern University and is president of Beasley & Associates, a business
training and consulting firm. Dr. Beasley also serves on the board of the
Harris County Children's Protective Services Agency.
Attorney Jesse Funchess, 69, was elected to the board in 2/00. He is managing
partner of Jesse Funchess & Associates Attorneys at Law in Houston and Beaumont,
Texas. Attorney Funchess is also the Chairman of the board of the South Central
Houston Community Action Council, Inc.
25
<PAGE>
EXECUTIVE COMPENSATION
The following report do not constitute soliciting materials and are not
considered filed or incorporated by reference into any other Company filing
under the Securities Act of 1933 or the Securities Exchange Act of 1934, unless
the Company states otherwise.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
(2000)(1)
Annual Compensation
-------------------
Name and
Principal Position Year Salary Bonus Other Annual Compensation
--------------------------- ---- ---------- ---------- -------------------------
<S> <C> <C> <C> <C>
WALTER DAVIS 2000 $ 120,000 $ 48,000 0
Chief Executive Officer
LAMONT WADDELL
Chief Financial Officer 2000 $ 95,000 $ 20,000 0
Long Term Compensation
----------------------
Name and Long-Term NUMBER OF STOCK
Principal Position Compensation Compensation Awards OPTIONS GRANTED
--------------------------- ---------------- --------------------- ---------------
WALTER DAVIS $ 0 $ 0 815,833
Chief Executive Officer
LAMONT WADDELL
Chief Financial Officer $ 0 $ 0 466,666
-------------------------
<FN>
1. Annualized compensation amounts projected for the year 2000. The current
Officers of the Company were not officers in 1999.
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
(as of June 30, 2000)
% of TOTAL
NUMBER OF OPTIONS
SECURITIES GRANTED TO
UNDERLYING ALL EXERCISE GRANT DATE
OPTIONS EMPLOYEES PRICE EXPIRATION PRESENT
NAME GRANTED 2000 PER SHARE) DATE VALUE
--------------- ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Walter Davis 350,000 $ 0.33 1/20/2007 0
465,833 $ 0.195 1/20/2007 0
Lamont Waddell 200,000 $ 0.33 1/21/2007 0
266,666 $ 0.195 1/21/2007 0
Jesse Funchess 100,000 $ 0.33 1/21/2007 0
133,333 $ 0.195 1/21/2007 0
Dr. Beatrice R.
Beasley 100,000 $ 0.33 1/21/2007 0
133,333 $ 0.195 1/21/2007 0
Vincent Edward
Alexander 100,000 $ 0.33 1/21/2007 0
133,333 $ 0.195 1/21/2007 0
Nelson Jones 100,000 $ 0.33 1/21/2007 0
133,333 $ 0.195 1/21/2007 0
Karvett
Tillery-Queen 116,500 $ 0.33 1/21/2007 0
Total: 2,332,331 2,332,331 ----
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
OPTION EXERCISES AND YEAR-END VALUE TABLE (1)
NUMBER
SECURITIES VALUE OF
NUMBER OF UNDERLYING UNEXERCISED
SHARES UNEXERCISED IN-THE-MONEY
ACQUIRED VALUE OPTIONS AT OPTION AS OF
NAME ON EXERCISE REALIZED JUNE 30, 2000 JUNE 30, 2000
----------------- ---------- ------------------------- ---------------- ----------------
EXERCISABLE NOT EXERCISABLE NOT
----------- --- ----------- ---
<S> <C> <C> <C> <C> <C> <C>
Walter Davis 0 -- -- -- -- --
Lamont Waddell 0 -- -- -- -- --
Jesse Funchess 0 -- -- -- -- --
Dr. Beatrice R.
Beasley 0 -- -- -- -- --
Vincent Edward
Alexnander 0 -- -- -- -- --
Nelson Jones 0 -- -- -- -- --
Karvett
Tillery-Queen 0 -- -- -- -- --
</TABLE>
PRINCIPAL SHAREHOLDERS
The following table sets forth as of March 31, 2000, information with
respect to (a) each person (including "group" as that term is used in section
13(d)(3) of the Securities Exchange Act of 1934 who is known to the Company to
be the beneficial owner of more than five percent (5%) of the outstanding Common
Stock of the Company and (b) the number and percentage of the Company's Common
Stock owned by (i) each of the directors and the executive officers named on the
Summary Compensation Table above and (ii) all directors and executive officers
of the Company as a group. The Company believes that, unless otherwise
indicated, each of the shareholders has sole voting and investment power with
respect to the shares beneficially owned.
CLASS NAME AND ADDRESS AMOUNT PERCENT
----------------------- ------------------------- --------- --------
Common CCGI Settlement Group LLC 1,900,000 6.7%
8484 Jefferson Highway
Baton Rouge, LA 70809
Common I Capital Group 1,500,000 5.29%
2603Main Street
Suite 1150
Irvine, California 92614
Common Officers and Directors 95,269 0.3`%
(One Officer)
Approximately 3,600 holders hold the balance of the Company's outstanding Common
Shares.
28
<PAGE>
DESCRIPTION OF OUR SECURITIES
The Company's authorized capital stock consists of 100,000,000 shares of
Common Stock and 1,000,000 shares of Preferred Stock. The following summary
description of certain terms of the capital stock of the Company is qualified in
its entirety by reference to the Company's Articles of Incorporation, which is
included as an exhibit to the Registration Statement of which this Prospectus is
a part.
Common Stock
The Company has authorized 100,000,000 shares of Common Stock, par value
$.00967 per share. As of the date of this Prospectus, assuming the successful
completion of the Offering, 51,341,714 shares of Common Stock will be
outstanding. In addition, options to purchase 2,432,331 shares of Common Stock
are outstanding. Except as required by applicable law, including the Delaware
General Corporation Laws ("DGCL"), the holders of Common Stock are entitled to
vote on all matters and are entitled, subject to the preferential rights of
holders of Preferred Stock, to receive such dividends, if any, as may be
declared by the Board of Directors from time to time out of legally available
funds. Upon liquidation or dissolution of the Company, the holders of Common
Stock are entitled to share in all assets of the Company that are legally
available for distribution, after payment of all debts and other liabilities and
subject to the prior rights of any holders of Preferred Stock then outstanding.
Holders of Common Stock have no preemptive rights to acquire new securities
issued by the Company, have no rights to cumulate their votes for the election
of directors and have no rights to convert their Common Stock into any other
securities of the Company.
Preferred Stock
The Company is authorized to issue 1,000,000 shares of Preferred Stock, par
value $100.00 per share ("Preferred Stock"). The Preferred Stock may be issued
in one or more series, the terms of which may be determined at the time of
issuance by the Board of Directors of the Company, without further action of the
shareholders, and may include voting rights (including the right to vote as a
series on particular matters), preferences as to dividends and liquidation,
conversion, redemption rights and sinking fund provisions.
The Company has an aggregate of 9,839 shares of Preferred Stock outstanding
as of the date of this Prospectus. The Company has no present plans for the
issuance of additional shares of Preferred Stock.
Class B Preferred Stock
As of the date of this Prospectus, 6,355 shares of Class B Preferred Stock,
stated value $100 per share ("Class B Preferred Stock") are issued and
outstanding. The terms and preferences of the Class B Preferred Stock are set
forth below.
Ranking. The Class B Preferred Stock ranks senior to the Company's Common
Stock with respect to dividends and rights upon liquidation or dissolution of
the Company.
Voting Rights. Except as required by applicable laws, holders of Class B
Preferred Stock are not entitled to vote.
Dividend Rights. The holders of Class B Preferred Stock are entitled to
receive out of funds of the Company legally available therefore, dividends at an
annual rate of 8% per share. Such dividends are payable at term in arrears.
Dividends accrue and cumulate from the date of first issuance and are paid to
holders of record as of the record date of the last day of the stated term.
Accumulated dividends do not bear interest. So long as any shares of Class B
Preferred Stock are outstanding, the Company may not declare or pay any dividend
on the Common Stock until all accumulated, unpaid dividends on the Class B
Preferred Stock have been paid in full.
Conversion and Mandatory Conversion. Shares of Class B Preferred Stock are
convertible by the holder at any time after twelve months after the date of
issuance into Common Stock at a conversion rate of 80% of the market price of
the Common Stock at the time of issuance. The Class B Preferred Stock has a
face value of $100 per share. At the end of twenty-four months the shares of
Class B Preferred Stock are automatically converted into shares of Common Stock
at a conversion rate equal to 80% of the market bid price of the Common Stock at
the time of issuance.
29
<PAGE>
Redemption. Each share of Class B Preferred Stock is redeemable by the
Company at anytime in exchange for a cash payment equal to $100, the face amount
of each share, plus accumulated and unpaid dividends.
Liquidation Rights. In the event of liquidation or dissolution of the
Company, whether voluntary or otherwise, after payment or provision for payment
of the debts and other liabilities of the Company, the holders of the Class B
Preferred Stock are entitled to receive, out of the remaining net assets of the
Company available for distribution to shareholders before any distribution or
payment made to holders of Common Stock or other junior capital stock, the Class
B Preferred Stock stated value of $100 per share, plus any accrued and unpaid
dividends thereon. Upon payment of the full amount of such stated value plus
any unpaid dividends, the holders of Class B Preferred Stock are not entitled to
any further participation in any distribution of assets of the Company.
Piggyback Rights. Each holder of shares of Class B Preferred Stock is
entitled to piggyback registration rights when and if the Company files a
registration statement offering its shares of Common Stock. In such event, the
participating holder of Class B Preferred Stock is responsible for its fees and
expenses associated with the registration of its shares.
Class E Preferred Stock.
As of the date of this Prospectus, 3,484 shares of Class E Preferred Stock,
stated value $100 per share ("Class E Preferred Stock") are issued and
outstanding. The terms and preferences of the Class E Preferred Stock are set
forth below.
Ranking. The Class E Preferred Stock ranks senior to the Company's Common
Stock with respect to dividends and rights upon liquidation or dissolution of
the Company and pari passu to the Company's Class B Preferred Stock with respect
to dividends and rights upon liquidation or dissolution of the Company.
Voting Rights. Except as required by applicable laws, holders of Class E
Preferred Stock are not entitled to vote.
Dividend Rights. The holders of Class E Preferred Stock are entitled to
receive out of funds of the Company legally available therefore, dividends at an
annual rate of 8% per share. Such dividends are at term in arrears. Dividends
accrue and cumulate from the date of first issuance and are paid to holders of
record as of the term. Accumulated dividends do not bear interest. So long as
any shares of Class E Preferred Stock are outstanding, the Company may not
declare or pay any dividend on the Common Stock until all accumulated, unpaid
dividends on the Class E Preferred Stock have been paid in full.
Conversion and Mandatory Conversion. Shares of Class E Preferred Stock are
convertible by the holder at any time after the date of issuance into Common
Stock at a conversion rate of 650 shares of Common Stock for each share of Class
E Preferred Stock. The Class E Preferred Stock has a face value of $100 per
share. Dividend payment of 8% is accrued and due on conversion.
Redemption. Each share of Class B Preferred Stock is redeemable by the
Company at anytime in exchange for a cash payment equal to $100, the face amount
of each share, plus accumulated and unpaid dividends.
Liquidation Rights. In the event of liquidation or dissolution of the
Company, whether voluntary or otherwise, after payment or provision for payment
of the debts and other liabilities of the Company, the holders of the Class B
Preferred Stock are entitled to receive, out of the remaining net assets of the
Company available for distribution to shareholders before any distribution or
payment made to holders of Common Stock or other junior capital stock, the Class
B Preferred Stock stated value of $100 per share, plus any accrued and unpaid
dividends thereon. Upon payment of the full amount of such stated value plus
any unpaid dividends, the holders of Class B Preferred Stock are not entitled to
any further participation in any distribution of assets of the Company.
Piggyback Rights. Each holder of shares of Class B Preferred Stock is
entitled to piggyback registration rights when and if the Company files a
registration statement offering its shares of Common Stock. In such event, the
participating holder of Class B Preferred Stock is responsible for its fees and
expenses associated with the registration of its shares.
Warrants
There are none authorized or issued.
30
<PAGE>
Transfer Agent
The Transfer Agent and Registrar for the Common Stock is Holladay Stock
Transfer, Inc., 2939 67th Place, Scottsdale, AZ, 85251
INTEREST OF NAMED EXPERTS AND COUNSEL
As of the date of this Prospectus, the law firm of Warner & Washington, LLP
holds an option to purchase up to 100,000 shares of Common Stock of the Company
at an exercise price of $.016 per share.
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION
----------------------------------------------------
FOR SECURITIES ACT LIABILITIES
The Company's organizing documents - charter and bylaws - do not provide
for indemnification of its directors, officers and control persons. In the
future, the Company may adopt such indemnification provisions in its organizing
documents. Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended (the "Securities Act"), may be permitted to
directors, officers and controlling persons of the Company pursuant to the
foregoing provisions or otherwise, the Company has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
RELATED PARTY TRANSACTIONS
In January 1999, the Company sold 645,625 shares of common stock for
$129,125 ($.20 per share) to a company owned by a relative of the Chairman of
the Board at the time (the Chairman was subsequently removed by the Board). The
Chairman of the Board charged the Company a fee in the amount of $5,125 to
consummate this transaction. The Board of Directors never approved this private
placement.
In January 1999, the Company issued 1,251,995 shares of common stock to
companies owned by relatives of the Chairman of the Board at the time. The
shares were issued to retire loans made to the Company by the Chairman of the
Board and a company owned by the deceased former Chairman of the Board. The
Board of Directors never approved these transactions. The Chairman resigned from
the Board. The shares were never returned and are still outstanding. In March
2000, the Company signed a settlement agreement and mutual release in return for
another private placement of stock (see note 14). In addition, the former
President of the Company agreed to return 200,000 shares of common stock in
settlement of his involvement in the issuance of the shares.
In April 1999, the Company issued 130,000 shares ($.20 per share) of common
stock to the Chairman of the Board at the time for compensation for services
performed.
In December 1999, the Company issued 53,600 shares ($.40 per share) of
common stock to the Chief Financial Officer for compensation for services
performed and the repayment of $11,500 in loans made to the Company.
On July 2, 1998, the Company completed a private offering of 1,500,000
shares of its common stock at an offering price of $.001 per share. Of the
1,500,000 offered, 1,499,138 shares were issued and sold. 283,000 shares were
sold to a company owned by the son of the Chairman of the Board at the time,
666,138 shares were sold to the Chairman of the Board at the end of 1998, and
500,000 shares were sold to a close business associate of the Chairman of the
Board, of which, 320,000 shares were subsequently transferred to the Chairman of
the Board. The shares were issued for less than the par value of the shares.
The excess of the par value over the proceeds from the placement has been
charged to Additional paid-in capital.
At December 31, 1998, $40,000 of the cash balance was pledged as collateral
for a personal loan made by the president of PMP. The Board of Directors of the
Company did not approve this transaction.
31
<PAGE>
SELLING SECURITY HOLDERS
This Prospectus also relates to the resale of up to 3,245,082 shares of
Common Stock by Selling Shareholders (collectively, the "Selling Shareholders")
in connection with certain registration rights granted to the Selling
Shareholders. See attached Exhibit A. In connection with the sale of its shares
in the Offering, the Selling Shareholders have agreed not to sell any additional
shares of Common Stock for a period of 90 days. The Company intends to grant to
the Selling Shareholders certain registration rights with respect to their
remaining shares.
The table below sets forth information concerning the resale by the Selling
Shareholders of shares of Common Stock.
<TABLE>
<CAPTION>
HOLDER SHARE HELD AMOUNT OFFERED SHARED HELD
(ASSUMING ALL AFTER OFFERING
ARE SOLD)
----------------- -------------- -------------- --------------
<S> <C> <C> <C>
I Capital Corp. 1,500,000 1,500,000 0
About Face Comm 500,000 50,000 450,000
Carolyn Harris 19,636 19,636 0
CCGI Settlement 200,000 200,000 0
CFG Inc. 52,250 52,250 0
Charterbridge 450,000 450,000 0
Chris Spohn 125,000 125,000 0
Clarence Campbell 199,650 199,650 0
Don Brown 310,869 31,086 279,783
E. Horton 96,387 96,387 0
Ian Rappoport 250,000 25,000 225,000
J. Hagan 192,930 19,293 173,637
Nancy Moreson 125,000 125,000 0
R. Sullivan 100,614 100,614 0
R. Walker 137,817 137,817 0
S. Smith 62,990 62,990 0
Steve Clemons 129,167 12,917 116,250
T. Smith 24,942 24,942 0
Wayne Franks 125,000 12,500 112,500
Total 4,602,252 3,245,082 1,357,170
============== ============== ===========
</TABLE>
32
<PAGE>
PLAN OF DISTRIBUTION
ISSUER SALES
The Company intends to sell the Common Stock through its offices and
directors without the assistance of underwriters or brokers.
SELLING SHAREHOLDER SALES
The Selling shareholder intends to sell after a 90 day holding period.
LEGAL MATTERS
The validity of the shares of Common Stock to be issued pursuant to the
Offering will be passed upon for the Company by Warner & Washington LLP,
Houston, Texas.
EXPERTS
The financial statements included in the Prospectus and in the Registration
Statement have been audited by R. E. Bassie & Co., P.C., independent certified
public accountants, to the extent and for the periods set forth in their report
(which contains an explanatory paragraph regarding the Company's ability to
continue as a going concern) appearing elsewhere herein and in the Registration
Statement, and are included in reliance upon such report given upon the
authority of such firm as experts in auditing and accounting.
ADDITIONAL INFORMATION
The Company is subject to the reporting requirements of the Securities
Exchange Act of 1934, as amended (the "1934 Act"). The Company has filed a
Registration Statement on Form SB-2 (together with all amendments, schedules and
exhibits thereto, the "Registration Statement") with the Commission under the
Securities Act, with respect to the Common Stock offered hereby. This
Prospectus, which is included as part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement, certain
portions of which have been omitted in accordance with the rules and regulations
of the Commission. Statements contained in this Prospectus as to the contents
of any contract or other document referred to herein are not necessarily
complete, and in each instance that a reference is made to a contract or other
document filed as an exhibit to the Registration Statement, each such examined
without charge at the Commission's principal offices at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the regional offices of the Commission located at
7 World Trade Center, Suite 1300, New York, New York 10048, and Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of all or
any part of the Registration Statement may be obtained from the Public Reference
Section of the Commission upon payment of certain fees prescribed by the
Commission. Copies of such materials may also be obtained over the Internet at
http://www.sec.gov.
The Company currently furnishes its shareholders with annual reports
containing consolidated financial statements audited and reported upon by its
independent public accounting firm quarterly consolidated financial statements
unaudited and reported on by its independent public accounting firm and current
periodic reports as are required by the 1934 Act.
33
<PAGE>
COMTECH CONSOLIDATION GROUP, INC. AND SUBSIDIARIES
INDEX TO YEAR END FINANCIALS
Independent Auditors' Report
Consolidated Financial Statements:
Balance Sheets - December 31, 1999 and 1998
Statements of Operations - Years ended December 31, 1999 and 1998
Statements of Stockholders' Equity - Years ended December 31, 1999 and 1998
Statements of Cash Flows - Years ended December 31, 1999 and 1998
Notes to Consolidated Financial Statements
34
<PAGE>
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 AUDITORS' REPORT
----------------------------
The Board of Directors
Comtech Consolidation Group, Inc.:
We have audited the consolidated balance sheets of ComTech Consolidation Group,
Inc. and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Comtech
Consolidation Group, Inc. and subsidiaries as of December 31, 1999 and 1998, and
the results of their operations and their cash flows for the two-year period
ended December 31, 1999, in conformity with generally accepted accounting
principles.
As shown in the consolidated financial statements, the Company incurred a net
loss of $3,091,578 in 1999. At December 31, 1999, current liabilities exceed
current assets by $733,063. These factors, and others discussed in Note 13,
raise substantial doubt about the Company's ability to continue as a going
concern. The consolidated financial statements do not include any adjustments
relating to the recoverability and classification of recorded assets, or the
amounts and classification of liabilities that might be necessary in the event
the Company cannot continue in existence.
/s/ R. E. Bassie & Co., P.C.
Houston, Texas
March 24, 2000
35
<PAGE>
<TABLE>
<CAPTION>
COMTECH CONSOLIDATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
Assets 1999 1998
------ --------------- -------------
<S> <C> <C>
Current assets:
Cash (note 3) $ 21,710 $ 40,505
Accounts receivable, less allowances for contractual
adjustments and doubtful accounts of $1,000
in 1999 and in 1998 (note 12) 110,007 173,017
Prepaid expenses - 79,850
Net assets of discontinued operations - 1,576,598
--------------- -------------
Total current assets 131,717 1,869,970
--------------- -------------
Note receivable (note 2) 20,000 -
Property and equipment, net of accumulated
depreciation and amortization (notes 4 and 5) 146,014 137,591
Excess of cost over net assets of businesses
acquired, less accumulated amortization of
$34,000 in 1999 and $8,004 in 1998 (notes 2 and 12) 646,000 671,996
Other assets 4,340 4,340
--------------- -------------
Total assets $ 948,071 $ 2,683,897
=============== =============
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable and accrued expenses 617,392 15,523
Accrued salaries and related liabilities 131,686 102,833
Loans payable to shareholders 42,482 277,882
Notes payable 10,000 -
Convertible subordinated debentures (note 8) - 195,000
Current installments of long-term debt (note 5) 63,220 33,754
--------------- -------------
Total current liabilities (note 12) 864,780 624,992
Long-term debt, less current installments (note 5) 545,114 417,136
--------------- -------------
Total liabilities 1,409,894 1,042,128
--------------- -------------
Stockholders' equity (notes 2, 3, 6, 8, 12 and 14):
Preferred stock, $.01 par value. Authorized
1,000,000 shares: issued and outstanding,
31,028 shares in 1999 and 31,450 in 1998
Class B, 8% cumulative and convertible 310 314
Common stock, $.00967 par value. Authorized
30,000,000 shares: issued and outstanding,
22,077,072 shares in 1999 and 16,970,849
shares in 1998 213,485 164,108
Additional paid-in capital 2,024,806 1,033,393
Retained earnings (deficit) (2,700,424) 443,954
--------------- -------------
Total stockholders' equity (deficit) (461,823) 1,641,769
Commitments and contingent liabilities (notes 6, 8, 9, 11, 13, 14 and 15)
--------------- -------------
Total liabilities and stockholders' equity $ 948,071 $ 2,683,897
=============== =============
</TABLE>
See accompanying notes to consolidated financial statements.
36
<PAGE>
<TABLE>
<CAPTION>
COMTECH CONSOLIDATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 1999 and 1998
1999 1998
-------------------- --------------------
<S> <C> <C>
Revenues:
Net patient service revenue $ 984,982 $ -
Internet service revenue 591,029 751,558
-------------------- --------------------
Total revenues 1,576,011 751,558
-------------------- --------------------
Operating expenses:
Health care operations 901,483 -
Internet operations 578,323 763,542
Corporate operations 1,221,083 251,687
Amortization 25,996 5,650
Depreciation 25,715 36,987
-------------------- --------------------
Total operating expenses 2,752,600 1,057,866
-------------------- --------------------
Operating loss (1,176,589) (306,308)
Other income (expenses):
Interest income - 187
Interest expense (4,617) (28,112)
-------------------- --------------------
Total other income (expenses) (4,617) (27,925)
-------------------- --------------------
Net loss from continuing operations (1,181,206) (334,233)
Loss from discontinued operations (note 12) (1,910,372) 1,049,818
Net earnings (loss) (note 8) $ (3,091,578) $ 715,585
==================== ====================
Earnings (loss) per share:
Basic:
Net loss from continuing operations $ (0.06) $ (0.02)
==================== ====================
Net earnings (loss) from discontinued operations $ (0.10) $ 0.07
==================== ====================
Net earnings (loss) $ (0.15) $ 0.05
==================== ====================
Diluted:
Net loss from continuing operations $ (0.05) $ (0.02)
==================== ====================
Net earnings (loss) from discontinued operations $ (0.08) $ 0.06
==================== ====================
Net earnings (loss) $ (0.13) $ 0.04
==================== ====================
Weighted average common shares:
Basic 19,954,922 14,719,450
==================== ====================
Diluted 24,634,045 16,312,361
==================== ====================
</TABLE>
See accompanying notes to consolidated financial statements.
37
<PAGE>
<TABLE>
<CAPTION>
COMTECH CONSOLIDATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 1999 and 1998
Total
Additional Retained stockholders'
Preferred Common paid-in earnings equity
stock stock capital (deficit) (deficit)
-------------- ---------- --------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1997 $ - $ 124,996 $ 75,978 $ (271,631) $ (70,657)
Issuance of 1,029,410 shares
for acquisitions (note 2) 314 9,670 743,958 - 753,942
Issuance of 1,499,138 shares
under private placement
(note 3) - 14,497 (12,998) - 1,499
Issuance of 182,000 shares -
for marketing services - 1,760 34,640 - 36,400
Conversion of debentures
for 1,363,511 shares
of common stock (note 9) - 13,185 191,815 - 205,000
Net earnings - - - 715,585 715,585
-------------- ---------- --------------- -------------- ---------------
Balance, December 31, 1998 314 164,108 1,033,393 443,954 1,641,769
Issuance of 3,500 shares of preferred
stock for acquisitions (note 2) 35 - 62,166 - 62,201
Issuance of 645,625 shares of
common stock under private
placement (note 3) - 6,243 122,882 - 129,125
Issuance of 1,251,995 shares of
common stock for retirement of
debt (note 3) - 12,108 238,291 - 250,399
Conversion of debentures
for 1,223,787 shares
of common stock (note 9) - 11,834 183,166 - 195,000
Issuance of 376,078 shares
for investor relations 25 3,622 300,174 - 303,821
Issuance of 183,600 shares of common
stock for contractual services
(note 3) - 1,775 45,665 - 47,440
Conversion of 6,400 shares of
preferred stock for 1,530,222
shares of common stock (note 6) (64) 14,797 (14,733) - -
Issuance of 96,392 shares of
common stock for preferred
stock dividends (note 6) - 932 51,868 (52,800) -
Retirement of 200,000 shares
of common stock (note 3) - (1,934) 1,934 - -
Net loss - - - (3,091,578) (3,091,578)
-------------- ---------- --------------- -------------- ---------------
Balance, December 31, 1999 $ 310 $ 213,485 $ 2,024,806 $ (2,700,424) $ (461,823)
============== ========== =============== ============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
38
<PAGE>
<TABLE>
<CAPTION>
COMTECH CONSOLIDATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1999 and 1998
1999 1998
------------------ -----------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ (3,091,578) $ 715,585
(Earnings) loss from discontinued operations (note 12) 1,910,372 (1,049,818)
------------------ -----------------
Net loss from continuing operations (1,181,206) (334,233)
Adjustments to reconcile net loss from continuing operations
to net cash provided by (used in) operating activities:
Depreciation and amortization of property and equipment 25,715 36,987
Amortization of excess of cost over net
assets of businesses acquired 25,966 5,650
Bad debt expense 86,000 -
Stock issued for various services 366,221 -
Loss on disposal of equipment 2,963 -
(Increase) decrease in assets:
Accounts receivable 16,010 (158,972)
Prepaid expenses 79,850 (79,850)
Other assets - (2,510)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses 601,869 (6,403)
Accrued salaries and related liabilities 28,853 28,472
------------------ -----------------
Net cash provided by (used in) continuing operations 52,241 (510,859)
Net cash provided by discontinued operations 90,431 152,480
------------------ -----------------
Net cash provided by (used in) operating activities 142,672 (358,379)
------------------ -----------------
Cash flows from investing activities:
Purchase of property and equipment (34,138) (69,172)
------------------ -----------------
Net cash used in investing activities (34,138) (69,172)
------------------ -----------------
Cash flows from financing activities:
Proceeds from borrowing from shareholders - 33,750
Repayments to shareholders (235,400) (37,038)
Proceeds from long-term debt - 79,850
Principal payments on long-term debt (31,054) (12,528)
Proceeds from short-term note payable 10,000 -
Proceeds from issuance of shares under private placement 129,125 1,499
Proceeds from sales of subordinated debentures - 400,000
------------------ -----------------
Net cash provided by (used in) financing activities (127,329) 465,533
------------------ -----------------
Net increase (decrease) in cash (18,795) 37,982
Cash at beginning of year 40,505 2,523
------------------ -----------------
Cash at end of year $ 21,710 $ 40,505
================== =================
Supplemental schedule of cash flow information:
Interest paid $ 4,617 $ 28,112
================== =================
Supplemental disclosures:
Noncash investing and financing activities (notes 2, 3, 8 and 12))
</TABLE>
See accompanying notes to consolidated financial statements.
39
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
ComTech Consolidation Group, Inc., a Delaware corporation, was incorporated
on July 13, 1987. The Company is a Houston, Texas based consolidation
company that is focused on acquiring and building growth-oriented
businesses through acquisitions in the technology related industries. The
Company has operations in Texas and Louisiana.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Comtech
Consolidation Group, Inc. and its wholly owned subsidiaries (the Company).
All material intercompany profits, transactions and balances have been
eliminated.
The accounts of purchased companies are included in the consolidated
financial statements from the dates of acquisition. The excess of cost over
the fair value of net assets of businesses acquired is being amortized
using the straight-line method over a 40-year period commencing with the
dates of acquisition.
PROPERTY AND EQUIPMENT AND DEPRECIATION
Property and equipment are stated at cost. Depreciation of property and
equipment is calculated using the straight-line method over the estimated
useful lives of the assets, which range from three to ten years.
EARNINGS PER SHARE
Earnings (losses) per common share have been computed by dividing net
earnings (losses) by the weighted average number of common shares
outstanding during the respective periods.
STATEMENTS OF CASH FLOWS
For purposes of the statements of cash flows, the Company considers all
highly liquid investments with original maturities of three months or less
to be cash equivalents.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates.
PATIENT SERVICE REVENUE
The Company's health care subsidiaries have agreements with third-party
payers (primarily Medicare and Medicaid programs) that provide for payments
to the Company at amounts different from its established rate for services
and supplies. Payment arrangements include prospectively determined rates,
reimbursed costs, discounted charges, and other arrangements. Patient
service revenue is reported at the estimated net realizable amounts from
patients, third-party payers, and others for services rendered, including
estimated retroactive adjustments under reimbursement agreements with
third-party payers. Retroactive adjustments are recorded on an estimated
basis in the period the related services are rendered and adjusted in the
future periods, as final settlements with the payers are determined.
40
<PAGE>
CONCENTRATION OF CREDIT RISK
Medicare and Medicaid Programs
Net revenue from the majority of the Company's subsidiaries is generated
from services rendered to Medicare and Medicaid program (the Programs)
beneficiaries. The reimbursement from the Programs is determined under
cost-based reimbursement formulas. The ultimate reimbursement to which the
Company is entitled is based on the submission of annual cost reports,
which are subject to audit, by the Programs through the Programs
intermediaries. Management has made allowances for potential cost
disallowances. Differences between allowances and final settlements are
reported as modification to net patient service revenue in the year of
settlement. Since the Company receives a substantial portion of its funding
from the Programs, it is dependent on funding from the Medicare and
Medicaid programs to support fifty percent of its operations.
(2) ACQUISITIONS
Effective January 1, 1999, the Company, through its wholly-owned
subsidiary, PMP, issued 1,000 shares of its Class B preferred stock (see
note 6) for all of the outstanding stock of Clinical Concepts, Inc., a
Louisiana health care corporation. On the same day, the Company sold
Clinical Concepts Inc. to an individual for a long-term note receivable in
the amount of $30,000. The note receivable is due in six annual
installments of $5,000.
Effective March 26, 1999, the Company, through its wholly-owned subsidiary,
Unique Dawning, Inc., issued 2,500 shares of its Class B preferred stock
(see note 6) for all of the outstanding stock of two Texas health care
corporations.
Effective February 15, 1998, the Company issued 500,000 shares of its
common stock in exchange for all of the outstanding stock of Professional
Management Providers, Inc. (PMP), a Louisiana health care management
corporation.
Effective April 1, 1998, the Company issued 500,000 shares of its common
stock in exchange for all of the outstanding stock of Unique Dawning, Inc.,
a Texas health care corporation.
Effective June 30, 1998, the Company, through its wholly-owned subsidiary,
PMP, issued 2,000 shares of its Class B preferred stock for all of the
outstanding stock of Superior Quality Health Care, Inc., a Texas health
care corporation.
Effective July 30, 1998, the Company, through its wholly-owned subsidiary,
PMP, issued 11,000 shares of its Class B preferred stock for all of the
outstanding stock of Home Care Center, Inc., a Louisiana health care
corporation (see note 11).
Effective August 13, 1998, the Company, through its wholly-owned
subsidiary, PMP, issued 1,300 shares of its Class B preferred stock for all
of the outstanding stock of Magnolia Home Health, Inc., a Louisiana health
care corporation.
Effective October 3, 1998, the Company, through its wholly-owned
subsidiary, PMP, issued 600 shares of its Class B preferred stock for all
of the outstanding stock of A-1 Bayou Health 2000, Inc., a Louisiana health
care corporation.
Between July 1, 1998 and December 29, 1998, the Company, through its
wholly-owned subsidiary, PMP, issued 16,550 shares of its Class B preferred
stock for certain net assets of twelve Louisiana health care corporations.
All of the above acquisitions have been accounted for using the purchase
method with the purchase price allocated to the acquired assets and
liabilities based on their respective estimated fair values at the
acquisition dates. Such allocations were based on evaluations and
estimations. A valuation adjustment in the amount of $2,000,000 has been
assigned to the value of existing contracts for entities acquired in 1998.
41
<PAGE>
The purchase allocation is summarized as follows:
<TABLE>
<CAPTION>
1999 1998
----------- -------------
<S> <C> <C>
Current assets $ 133,849 $ 3,630,796
Noncurrent assets 25,000 -
Property and equipment - 439,745
Excess of cost over net assets
of businesses acquired - 2,000,000
Current liabilities (96,648) (5,229,128)
Long-term liabilities - (87,471)
----------- -------------
$ 62,201 $ 753,942
=========== =============
</TABLE>
Goodwill is being amortized over a period of 40 years.
(3) RELATED PARTY TRANSACTIONS
In January 1999, the Company sold 645,625 shares of common stock for
$129,125 ($.20 per share) to a company owned by a relative of the Chairman
of the Board at the time (the Chairman was subsequently removed by the
Board). The Chairman of the Board charged the Company a fee in the amount
of $5,125 to consummate this transaction. This private placement was never
approved by the Board of Directors.
In January 1999, the Company issued 1,251,995 shares of common stock to
companies owned by relatives of the Chairman of the Board at the time. The
shares were issued to retire loans made to the Company by the Chairman of
the Board and a company owned by the deceased former Chairman of the Board.
The Board of Directors never approved these transactions. The Board
subsequently removed the Chairman from the Board. The shares were never
returned and are still outstanding. In March 2000, the Company signed a
settlement agreement and mutual release in return for another private
placement of stock (see note 14). In addition, the former President of the
Company agreed to return 200,000 shares of common stock in settlement of
his involvement in the issuance of the shares.
In April 1999, the Company issued 130,000 shares ($.20 per share) of common
stock to the Chairman of the Board at the time for compensation for
services performed.
In December 1999, the Company issued 53,600 shares ($.40 per share) of
common stock to the Chief Financial Officer for compensation for services
performed and the repayment of $11,500 in loans made to the Company,
On July 2, 1998, the Company completed a private offering of 1,500,000
shares of its common stock at an offering price of $.001 per share. Of the
1,500,000 offered, 1,499,138 shares were issued and sold. 283,000 shares
were sold to a company owned by the son of the Chairman of the Board at the
time, 666,138 shares were sold to the Chairman of the Board at the end of
1998, and 500,000 shares were sold to a close business associate of the
Chairman of the Board, of which, 320,000 shares were subsequently
transferred to the Chairman of the Board. The shares were issued for less
than the par value of the shares. The excess of the par value over the
proceeds from the placement has been charged to Additional paid-in capital.
The Company has not determined whether the issuance met the requirements of
state law.
At December 31, 1998, $40,000 of the cash balance was pledged as collateral
for a personal loan made by the president of PMP. The Board of Directors of
the Company did not approve this transaction.
42
<PAGE>
(4) PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows:
<TABLE>
<CAPTION>
December 31,
--------------------
1999 1998
--------- ---------
<S> <C> <C>
Equipment $ 240,317 $ 206,179
Furniture and fixtures 1,600 1,600
--------- ---------
Total property and equipment 241,917 207,779
LESS ACCUMULATED DEPRECIATION AND
Amortization 95,903 70,188
--------- ---------
Net property and equipment $ 146,014 $ 137,591
========= =========
</TABLE>
(5) LONG-TERM DEBT
Long-term debt is summarized as follows:
<TABLE>
<CAPTION>
December 31,
-----------------
1999 1998
-------- --------
<S> <C> <C>
Notes payable (8), due March 10, 2001, with
interest at 6.5% (see note 11) $251,100 $ -
Note payable in monthly installments of $868
through September 2003; with interest at
10.5%, unsecured 34,075 40,393
Note payable in monthly installments of $970
through September 2004, with monthly
installments increasing to $5,500 through
August 2005, with interest, unsecured 115,126 119,006
NOTE PAYABLE IN MONTHLY INSTALLMENTS OF $3,700
THROUGH AUGUST 2004, UNSECURED 208,033 224,169
Note payable to a bank, with interest at
the lender's prime rate plus 2%, due
March 5, 2000 (note 12), - 67,322
-------- --------
Total long-term debt 608,334 450,890
Less current installments 63,220 33,754
-------- --------
Long-term debt, less
current installments $545,114 $417,136
======== ========
</TABLE>
Aggregate yearly maturities of long-term debt for the periods after
December 31, 1999 are as follows:
Years
--------
2000 $ 63,220
2001 315,111
2002 64,889
2003 66,115
2004 60,193
Thereafer 38,806
--------
$608,334
========
43
<PAGE>
(6) PREFERRED STOCK
In 1999, the Company issued 3,500 shares of its Class B preferred stock in
exchange for all of the outstanding stock of three health care companies
(see note 2). In 1998, the Company issued 31,450 shares of its Class B
preferred stock in exchange for all of the outstanding stock of four health
care companies and certain net assets of twelve health care companies (see
note 2). The Class B preferred shares have a face value of $100 per share,
with an annual cumulative dividend equal to 8%, with a term of 24 months.
The Class B preferred shares are convertible by the shareholders for the
Company's common stock at anytime after 12 months from the date of issuance
at a conversion rate equal to 80% of the then market price of the Company's
common stock. The Class B preferred shares are redeemable by the Company at
anytime in exchange for cash payment equal to the full-face amount of the
shares plus accumulated dividends. At the end of the 24 month term, if not
redeemed by the Company for cash equal to the face amount of the preferred
shares, the shares automatically convert to common stock at a conversion
rate equal to 80% of the then market bid price of the Company's common
stock. See note 14 for subsequent events related to the creation and
subsequent sale of the Company's Class E preferred stock.
(7) FEDERAL INCOME TAX EXPENSE
The estimated federal income tax expense for the year ended December 31,
1998 is eliminated by net operating loss carryforwards.
(8) CONVERTIBLE SUBORDINATED DEBENTURES
On August 3, 1998, the Company entered into an agreement to issue, as
needed, $750,000 of 8% senior subordinated convertible redeemable
debentures (the Debentures) due August 3, 1999. Interest on the outstanding
balance is due and payable monthly commencing September 3, 1998. The
Debentures may be converted into shares of the Company's stock at the lower
of 75% of the closing bid price of the Company's stock the day immediately
preceding the date of receipt by the Company of notice of conversion or by
75% of the closing bid price of the Company's stock on the five days
immediately preceding the date of subscription by the holder as reported by
the National Association of Securities Dealers Electronic Bulletin Board
("NASDAQ"). As of December 31, 1998, the Company had borrowed $400,000 of
the $750,000. And, the holders of the Debentures converted $205,000 of the
borrowings into 1,363,511 shares of the Company's common stock. The
remaining $195,000 is recorded as a current liability at December 31, 1998.
In 1999, the Company converted the remaining $195,000 into 1,223,787 shares
of the Company's common stock.
(9) LEASES
The Company leases certain office space, furniture and equipment under
operating leases. Future minimum lease payments under noncancellable
operating leases at December 31, 1999 are as follows:
Year
----
2000 $ 73,633
2001 19,168
---------
Total $ 92,801
=========
44
<PAGE>
(10) INDUSTRY SEGMENTS
The Company operated in two industries (health care and internet service
providers) and two geographical locations (Texas and Louisiana) during 1999 and
1998. Professional Management Providers, Inc. provided health care services in
the state of Louisiana (see note 12), and Unique Dawning, Inc. provided health
care services in the state of Texas (see note 12). Networks On-Line, Inc. is an
Internet service provider (ISP) in Texas. Segment and geographical information
for the years ended December 31, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
1999 1998
------------- ------------
<S> <C> <C>
Revenues:
Health care - Louisiana $ 984,982 $ -
ISP - Texas 591,029 751,558
------------- ------------
$ 1,576,011 $ 751,558
============= ============
Operating income (loss):
Health care - Louisiana $ 74,259 $ -
ISP - Texas (29,765) (54,621)
Corporate expenses (1,221,083) (251,687)
------------- ------------
$ (1,176,589) $ (306,308)
============= ============
Identifiable assets:
Health care - Louisiana $ 292,103 $ 293,514
ISP - Texas 630,916 644,874
Assets of discontinued
operations - 1,576,598
Corporate 25,052 168,911
------------- ------------
$ 948,071 $ 2,683,897
============= ============
</TABLE>
Corporate expenses for the year ended December 31, 1999 are summarized as
follows:
Settled and pending litigation $ 400,000
Investor relations 373,702
Contractual services 112,727
Bad debt expenses 86,000
Legal fees 71,198
Accounting and audit fees 47,696
Salaries and payroll taxes 38,131
Other administrative expense 91,629
----------
Total $1,221,083
==========
(11) LITIGATION
The Company has certain pending and threatened litigation and claims
incurred in the ordinary course of business (primarily related to acquisitions
and disposition of subsidiaries and related employment agreements). Management
has not determined whether or not the probable resolution of such contingencies
will have any additional material affect on the financial position of the
Company or the results of operations. Included in long-term debt is $251,100 of
liabilities related to settled litigation. In addition, approximately $150,000
is included in accounts payable and accrued expenses for pending litigation.
45
<PAGE>
(12) DISPOSAL OF HEALTH CARE FACILITIES
During 1999, a number of the facilities (6) in Louisiana owned by the
Company's subsidiary, Professional Management Providers, Inc. were
operating under Chapter 11 of the U.S. Bankruptcy Code. As a result of
several disputes and lawsuits with former management of the subsidiary, the
Trustee in bankruptcy closed the six subsidiary corporations of Home Care
Center, Inc. in July 1999. Thereafter, the Company closed three of the
remaining four facilities in Louisiana, and transferred ownership of the
remaining one to the parent company. The one remaining facility was still
in operation at December 31, 1999.
In addition, the Company made several acquisitions during 1999 through its
Unique Dawning, Inc. (UDI) subsidiary without board approval or corporate
involvement. These facilities proved unmanageable, and as a result, Unique
Dawning, Inc. was placed in Chapter 11 of the Bankruptcy Code in September
1999. Subsequently, the Trustee transferred the filing to Chapter 7, which
provides for liquidation.
As a result of these events, the Company recognized losses on the closing
and disposal of the twelve facilities (nine under Professional Management
Providers, Inc. (PMP) and three under Unique Dawning, Inc.). The loss has
been reflected in the accompanying statement of operations as a loss from
discontinued operations. No income tax credit has been provided against the
loss due to the unavailability of recoverable taxes in prior periods. The
losses were as follows:
<TABLE>
<CAPTION>
PMP UDI Total
------------ ---------- ------------
<S> <C> <C> <C>
Loss on disposal $(2,088,367) $(639,273) $(2,727,640)
Net earnings for 1999 586,309 230,959 817,268
------------ ---------- ------------
Net loss $(1,502,058) $(408,314) $(1,910,372)
============ ========== ============
</TABLE>
Shown below is a summary of certain elements of PMP's and UDI's operations
and net assets:
<TABLE>
<CAPTION>
1999 1998
----------- ----------
<S> <C> <C>
Revenues $ 7,876,070 $8,148,863
Cost and expenses 7,058,802 7,099,045
----------- ----------
Net earnings $ 817,268 $1,049,818
=========== ==========
Net assets $ 2,727,640 $1,576,598
=========== ==========
</TABLE>
RECLASSIFICATIONS
The accounting for the disposal of the health care facilities was
originally treated as an extraordinary item. The consolidated financial
statements for 1999 and 1998 have been reclassified to account for the
disposal as a loss from discontinued operations. These reclassifications
did not have an affect on retained earnings (deficit) for 1999 or 1998.
(13) OPERATIONAL STATUS
The current company is the survivor of a reverse merger, which occurred in
1997 and has expanded since then through both internal growth and
acquisitions. During this growth period, the Company reported significant
revenues in 1998 and 1999; however, the revenues reported for both years
represented approximately one-half of a year's operations. This situation
was due to significant acquisitions occurring in mid-year 1998 and the
disposition (note 12) of a majority of those businesses in mid-year 1999.
The management of the acquisition process and the management of those
subsequent operations exposed the Company to significant legal liabilities
(note 11).
At December 31, 1999, current liabilities exceeded current assets by
$733,063. At December 31, 1999, the Company primarily had two operational
subsidiaries: one health care subsidiary located in Louisiana and one
46
<PAGE>
Internet Service Provider located in Houston, Texas. The net income from
these operations is not sufficient to support corporate expenses and pay
current liabilities.
In view of these matters, realization of a major portion of the assets in
the accompanying consolidated balance sheet is dependent upon continued
operations of the Company, the success of a secondary placement and future
acquisitions and operations. Management believes that actions presently
being taken to obtain additional equity financing through a secondary
offering and acquisitions and increasing sales in the technology sector
will provide the opportunity to continue as a going concern.
(14) SUBSEQUENT EVENT
During February and March 2000, the Company raised $200,000 through a
private placement. The Company agreed to sell 2,000 shares of its Class E
preferred stock at $100 per share. 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.
(15) YEAR 2000 ISSUE
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define a specific year. Absent corrective
actions, a computer program that has date-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result
in system failures or miscalculations causing disruptions to various activities
and operations.
The Company primarily uses licensed software products in its operations
with a significant portion of processes and transactions centralized in
several particular accounting software packages. The Company has not
experienced any year 2000 problems to date; however, the Company plans to
continue to monitor the situation closely.
47
<PAGE>
COMTECH CONSOLIDATION GROUP, INC. AND SUBSIDIARIES
INDEX FOR INTERIM FINANCIALS
JUNE 30, 2000 AND 1999
Consolidated Financial Statements:
Balance Sheets - June 30, 2000 and December 31, 1999
Statements of Operations - Three months and Six months ended June 30, 2000
and 1999
Statements of Cash Flows - Six months ended June 30, 2000 and 1999
Notes to Consolidated Financial Statements
MARCH 31, 2000 AND 1999
Consolidated Financial Statements:
Balance Sheets - March 31, 2000 and 1999
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
48
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
-------------------------------
The Board of Directors and Stockholders
Comtech Consolidation Group, Inc.:
We have reviewed the accompanying condensed consolidated balance sheet of
Comtech Consolidation Group, Inc. and subsidiaries as of June 30, 2000, and the
related condensed consolidated statements of operations and cash flows for the
three-month and six month periods ended June 30, 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 3 to the
condensed financial statements (and Note 13 to the annual financial statements
for the year ended December 31, 1999 (not 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 3 (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
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
August 11, 2000
49
<PAGE>
<TABLE>
<CAPTION>
COMTECH CONSOLIDATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 2000 and December 31, 1999
(Unaudited - see accompanying accountants' review report)
Assets 2000 1999
------ ------------- --------------
<S> <C> <C>
(Audited)
Current assets:
Cash $ 41,696 $ 21,710
Accounts receivable, less allowances for contractual
adjustments and doubtful accounts of $1,000
in 2000 and 1999 432,919 110,007
Prepaid expenses 74,008 -
------------- --------------
Total current assets 548,623 131,717
------------- --------------
Note receivable 20,000 20,000
Property and equipment, net of accumulated
depreciation and amortization 130,791 146,014
Excess of cost over net assets of businesses
acquired, less accumulated amortization of
$42,500 in 2000 and $34,000 in 1999 637,500 646,000
Other assets 4,340 4,340
------------- --------------
Total assets $ 1,341,254 $ 948,071
============= ==============
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable and accrued expenses 552,465 617,392
Accrued salaries and related liabilities 160,406 131,686
Loans payable to shareholders 42,482 42,482
Notes payable 10,000 10,000
Current installments of long-term debt 306,959 63,220
------------- --------------
Total current liabilities 1,072,312 864,780
Long-term debt, less current installments 294,014 545,114
------------- --------------
Total liabilities 1,366,326 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 358 310
Common stock, $.00967 par value. Authorized
30,000,000 shares: issued and outstanding,
27,923,290 shares in 2000 and 22,077,072
shares in 1999 270,018 213,485
Additional paid-in capital 2,363,395 2,024,806
Retained earnings (deficit) (2,658,843) (2,700,424)
------------- --------------
Total stockholders' equity (deficit) (25,072) (461,823)
Commitments and contingent liabilities
------------- --------------
Total liabilities and stockholders' equity $ 1,341,254 $ 948,071
============= ==============
</TABLE>
See accompanying notes to consolidated financial statements.
50
<PAGE>
<TABLE>
<CAPTION>
COMTECH CONSOLIDATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended June 30, 2000 and 1999
(Unaudited - see accompanying accountants' review report)
2000 1999
------------------- -------------------
<S> <C> <C>
Revenues:
Patient service revenue, net $ 317,661 $ 238,540
Internet service revenue 130,337 185,580
------------------- -------------------
Total revenues 447,998 424,120
------------------- -------------------
Operating expenses:
Health care operations 207,704 143,964
Internet operations 116,862 159,250
Corporate operations 84,714 51,395
Amortization 4,250 6,300
Depreciation 12,211 9,849
------------------- -------------------
Total operating expenses 425,741 370,758
------------------- -------------------
Operating income 22,257 53,362
Other income (expenses):
Interest income - 4
Interest expense (6) (938)
------------------- -------------------
Net earnings (loss) from continuing operations 22,251 52,428
Earnings from discontinued operations - 837,839
------------------- -------------------
Net earnings $ 22,251 $ 890,267
=================== ===================
Earnings per share:
Basic:
Net earnings from continuing operations $ 0.00 $ 0.00
=================== ===================
Net earnings from discontinued operations $ - $ 0.04
=================== ===================
Net earnings $ 0.00 $ 0.05
=================== ===================
Diluted:
Net earnings from continuing operations $ 0.00 $ 0.00
=================== ===================
Net earnings from discontinued operations $ - $ 0.04
=================== ===================
Net earnings $ 0.00 $ 0.04
=================== ===================
Weighted average common shares:
Basic 23,737,296 18,956,000
=================== ===================
Diluted 26,111,026 20,851,600
=================== ===================
</TABLE>
See accompanying notes to consolidated financial statements.
51
<PAGE>
<TABLE>
<CAPTION>
COMTECH CONSOLIDATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Six months ended June 30, 2000 and 1999
(Unaudited - see accompanying accountants' review report)
2000 1999
------------------- -------------------
<S> <C> <C>
Revenues:
Patient service revenue, net $ 673,639 $ 538,635
Internet service revenue 299,521 344,780
------------------- -------------------
Total revenues 973,160 883,415
------------------- -------------------
Operating expenses:
Health care operations 451,251 395,680
Internet operations 263,868 301,189
Corporate operations 183,953 128,092
Amortization 8,500 12,600
Depreciation 23,940 19,573
------------------- -------------------
Total operating expenses 931,512 857,134
------------------- -------------------
Operating income 41,648 26,281
Other income (expenses):
Interest income - 14
Interest expense (67) (1,876)
------------------- -------------------
Net earnings from continuing operations 41,581 24,419
Earnings from discontinued operations - 1,613,719
------------------- -------------------
Net earnings $ 41,581 $ 1,638,138
=================== ===================
Earnings per share:
Basic:
Net earnings (loss) from continuing operations $ 0.00 $ 0.00
=================== ===================
Net earnings from discontinued operations $ - $ 0.09
=================== ===================
Net earnings $ 0.00 $ 0.09
=================== ===================
Diluted:
Net earnings (loss) from continuing operations $ 0.00 $ 0.00
=================== ===================
Net earnings from discontinued operations $ - $ 0.08
=================== ===================
Net earnings $ 0.00 $ 0.08
=================== ===================
Weighted average common shares:
Basic 25,167,617 17,856,000
=================== ===================
Diluted 27,684,379 19,641,600
=================== ===================
</TABLE>
See accompanying notes to consolidated financial statements.
52
<PAGE>
<TABLE>
<CAPTION>
COMTECH CONSOLIDATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended June 30, 2000 and 1999
(Unaudited - see accompanying accountants' review report)
2000 1999
---------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 41,581 $ 1,638,138
Earnings from discontinued operations - (1,613,719)
---------------- ---------------
Net earnings from continuing operations 41,581 24,419
Adjustments to reconcile net earnings (loss) from continuing
operations to net cash used in operating activities:
Depreciation and amortization of property and equipment 23,940 19,573
Amortization of excess of cost over net
assets of businesses acquired 8,500 12,600
Stock issued for services 147,800 -
(Increase) decrease in assets:
Accounts receivable (322,912) (49)
Prepaid expenses (74,008) -
Increase (decrease) in liabilities:
Accounts payable and accrued expenses (64,927) (48,947)
Accrued salaries and related liabilities 28,720 81,573
---------------- ---------------
Net cash provided by (used in) continuing operations (211,306) 89,169
Net cash used in discontinued operations - (125,328)
---------------- ---------------
Net cash used in operating activities (211,306) (36,159)
---------------- ---------------
Cash flows from investing activities:
Purchase of property and equipment (8,717) (26,637)
---------------- ---------------
Net cash used in investing activities (8,717) (26,637)
---------------- ---------------
Cash flows from financing activities:
Principal payments on long-term debt (7,361) (27,948)
Proceeds from issuance of shares under private placement 247,370 114,000
---------------- ---------------
Net cash provided by operating activities 240,009 86,052
---------------- ---------------
Net increase in cash 19,986 23,256
Cash at beginning of year 21,710 40,505
---------------- ---------------
Cash at end of period $ 41,696 $ 63,761
================ ===============
Supplemental schedule of cash flow information:
Interest paid $ 67 $ 1,876
================ ===============
</TABLE>
See accompanying notes to consolidated financial statements.
53
<PAGE>
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 Rules
of Regulation S-B, 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) FEDERAL INCOME TAX EXPENSE
The estimated federal income tax expense for the three-month and six-month
periods ended June 30, 2000 and 1999 is eliminated by net operating loss
carryforwards.
(3) OPERATIONAL STATUS
At June 30, 2000, current liabilities exceeded current assets by $523,689.
At June 30, 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 approximately
$400,000 in operating capital through private placements of the Company's
common and preferred stock. Total assets at June 30, 2000 increased by
$393,183 compared to total assets at 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 2nd quarter 10QSB, Item 2.
ITEM 2- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
THE THREE AND SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO THE THREE AND SIX
MONTHS ENDED JUNE 30, 1999
Revenues for the six months and three months ended June 30, 2000 increased by
$89,745 or 10.2% and $23,878 or 5.6%, respectively, over the comparable periods
a year earlier. Increase in sales was primarily due to increase patient census
in the health care subsidiary.
54
<PAGE>
Net earnings from continuing operations for the six and three months ended June
30, 2000 increased by $17,162 and decreased by $30,177, respectively.
LIQUIDITY AND CAPITAL RESOURCES
During the quarter ended June 30, 2000, the Company raised $47,370 through
private placements. The funds were used to pay for corporate operations. The
Company had filed Form SB-2 with the Securities and Exchange Commission to
register 27,000,000 shares of common stock for sale to the public. The Company
expects to raise approximately $4,000,000 with this offering. There can be no
assurance that the Company will be successful in this effort.
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 had hired an experienced ISP
operator whose compensation is 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
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 experienced health care administrator. The administrator is
responsible for the growth and management of the day-to-day operations of A-1
Bayou.
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.
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.
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
consolidation and spin-off opportunities available to the Company and its
shareholders, Comtech will provide its customers the best service and content in
the industry.
55
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
---------------------------------
The Board of Directors and Stockholders
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
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
56
<PAGE>
<TABLE>
<CAPTION>
COMTECH CONSOLIDATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 2000 and December 31, 1999
(Unaudited - see accompanying accountants' review report)
Assets 2000 1999
------ ------------- --------------
<S> <C> <C>
(Audited)
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
============= ==============
</TABLE>
See accompanying notes to consolidated financial statements.
57
<PAGE>
<TABLE>
<CAPTION>
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
------------------- -------------------
<S> <C> <C>
Revenues:
Patient service revenue, net $ 355,978 $ 300,095
Internet service revenue 169,184 159,200
------------------- -------------------
Total revenues 525,162 459,295
------------------- -------------------
Operating expenses:
Health care operations 243,547 251,716
Internet operations 147,006 141,939
Corporate operations 99,239 76,697
Amortization 4,250 6,300
Depreciation 11,729 9,724
------------------- -------------------
Total operating expenses 505,771 486,376
------------------- -------------------
Operating income (loss) 19,391 (27,081)
Other income (expenses):
Interest income - 18
Interest expense (61) (938)
------------------- -------------------
Net earnings (loss) from continuing operations 19,330 (28,001)
Earnings from discontinued operations - 775,880
Net earnings $ 19,330 $ 747,879
=================== ===================
Earnings per share:
Basic:
Net earnings (loss) from continuing operations $ - $ -
=================== ===================
Net earnings from discontinued operations $ - $ 0.04
=================== ===================
Net earnings $ - $ 0.04
=================== ===================
Diluted:
Net earnings (loss) from continuing operations $ - $ -
=================== ===================
Net earnings from discontinued operations $ - $ 0.04
=================== ===================
Net earnings $ - $ 0.04
=================== ===================
Weighted average common shares:
Basic 22,521,890 17,726,000
=================== ===================
Diluted 24,774,079 19,498,600
=================== ===================
</TABLE>
See accompanying notes to consolidated financial statements.
58
<PAGE>
<TABLE>
<CAPTION>
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
---------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 19,330 $ 747,879
Earnings from discontinued operations - (775,880)
---------------- ---------------
Net earnings (loss) from continuing operations 19,330 (28,001)
Adjustments to reconcile net earnings (loss) from continuing
operations to net cash used in operating activities:
Depreciation and amortization of property and equipment 11,729 9,724
Amortization of excess of cost over net
assets of businesses acquired 4,250 6,300
(Increase) decrease in assets:
Accounts receivable (162,571) (15,627)
Prepaid expenses (66,000) -
Increase (decrease) in liabilities:
Accounts payable and accrued expenses 31,788 55,564
Accrued salaries and related liabilities 12,912 (102,302)
---------------- ---------------
Net cash used in continuing operations (148,562) (74,342)
Net cash used in discontinued operations - (31,387)
---------------- ---------------
Net cash used in operating activities (148,562) (105,729)
---------------- ---------------
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 (33,323)
Cash at beginning of year 21,710 40,505
---------------- ---------------
Cash at end of period $ 64,082 $ 7,182
================ ===============
Supplemental schedule of cash flow information:
Interest paid $ 61 $ 3,532
================ ===============
</TABLE>
See accompanying notes to consolidated financial statements.
59
<PAGE>
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 Rules
of Regulation S-B, 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:
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
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
======== ========
</TABLE>
(3) LONG-TERM DEBT
Long-term debt at March 31, 2000 and December 31, 1999 are as follows:
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Long-term debt $602,768 $608,334
Less current installments 308,754 63,220
-------- --------
$294,014 $545,114
======== ========
</TABLE>
(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.
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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.
(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.
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 $459,295, respectively, which is an increase of $65,867 or approximately
14%.
Net earnings (loss) from continuing operations for the three months ended March
31, 2000 and 1999 was $19,330 and $(28,001) respectively, which represents a
increase of $47,331. The increase in net earnings for this period is primarily
attributable to new management implementation of a plan to reduce operating
expenses and increasing revenue at the four remaining subsidiaries.
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
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.
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<PAGE>
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.
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
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<PAGE>
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
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.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICER
1. Section 145 of the Delaware General Corporation Laws ("DGCL") provides, in
relevant part, as follows: "(a) A corporation shall have power to indemnify
any person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in
the right of the corporation) by reason of the fact that the person is or
was a director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by the
person in connection with such action, suit or proceeding if the person
acted in good faith and in a manner the person reasonably believed to be in
or not opposed to the best interests of the corporation, and, with respect
to any criminal action or proceeding, had no reasonable cause to believe
the person's conduct was unlawful. The termination of any action, suit or
proceeding by judgment, order, settlement, conviction, or upon a plea of
nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which
the person reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had reasonable cause to believe that the person's conduct was
unlawful.
(b) A corporation shall have power to indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that the person is or was a
director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise against expenses (including attorneys' fees) actually and
reasonably incurred by the person in connection with the defense or
settlement of such action or suit if the person acted in good faith and in
a manner the person reasonably believed to be in or not opposed to the best
interests of the corporation and except that no indemnification shall be
made in respect of any claim, issue or matter as to which such person shall
have been adjudged to be liable to the corporation unless and only to the
extent that the Court of Chancery or the court in which such action or suit
was brought shall determine upon application that, despite the adjudication
of liability but in view of all the circumstances of the case, such person
is fairly and reasonably entitled to indemnity for such expenses which the
Court of Chancery or such other court shall deem proper.
(c) To the extent that a present or former director or officer of a
corporation has been successful on the merits or otherwise in defense of
any action, suit or proceeding referred to in subsections (a) and (b) of
this section, or in defense of any claim, issue or matter therein, such
person shall be indemnified against expenses (including attorneys' fees)
actually and reasonably incurred by such person in connection therewith.
(d) Any indemnification under subsections (a) and (b) of this section
(unless ordered by a court) shall be made by the corporation only as
authorized in the specific case upon a determination that indemnification
of the present or former director, officer, employee or agent is proper in
the circumstances because the person has met the applicable standard of
conduct set forth in subsections (a) and (b) of this section. Such
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<PAGE>
determination shall be made, with respect to a person who is a director or
officer at the time of such determination, (1) by a majority vote of the
directors who are not parties to such action, suit or proceeding, even
though less than a quorum, or (2) by a committee of such directors
designated by majority vote of such directors, even though less than a
quorum, or (3) if there are no such directors, or if such directors so
direct, by independent legal counsel in a written opinion, or (4) by the
stockholders.
(e) Expenses (including attorneys' fees) incurred by an officer or director
in defending any civil, criminal, administrative or investigative action,
suit or proceeding may be paid by the corporation in advance of the final
disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such director or officer to repay such
amount if it shall ultimately be determined that such person is not
entitled to be indemnified by the corporation as authorized in this
section. Such expenses (including attorneys' fees) incurred by former
directors and officers or other employees and agents may be so paid upon
such terms and conditions, if any, as the corporation deems appropriate."
2. Comtech Consolidation Group, Inc. (the "Registrant") has not provided for
indemnification of its directors or officers in its organizing documents.
3. The Registrant may purchase and maintain insurance, at its expense, on
behalf of any indemnitee against any liability asserted against him or her
and incurred by him or her in such a capacity or arising out of his or her
status as a representative of the Registrant, whether or not the Registrant
would have the power to indemnify such person against such expense,
liability or loss under the DGCL.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses to be incurred in
connection with the distribution of the securities being registered. The
expenses shall be paid by the Registrant.
SEC Registration Fee. . . . . . . . . . . . . . . . $ 1,069
NASD Filing Fee . . . . . . . . . . . . . . . . . . ---
Legal Fees and Expenses . . . . . . . . . . . . . . 30,000
Accounting Fees and Expenses. . . . . . . . . . . . 20,000
Blue Sky Fees and Expenses (including counsel fees) 3,500
Federal Taxes . . . . . . . . . . . . . . . . . . . ---
State Taxes and Fees . . . . . . . . . . . . . . . ---
Printing and Engraving Expenses . . . . . . . . . . 5,000
Transfer Agent and Registrar Fees and Expenses. . . 2,000
Expenses by Selling Shareholders. . . . . . . . . . ---
Miscellaneous . . . . . . . . . . . . . . . . . . . ---
Total . . . . . . . . . . . . . . . . . . $61,569
=======
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
Between March 31, 2000 and June 30, 2000, the Company raised $40,500 through the
private sale of Common Stock to existing shareholders of the Company.
During February and March 2000, the Company raised $200,000 through a private
placement. The Company entered into an agreement with Jim Thuney, a Comtech
shareholder, to sell Mr. Thuney up to 2,000 shares of its Class E preferred
stock at $100 per share. Each share of the Class E preferred stock, has an
annual cumulative dividend equal to 8%, a term of 12 months, and is convertible
into 650 shares of the Company's Common Stock.
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<PAGE>
Effective January 1, 1999, the Company, through its wholly-owned subsidiary,
PMP, issued 1,000 shares of its Class B preferred stock (see note 6) for all of
the outstanding stock of Clinical Concepts, Inc., a Louisiana health care
corporation. On the same day, the Company sold Clinical Concepts Inc. to an
individual for a long-term note receivable in the amount of $30,000. The note
receivable is due in six annual installments of $5,000.
Effective March 26, 1999, the Company, through its wholly-owned subsidiary,
Unique Dawning, Inc., issued 2,500 shares of its Class B preferred stock (see
note 6) for all of the outstanding stock of two Texas health care corporations.
Effective February 15, 1998, the Company issued 500,000 shares of its common
stock in exchange for all of the outstanding stock of Professional Management
Providers, Inc. (PMP), a Louisiana health care management corporation.
Effective April 1, 1998, the Company issued 500,000 shares of its common stock
in exchange for all of the outstanding stock of Unique Dawning, Inc., a Texas
health care corporation.
Effective June 30, 1998, the Company, through its wholly-owned subsidiary, PMP,
issued 2,000 shares of its Class B preferred stock for all of the outstanding
stock of Superior Quality Health Care, Inc., a Texas health care corporation.
Effective July 30, 1998, the Company, through its wholly-owned subsidiary, PMP,
issued 11,000 shares of its Class B preferred stock for all of the outstanding
stock of Home Care Center, Inc., a Louisiana health care corporation (see note
11).
Effective August 13, 1998, the Company, through its wholly owned subsidiary,
PMP, issued 1,300 shares of its Class B preferred stock for all of the
outstanding stock of Magnolia Home Health, Inc., a Louisiana health care
corporation.
Effective October 3, 1998, the Company, through its wholly-owned subsidiary,
PMP, issued 600 shares of its Class B preferred stock for all of the outstanding
stock of A-1 Bayou Health 2000, Inc., a Louisiana health care corporation.
Between July 1, 1998 and December 29, 1998, the Company, through its
wholly-owned subsidiary, PMP, issued 16,550 shares of its Class B preferred
stock for certain net assets of twelve Louisiana health care corporations.
All of the above acquisitions have been accounted for using the purchase method
with the purchase price allocated to the acquired assets and liabilities based
on their respective estimated fair values at the acquisition dates. Such
allocations were based on evaluations and estimations. A valuation adjustment
in the amount of $2,000,000 has been assigned to the value of existing contracts
for entities acquired in 1998.
ITEM 27. EXHIBITS
3.1 Certificate of Incorporation of the Registrant, as amended.
3.2 Bylaws of the Company.
5.1 Opinion of Warner & Washington L.L.P.
10.1 Lease Agreement dated as of June 19, 1998, between the Registrant and
Mack-Call Texas Property, L.P.
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10.2 Stock Subscription Agreement, dated February 23, 2000, by and between the
Registrant and Jim Thuney for the sale of up to 2,000 shares of Class E
Preferred Stock.
10.3 DSL Partnership Program Agreement, dated May 24, 1999, by and between the
Networks On-Line, Inc. and Southwestern Bell Telephone Company.
10.4 Database Access Agreement, dated September 2, 1999, by and between Networks
On-Line, Inc. and Southwestern Bell Telephone Company.
10.5 Ascend Lease Agreement, dated June 12, 1998, by and between Networks
On-Line, Inc. and Ascend Credit Corporation.
10.6 Basic Internet Service Agreement, dated April 30, 1998, by and between
Networks On-Line, Inc. and Savvis Communications Corporation.
10.7 Receipt, Release and Indemnity Agreement dated as of March 10, 2000, among
the Registrant, Neva Kannon Durbin, John L. Fontana, Phyllisine C. Glass,
Shelisi Oliver, Barbara Culberson, Lizzie Jefferson, Anita Jones, Kimberly
Rankin, and CCGI Settlement Group, L.L.C. (to be filed)
10.8 Comtech Consolidation Group, Inc. 2000 Stock Option Plan (to be filed)
21.1 List of Subsidiaries of the Registrant.
23.1 Consent of R.E. Bassie & Co., P.C.
23.2 Awareness Letter R.E. Bassie & Co., P.C.
23.3 Consent of Warner & Washington L.L.P.
ITEM 28. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended, the "Securities Act"), may be permitted to directors,
officers and controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes:
1. To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
i. To include any prospectus required by Section 10(a)(3) of the
Securities Act;
ii. To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the
information set forth in the registration statement; and
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iii. To include any additional or changed material information with
respect to the plan of distribution.
2. That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
3. To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the
termination of the offering.
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SIGNATURES
In accordance with the requirements of the Securities Act, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements of filing on Form SB-2 and authorizes this registration statement
to be signed on its behalf by the undersigned, in the City of Houston State of
Texas on August 30, 2000.
Comtech Consolidation Group, Inc.
By: /s/ Walter D. Davis
----------------------
Walter D. Davis, Chief Executive Officer
In accordance with the requirements of the Securities Act, this registration
statement was signed by the following persons in the capacities and on the dates
stated:
Signature Date
------------------------- -------------------------
By: /s/ Walter D. Davis August 30, 2000
------------------------
Walter D. Davis
By: /S/ Lamont J. Waddell August 30, 2000
------------------------
Lamont J. Waddell
By: August __, 2000
------------------------
Vincent E. Alexander
By: /s/ Dr. Beatrice Beasley August 30, 2000
------------------------
Dr. Beatrice Beasley
By: /s/ Jesse Funchess August 30, 2000
------------------------
Jesse Funchess, JD
69
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