<PAGE>
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FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter ended September 30, 1998 Commission File Number 0-16472
COMC, INC.
------------------------------------------------------
(Exact Name of Registrant As Specified In Its Charter)
Illinois 36-3021754
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
400 N. Gleoaks Boulevard, Burbank, CA 91502
------------------------------------- ----------
(Address of principal executive office) (Zip Code)
818-556-3333
----------------------------
(Registrant's telephone no.)
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15 (d) of the Securities
Exchange Act of 1934 during the preceding twelve months (or for such shorter
period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past ninety days.
Yes [X] No [ ]
As of November 16, 1998, 20,054,946 shares of the Registrant's
common stock par value $.01 were issued and outstanding.
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PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
COMC, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 633,958 $ 85,082
Accounts receivable, net and unbilled revenue 3,947,052 360,702
Inventories 219,646 106,806
Loans receivable from officer 90,075 43,885
Prepaid expenses and other current assets 51,527 36,247
------------ ------------
TOTAL CURRENT ASSETS 4,942,258 632,722
PROPERTY AND EQUIPMENT, Net 753,585 110,090
OTHER ASSETS
Goodwill, net 10,998,972 --
Deferred income taxes 356,075 --
Deposits 51,955 17,825
------------ ------------
TOTAL OTHER ASSETS 11,407,002 17,825
------------ ------------
$ 17,102,845 $ 760,637
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Bank credit line payable $ 296,500 $ --
Current portion of long-term debt 56,840 50,000
Notes payable to stockholders 3,500,000 --
Income taxes payable 1,289,325 --
Accounts payable 867,203 200,049
Accrued salaries and payroll taxes 143,229 --
Accrued vacation 109,439 14,669
Accrued interest 105,183 --
Customers' deposits 62,537 207,908
Other current liabilities 179,780 28,871
------------ ------------
TOTAL CURRENT LIABILITIES 6,610,036 501,497
LONG-TERM DEBT, net of current portion 99,686 116,667
SHAREHOLDERS' EQUITY
Common stock, $.01 par value; authorized - 40,000,000 shares;
issued and outstanding - 20,054,946 and 12,498,107 shares 200,549 124,981
Additional paid-in capital 10,558,454 210,022
Accumulated deficit (365,880) (192,530)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 10,393,123 142,473
------------ ------------
$ 17,102,845 $ 760,637
============ ============
</TABLE>
See accompanying notes
1
<PAGE>
COMC, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
1998 1997
------------ ------------
(Unaudited) (Unaudited)
REVENUES $ 3,096,409 $ 2,028,279
COST AND EXPENSES
Cost of revenues 1,868,343 1,269,802
Selling, general and administrative 1,138,699 851,920
Amortization of goodwill 46,020 --
Depreciation 42,235 12,073
------------ ------------
TOTAL COST AND EXPENSES 3,095,297 2,133,795
------------ ------------
INCOME (LOSS) FROM OPERATIONS 1,112 (105,516)
OTHER INCOME (EXPENSE)
Interest income 1,463 372
Interest expense (24,717) (38,512)
Other, net 3,222 --
------------ ------------
TOTAL OTHER INCOME (EXPENSE) (20,032) (38,140)
------------ ------------
LOSS BEFORE INCOME TAXES (18,920) (143,656)
INCOME TAXES 154,430 --
------------ ------------
NET LOSS $ (173,350) $ (143,656)
============ ============
LOSS PER SHARE $ (.01) $ (.01)
============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 13,395,000 12,498,000
============ ============
See accompanying notes.
2
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COMC, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
1998 1997
------------ ------------
(Unaudited) (Unaudited)
REVENUES $ 2,214,794 $ 408,876
COST AND EXPENSES
Cost of revenues 1,381,438 272,360
Selling, general and administrative 681,010 228,716
Amortization of goodwill 46,020 --
Depreciation 22,774 910
------------ ------------
TOTAL COST AND EXPENSES 2,131,242 501,986
------------ ------------
INCOME (LOSS) FROM OPERATIONS 83,552 (93,110)
OTHER INCOME (EXPENSE)
Interest income 1,244 124
Interest expense (10,904) (13,307)
Other, net 3,222 --
------------ ------------
TOTAL OTHER INCOME (EXPENSE) (6,438) (13,183)
------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES 77,114 (106,293)
INCOME TAXES 154,430 --
------------ ------------
NET LOSS $ (77,316) $ (106,293)
============ ============
LOSS PER SHARE $ (.01) $ (.01)
============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 15,189,000 12,498,000
============ ============
See accompanying notes.
3
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COMC, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
1998 1997
----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (173,350) $ (143,656)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Amortization of goodwill 46,020 --
Depreciation 42,235 12,073
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable (211,632) 253,413
Inventories 22,914 15,650
Prepaid expenses and other current assets 23,674 (27,037)
Increase (decrease) in:
Income taxes payable 105,087 (2,045)
Accounts payable and accrued liabilities (455,041) 28,160
----------- -----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (600,093) 136,558
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash acquired from purchase business combination 1,149,296 --
Cash paid to selling stockholders of ICF (1,500,000) --
Expenses related to purchase of ICF (135,646) --
Deposits 1,923 --
Loans receivable from officer (46,190) (38,198)
Purchases of property and equipment (30,773) (16,816)
----------- -----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (561,390) (55,014)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Sale of common stock, net of offering costs 1,424,000 --
Advances from bank loans 325,252 76,000
Repayments on bank loans (38,893) (138,333)
----------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 1,710,359 (62,333)
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 548,876 19,211
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 85,082 57,180
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD 633,958 76,391
=========== ===========
CASH PAID FOR:
Interest $ 24,717 $ 41,584
Income taxes $ 49,343 $ 2,045
</TABLE>
See accompanying notes.
4
<PAGE>
COMC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
1. BASIS OF PRESENTATION
The interim consolidated condensed financial statements presented have
been prepared by COMC, Inc. (the "Company") without audit and, in the
opinion of the management, reflect all adjustments of a normal
recurring nature necessary for a fair statement of (a) the results of
operations for the three and nine months ended September 30, 1998 and
1997, (b) the financial position at September 30, 1998 and (c) the cash
flows for the nine months ended September 30, 1998 and 1997. Interim
results are not necessarily indicative of results for a full year.
The consolidated balance sheet presented as of December 31, 1997 has
been derived from the consolidated financial statements that have been
audited by the Company's independent public accountants. The
consolidated financial statements and notes are condensed as permitted
by Form 10-QSB and do not contain certain information included in the
annual financial statements and notes of the Company. The consolidated
financial statements and notes included herein should be read in
conjunction with the financial statements and notes included in the
Company's Annual Report on Form 10-KSB and the audited financial
statements of ICF Communication Systems, Inc. ("ICF') and notes
included in the Company's Form 8K/A dated August 17, 1998.
The results of operations reported in these consolidated financial
statements reflect the operations of the Company prior to August 31,
1998 and reflect the consolidated operations of the Company and ICF
subsequent to August 31, 1998.
2. ACQUISITION
On August 17, 1998, the Company consummated the acquisition of ICF.
Under the terms of the Agreement and Plan of Merger dated July 24, 1998
(as amended on August 3, 1998, the "Agreement"), ICF merged with and
into a wholly-owned subsidiary of the Company that had been especially
organized for purposes of this transaction (the "Merger"). In
connection with the Merger, ICF's name was changed to ICF Communication
Solutions, Inc. In consideration for the Merger, the two principals of
ICF received an aggregate payment valued at $14,000,000, as follows:
$1,500,000 in cash at the closing of the transaction; $1,500,000 in
promissory notes due and payable January 5, 1999, secured by all
accounts receivable of the Company; $1,000,000 in promissory notes due
and payable January 4, 1999; $1,000,000 in promissory notes due and
payable August 17, 1999; and 6,493,506 shares of COMC's common stock
valued at $9,000,000 or $1.386 per share. The Company agreed to use its
best efforts to register the shares of common stock issued in
connection with the Merger.
5
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In addition, under the Agreement, Messrs. Charles Lincoln and William
Burns, the principal shareholders and executive officers of ICF, were
elected to the Company's Board of Directors and were appointed Chairman
and President of ICF Communication Solutions, Inc., pursuant to
two-year employment agreements with each of Mr. Lincoln and Burns,
providing, among other things, for annual salaries of $135,000 as well
as annual bonuses at the discretion of COMC's Board of Directors.
The transaction was accounted for using the purchase method of
accounting. The balance sheet of ICF as of August 31, 1998 is as
follows:
Current assets other than cash $ 3,549,426
Property and equipment, net 654,957
Other assets 486,181
Current liabilities (2,655,153)
Common stock issued (20,002)
Retained earnings (3,164,705)
------------
Cash acquired $ 1,149,296
============
The transaction resulted in a Goodwill of $11,044,992, the excess of
costs of $14,229,699 over the net assets acquired of $3,184,707. The
Goodwill is being amortized on a straight-line basis over a twenty-year
period. Pro forma results of operations of the Company as if the
purchase had occurred as of January 1, 1998 is as follows:
Nine Months Ended
September 30,
1998
-----------------
Revenues $ 14,872,543
Gross Profit 4,584,293
S,G& A Expenses 3,973,639
Depreciation expenses 148,321
Amortization of Goodwill 552,240
Income Taxes 327,807
Net loss $ (417,704)
Loss per share $ (.02)
On a pro forma basis ICF represents 93% of total revenues since January
1, 1998. ICF's gross margins were 30% versus 43% for COMC. Selling,
general and administrative expenses as a percentage of sales during the
same period was 23.1% for ICF and 71.9% for COMC. During this period,
ICF's operating margin was 6.9%, or $805,092.
6
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COMMON STOCK TRANSACTIONS
During the nine months ended September 30, 1998, the Company issued
1,063,333 common shares, including 30,000 common shares issued as
partial payment of offering costs, for total cash proceeds of
$1,550,000 less cash offering costs of $126,000. In addition, the
Company issued 6,493,506 valued at $9,000,000 to the selling
stockholders of ICF (see Note 2).
Management's Discussion and Analysis of Financial Condition and Results of
Operations
This report contains certain statements of a forward-looking nature relating to
future performance of the Company. Prospective investors are cautioned that such
statements are only predictions and that actual events or results may differ
materially.
Overview
COMC, Inc., ("COMC" or the "Company") designs, implements, supports and manages
telecommunication and voice equipment, computer network systems, and premise
wiring for healthcare organizations, financial institutions, and the
entertainment sector. The Company's services include the purchase, delivery,
installation and maintenance of voice and data equipment. Service-related
revenues, maintenance and client outsourcing services, through its wholly owned
subsidiary, ICF Communications Solutions Inc. ("ICF"), represent over 93% of
total revenues. The remaining revenue consists primarily of the installation of
third-party hardware. The Company's gross margin varies significantly depending
on the percentage of service revenues versus revenues from the sale and
installation of products (with respect to which the Company obtains a lower
margin). For its major customers, the Company typically provides these services
under contracts with one or more years in duration.
Under an acquisition and consolidation strategy, COMC intends to build its
operations and to expands its presence primarily in the high growth markets of
Los Angeles, San Francisco and San Diego California; Phoenix, Arizona; Las Vegas
and Reno, Nevada.
Results of Operations
The Company's revenues were $2,214,794 and $408,876 for the quarters ended
September 30, 1998 and 1997, respectively, representing an increase of 442%.
This increase was due primarily to the merger with ICF which merged with COMC on
August 17, 1998 and reflects one month of revenue from ICF. For the nine months
ended September 30, 1998 and 1997, respectively, sales were $3,096,409 and
$2,028,279, which represents an increase of 53%.
Cost of revenues was $1,381,483 and $272,360 for the quarters ended September
30, 1998 and 1997, respectively, representing an increase of 407%. This increase
was primarily due to the merger of
7
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ICF. Gross margin remained unchanged at 33% for the quarters ended September 30,
1998 and 1997. Cost of revenues for the nine-month period ended September 30,
1998 and 1997 were $1,868,343 and $1,269,802, respectively, which is an increase
of 47%. Gross margin for the six months ended September 30, 1998 and 1997, was
40% and 37%, respectively. The increase in gross margin for the latest period is
primarily attributable to increased revenues from maintenance services, which
have higher margins.
Selling, general and administrative expenses were $681,010 and $228,716 for the
quarters ended September 30, 1998 and 1997, respectively, representing an
increase of 198%. This increase was primarily due to the merger of ICF. Sales
and marketing expenses were 31% and 56% of revenues for the quarters ended
September 30, 1998 and 1997, respectively. For the nine-month periods ended
September 30, 1998 and 1997, sales and marketing expenses were $1,138,699 and
$851,920, respectively, representing 37% and 42% of revenues in those periods.
Although these expenses continue to decrease as a percentage of revenue, the
Company expects that sales and marketing expenses will continue to increase in
dollar terms to support the anticipated growth in the Company's business.
Excluded from selling, general and administrative expenses section above are
merger and transaction related costs, which totaled $229,699 during the quarter
ended September 30, 1998. These costs were capitalized as goodwill.
Depreciation expenses were $22,774 and $910 for the quarters ended September 30,
1998 and 1997, respectively. This increase was primarily due to the merger of
ICF. Depreciation expenses were 1% and .2% of revenues for the quarters ended
September 30, 1998 and 1997, respectively. For the nine-month periods ended
September 30, 1998 and 1997, depreciation expenses were $42,235 and $12,072,
respectively, representing 1.4% and .6% of revenues in those periods. Although
depreciation expenses is expected to decrease as a percentage of revenue, the
Company expects that depreciation will continue to increase in dollar terms as a
result of additional investments in capital equipment required to support the
anticipated growth in the Company's business.
Amortization expense of goodwill as a result of the merger with ICF during the
quarter ended and for the nine-month ending September 30, 1998 was $46,020. This
reflects a month's worth of amortization. The merger of ICF, which was based on
purchase accounting and generated $11,044,992 in goodwill which will result in
an annual amortization charge of $552,240 over a period of 20 years.
Other income, net, was a negative $6,438 and a negative $13,183 for the quarters
ended September 30, 1998 and 1997, respectively, representing a decrease of 51%.
This decrease was primarily due to reduced interest expense and higher interest
income on a higher available cash balance as a result of the Merger with ICF.
For the nine-month periods ended September 30, 1998 and 1997, other net income,
were a negative $20,032 and a negative $38.140, respectively, representing a
decrease of 47%. Other income, net, is primarily interest income on cash and
cash equivalents, and short-term investments. Interest expense consists of
interest associated with the Company's business lines of credit and term
financing of insurance premiums, but was not significant during either period.
8
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As of September 30, 1998, the Company had assumed income tax for one month of
operations for ICF's operations of $154,430.
Liquidity and Capital Resources
Cash and cash equivalents increased $548,876 at September 30, 1998 compared to
December 31, 1997. For the nine months ended September 30, 1998, cash used in
operating activities was $600,093 which resulted primarily from an increase in
the Company's investment in accounts receivables, which was $211,632, and cash
used for accounts payable and accrued liabilities, which was $455,041, the
majority being the payment of income tax payable to the Internal Revenue Service
("IRS") as hereinafter described.
For the nine-months ended September 30, 1998, cash generated from investing
activities was a negative $561,390, as a result of a $1,500,000 payment paid to
the former shareholders of ICF and $1,149,296 in cash acquired of ICF as a
result of the merger. In addition, there where $135,646 in merger and related
expenses, $30,773 in investment in capital equipment, and $46,190 in advances to
officers. Prior to the Merger an additional $94,053 in legal expenses were paid
by ICF and are not reflected in the cashflow statements for the nine-month or
the quarter ending September 30, 1998.
For the nine-months ended September 30, 1998, cash generated from financing
activities was $1,710,000, as a result of a $1,424,000 received from the sale of
common stock, net of offering costs and $325,252 from the Company's credit line.
The Company has a $250,000 term loan agreement with a bank, principal payable in
a monthly installment of $4,167 and interest at the bank's prime rate plus 2.5%.
The note matures on April 15, 2001 and has an outstanding balance of $129,167 as
of September 30, 1998. The Company has a revolving credit agreement available
for $300,000 with the same bank. Interest is at the bank's prime rate plus 2.5%
and as of September 30, 1998 has used $296,650.
At September 30, 1998, the Company had a working capital deficiency of
$1,667,778, which is down from the $131,225 on December 31, 1997. This includes
$1,289,325 of income tax payable, $889,325 of which is due to the IRS and an
estimated $400,000 is due to the State of California. The income tax payables
are the result of a change in accounting policy from cash to accrual based
accounting at ICF. The current liabilities also include $3,500,000 in notes
payable to stockholders, who are former owners of ICF. These notes will be paid
as follows: $1,500,000 in promissory notes due and payable January 5, 1999,
secured by all accounts receivable of the Company; $1,000,000 in promissory
notes due and payable January 4, 1999; and $1,000,000 in promissory notes due
and payable August 17, 1999.
The Company intends to recapitalize its balance sheet and shift some of the
current liabilities to long term obligations. The Company is currently in
discussions with several financial institutions to secure up to $5 million in
senior debt financing ("Senior Debt Facility"). It is contemplated that the
Senior Debt Facility will be secured by substantially all of the assets of the
Company and will contain the customary covenants and restrictions. The Company
intends to use the Senior Debt
9
<PAGE>
Facility for: i) the balance of income tax payable due the Internal Revenue
Service; ii) the $1,500,000 promissory note due on January 5, 1999; and iii)
working capital purposes including additional acquisition financing. There can
be no assurance that the Company will be able to secure this Senior Debt
Facility.
Despite the deficiency in working capital, the Company believes that its current
cash flow from operations plus its present sources of liquidity from current
assets will be sufficient to finance operations for the foreseeable future and
meet its short-term obligations.
The Company is in the process of selling additional equity, debt securities,
and/or obtaining additional credit facilities. The sale of additional equity
securities or issuance of same in future acquisitions could result in additional
dilution to the Company's stockholders and the incurrence of debt could result
in additional interest expense.
The Company intends to continue its search for additional merger and acquisition
candidates that will expand its existing markets in related products and
services. COMC has depended on a few large customers for the majority of its
revenue to date. A loss of any one could have a material effect on the Company's
liquidity. Due to the quality of the Company's major customers, the
collectibility of accounts receivable has not been a problem.
PART II. OTHER INFORMATION
Item 6: Exhibits and Reports on Form 8-K
Form 8-K filed on August 31, 1998 as amended on November 2, 1998
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMC INC.
Date: November 17, 1998 By: /s/ John Ackerman
-------------------------------------
John Ackerman
Chief Executive Officer
Date: November 17, 1998 By: /s/ Albert P. Vasquez
------------------------------------
Albert P. Vasquez
Acting Chief Financial Officer
10
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 633,958
<SECURITIES> 0
<RECEIVABLES> 4,223,952
<ALLOWANCES> 276,900
<INVENTORY> 219,646
<CURRENT-ASSETS> 4,942,258
<PP&E> 1,157,521
<DEPRECIATION> 403,936
<TOTAL-ASSETS> 17,102,845
<CURRENT-LIABILITIES> 6,610,036
<BONDS> 0
0
0
<COMMON> 200,549
<OTHER-SE> 10,192,574
<TOTAL-LIABILITY-AND-EQUITY> 17,102,845
<SALES> 0
<TOTAL-REVENUES> 3,096,409
<CGS> 0
<TOTAL-COSTS> 1,868,343
<OTHER-EXPENSES> 1,226,954
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24,717
<INCOME-PRETAX> (18,920)
<INCOME-TAX> 154,430
<INCOME-CONTINUING> (173,350)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (173,350)
<EPS-PRIMARY> (0.01)
<EPS-DILUTED> (0.01)
</TABLE>
