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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Fiscal Year ended December 31, 1998 Commission File Number 0-16472
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COMC, INC.
(Exact Name of Registrant as Specified in its Charter)
Illinois 36-3021754
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(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
400 N. Glenoaks Boulevard
Burbank, California 91502
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number,
including Area Code: (818) 556-3333
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Securities registered pursuant to Section 12(b) of the Act:
None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock (par value $.01 per share)
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Title of Class
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 (12) months (or for such shorter period that
the registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past ninety (90) days. Yes x No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the registrant's best knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.[ ]
The aggregate market value of voting stock held by non-affiliates of
the Registrant: $2,977,067
The number of shares outstanding of Registrant's Common Stock as of
March 31, 1999: 20,054,946
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Certain matters discussed herein may constitute forward-looking statements,
within the meaning of the Private Securities Litigation Reform Act of 1995 and
as such may involve risks and uncertainties. These forward-looking statements
relate to, among other things, expectations of the business environment in which
the Company operates, projections of future performance, perceived opportunities
the market and statements regarding the Company's mission and vision. The
Company's actual results, performance, or achievements may differ significantly
from the results, performance, or achievements expressed or implied in such
forward-looking statements.
PART I
Item 1. DESCRIPTION OF BUSINESS
General
COMC, Inc., through its wholly-owned subsidiaries, ICF Communications
Solutions, Inc. and Complete Communications, Inc., designs, sells, installs,
supports and manages computer network systems, telecommunication and voice
equipment and premise wiring for healthcare organizations, financial
institutions, the entertainment sector and others. The Company intends to expand
its operations and revenues through the acquisition of small and mid-sized
companies that generate most of their revenues through maintenance service
contracts and that are strategically located in high growth markets, primarily
in the western and southwestern part of the United States.
Overview of the Industry
The telecommunication industry is undergoing rapid changes due to
deregulation and advances in technology. These developments have created the
need for new, more sophisticated systems that integrate voice and data services
and primarily affect the computer, telephony, broadcasting, multimedia and the
cable industries. Due to increasing levels of sophistication and shrinking
product life cycles, companies are outsourcing their voice and data services.
Outsourcing is generally less expensive than funding an in-house maintenance
team. Many of the current external maintenance providers tend to be small
operators that lack liquidity and expertise in both voice and data services.
The traditional voice market is undergoing a major restructuring as PBX
systems equipment, which are older than five years are being upgraded. Current
PBX systems do not have the functionality of the newer digital PBX systems
incorporating both data and voice capabilities, nor are they capable of growing
past their existing configuration. As a result, many companies are in the
upgrade mode which the Company believes will add significantly to the cable/wire
and digital PBX market in the next 5 to 10 years.
Products and Markets
Telecommunications (voice) Solutions
COMC sells, installs, configures and maintains telephone systems,
including PBXs, handsets, and other telecommunication equipment. It designs,
sells and supports (voice) network solutions for remote access and video and
desktop conferencing and provides installation and service to both digital and
analog telephone systems. COMC is a certified reseller and installer for
AT&T/Lucent, Northern Telecom, NEC, Toshiba, and other brands of telephone
systems, allowing COMC to provide equipment to both new companies and those with
existing equipment looking to improve or add to their systems. In addition, COMC
is a reseller for Pacific Bell, AT&T, MFS and other local and long distance
companies, allowing COMC to provide not only equipment, but also the required
services. The majority of COMC's revenues are currently generated by maintenance
services in voice and telecommunication services.
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LAN/WAN Solutions
The Company designs, implements and maintains LAN and WAN networks,
including installation and configuration of computer hardware and software. It
also offers hardware and software solutions for mainframe and PC platforms. COMC
will work with a customer to define network requirements, equipment needs and
management issues, and then designs a computer network to provide for the
client's needs. This often requires an in-depth examination of the customer's
business operations, and provides an initial entry into providing further data,
voice, Internet, wiring and/or consulting services.
Once COMC designs a network, its Premise Wiring Services Group is
called in to install and maintain the physical equipment. COMC provides,
installs and manages any required network equipment, including routers, hubs and
data switches. COMC also configures, troubleshoots and maintains the personal
computers connected to the network. This may be in the form of an outsourcing
agreement where a company relies upon COMC to provide all of its computer
support, or it may be in conjunction with a client's internal Information
Services department.
The Company plans to increase the revenue of this business unit by
acquiring other similarly situated companies that focus primarily on desk top
support and maintenance.
Premise Wiring Services
The Company offers complete wiring services, including voice, data,
fiber and video system application design, installation and management services.
The explosive growth of business use of telephone lines, fax machines, modems,
voice mail, computer networks, video conferencing, etc., has created a large and
growing market for companies which provide the most basic service required for
operation - a copper or fiber optic wiring pathway over which these services
operate. The constant changes in the voice and data industries, as well as
general corporate trends towards downsizing or "right-sizing" result in constant
and ongoing changes needed in wiring systems.
"Adds, Moves and Changes" are the core of COMC's product in this area.
Companies grow and need new wiring. Constant flux in every business generates a
requirement for voice and data stations to be relocated. COMC installs and
maintains new wiring systems, moves connections from one office to another, and
changes them from voice to data and back again. The Company works in new
building construction, during major renovations, and within existing operating
businesses to provide wiring services. The Company's technical personnel
participate in continuous certification programs offered by companies such as
AT&T, Lucent, Seicor, AMP, Mod Tap, and Pacific Bell.
Internet Business Solutions
The Company provides services in connection with the design,
implementation and maintenance of web pages on the Internet. The Company
attempts to improve the interactive capabilities of a particular design and
provides, through third parties, credit card clearing services.
In a few short years, the Internet has gone from being a research
curiosity to a business requirement. Long term, COMC intends to provide Internet
connectivity to its customer base. Recognizing the difficulty and expense in
competing with the dial-up $20/month Internet Service Providers, COMC made the
strategic decision to concentrate solely on the business world, focusing on
high-bandwidth Internet requirements. COMC does not provide dial-up
connectivity. The smallest pipeline offered by COMC is a 56K leased line,
although most customers use at least a Fractional T1 line.
The Company believes that it provides the services that smaller
companies need, but don't have the infrastructure to support. Few companies can
afford a complete IS department, and even those that can, often find it more
cost effective to outsource these services. COMC provides a way for companies to
share the benefits of highly sophisticated network servers, network management,
databases, and other technology, without participating in the high costs of
acquisition and management.
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Customers
The Company caters primarily to the financial, healthcare and municipal
sectors. For the year ended December 31, 1998, Bank of America represented 32%,
Wells Fargo Bank represented 18%, City of Los Angeles and County of Sonoma each
represented 9% of the Company's revenues, respectively. It is expected that as a
result of the ICF Transaction, the number and identity of the Company's
principal customers will change. A loss of any one of the Company's principal
customers could have a materially adverse impact on the Company's revenues.
Sales and Marketing
COMC believes that it has built a strong base of Fortune 1000
corporations as customers. The 500 largest companies usually have annual budgets
that range between $1 and $10 million for the acquisition of PC products. Other
entities have budgets ranging from $300,000 to $1 million per year.
The Company believes that long-term relationships with new and existing
customers are the most effective way of attaining its business objectives.
Presently, COMC's primarily means of expanding its customer base is through
acquisitions. Through a proactive campaign COMC will cross-fertilize
telecommunication services with a customer in an attempt to capture a larger
share of the customer's business. Unlike other competitors COMC focuses on large
corporations who have diversified needs and substantial pent up demand to
outsource its maintenance requirements. The Company also intends to hire
additional sales personnel. It is anticipated that such salesmen will be
compensated strictly on a commission basis utilizing leads generated through
referrals, periodic mailings, telemarketing and cold calls. The Company believes
that buying market share through direct sales, cross-fertilization of services
as well as mergers and acquisitions will be an effective strategy for growth in
the short term.
Services rendered to the Company's customers are performed primarily
under master contracts. Each master contract contemplates hundreds of individual
construction and maintenance projects valued generally at less than $100,000
each. These contracts typically are awarded on a competitive bid basis. The
Company also has contracts similar to master contracts with certain other
customers. In addition to services rendered pursuant to master contracts, the
Company provides construction and maintenance on individual projects awarded on
a competitive bid basis. While such projects are generally substantially larger
than the individual projects covered by master contracts, they typically require
the provision of services similar to those rendered under master contracts.
To date, most of the Company's business has been generated through
referrals. However, the Company intends to expand its marketing efforts to
include trade magazine advertising; regular appearances at computer industry and
business trade shows; solicitation from manufacturers for on-line advertising
and promotional plans; retaining a major public relations firm and corporate
identity specialist; and Improved graphic user interface and development of an
advertising presence on the World Wide Web.
In addition, the Company will attempt to increase its customer base by
an aggressive pricing policy and by acquiring additional distributors thereby
broadening its product offering. COMC also intends to add technicians qualified
to service these new products and services and increase its flexibility in both
pricing and in service offerings.
In March 1999, the Company entered into a one-year agreement with Avtel
Communications, Inc. Under the terms of the agreement, the parties will use
their best efforts to market, sell, install and service each other's products
and services to current and prospective customers. The agreement contemplates
payment of commissions for sales and services performed under the agreement. The
amount of commissions is subject to further negotiation.
Competition
The telecommunications industry is dominated by large players. The
Company believes that the small to middle tier market is poorly served by the
larger players and, in their absence, this market is primarily served by a large
number of "mom-and-pop" companies. The Company views competition in three tiers
as follows:
First tier (Telecom Equipment Suppliers): companies such as
AT&T, Pacific Bell, Sprint, MFS and Lucent, which have their own
installation forces. These entities target primarily larger customers
that must meet
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volume requirements. In addition, these entities are focused on the
sale of equipment and not on maintenance or service contracts. A number
of these entities outsource their service contracts to the Company.
Second tier (System Integrators): Companies such as EDS and
Perot Systems compete directly with telecom equipment suppliers, but
they tend to be more business solution driven within a vertical market
than the Company. However, System Integrators are increasingly
outsourcing their mid-sized accounts to companies like COMC.
Third tier (Direct competitors): These entities primarily
target small to mid-size companies. The quality of both management and
work provided varies by competitor. These companies tend to be small
and lack professional management. They also lack the critical mass to
receive equipment vendor endorsements.
Several competitors have emerged that are pursuing an acquisition roll
up strategy in this market. However, few focus on servicing large institutional
clients. While the middle market is an attractive market to serve, the Company
believes that this market is unsophisticated, that the equipment sold into this
market is less complex and that this market has less stringent technical service
requirements. The Company intends to acquire companies with "preferred vendor
status" at large institutions which validates their service skills.
Employees
As of March 31, 1999 the Company employed 220 persons, of whom three
were executive officers, 33 were engaged in administrative and clerical
activities, nine were engaged in sales and four were involved in warehousing and
shipping. None of the Company's employees are represented by a union and no work
stoppages have occurred.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's headquarters are located at 400 N. Glenoaks Boulevard,
Burbank, California. The Company occupies 2,700 square feet for which it pays a
monthly rent of $3,800 under a lease that was signed in April 1995 and that will
expire in March 2000. In addition, the Company's principal subsidiary, ICF,
occupies a 8,000 square feet space in a commercial building at 2840 Howe Road,
Suite D, Martinez, California, of which approximately 7,000 square feet are
dedicated to office space and 1,000 square feet are dedicated to warehouse
space. ICF pays a monthly rent of $7,950 under a lease that will expire in
October 2002. In addition ICF occupies an office in a commercial building at
5201 Mitchelldale, Suite B3, in Houston, Texas, of which approximately 1,000
square feet are dedicated office space and 1,000 square feet are dedicated to
warehouse space. ICF pays a monthly rent of $1,340 under a lease that will
expire in October 2000. In addition ICF occupies an office in a commercial
building at 2810 S. 24th Street, Suite 111, Phoenix, Arizona, of which
approximately 1,000 square feet are dedicated office space and 1,000 square feet
are dedicated to warehouse space. ICF pays a monthly rent of $984 under a lease
that will expire in September 1999. In addition ICF occupies an office in a
commercial building at 1788 N. Helm, Suite 107, Fresno, California, of which
approximately 1,000 square feet are dedicated office space and 1,500 square feet
are dedicated to warehouse space. ICF pays a monthly rent of $1,000 under a
lease that will expire in December 2001.
ITEM 3. LEGAL PROCEEDINGS
The Company is not involved in any material legal proceedings.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
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PART II
Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market for Common Equity
The Company's Common Stock is quoted on the electronic Bulletin Board.
The following table sets forth the high and low bid quotations for the Company's
Common Stock through the quarter ended March 31, 1999. Prior to the fiscal
quarter ended March 31, 1998, no trading market existed for the Company's
securities. These quotations have been reported by the National Association of
Securities Dealers, Inc. and represent quotations by dealers without adjustments
for retail mark-ups, mark-downs or commissions and may not represent actual
transactions.
Common Stock
Fiscal Quarter -----------------
Ended High Low
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March 31, 1998 $.50 $.50
June 30, 1998 $3.00 $3.00
September 30, 1998 $1.812 $1.562
December 31, 1998 $2.371 $1.50
March 31, 1999 $1.00 $1.00
The Company has not paid a cash dividend on its Common Stock. The
Company intends to retain all earnings for the foreseeable future for use in the
operation and expansion of its business and, accordingly, the Company does not
contemplate paying any cash dividends on its Common Stock in the near future.
Recent Sales of Unregistered Securities
In July 1998, pursuant to a private placement, the Company issued to a
number of foreign financial institutions units consisting of an aggregate of
1,000,000 shares of Common Stock and warrants to purchase 200,000 shares of
Common Stock at $2.00 per share until July 31, 2000. These issuances were exempt
from registration under Rule 506 promulgated under the Securities Act. Total
gross cash proceeds of this offering were $1,500,000. An additional 33,333
shares of Common Stock and 6,666 warrants were sold to one U.S. investor on the
same terms.
In connection with the aforementioned private placement, the Company
issued 30,000 shares of Common Stock and 100,000 warrants to purchase Common
Stock at $1.50 per share until July 31, 2000 to nominees of an overseas entity
in connection with its assistance in the completion of the offering. These
issuances were exempt from registration pursuant to Section 4(2) of the
Securities Act.
In August 1998, the Company issued an aggregate of 6,493,506 shares of
Common Stock to Messrs. Lincoln and Burns, the Company's President and Chief
Operating Officer, respectively, in connection with the acquisition by the
Company of ICF Communication Solutions, Inc. These issuances were exempt from
registration pursuant to Section 4(2) of the Securities Act.
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Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain matters discussed herein may constitute forward-looking statements,
within the meaning of the Private Securities Litigation Reform Act of 1995 and
as such may involve risks and uncertainties. These forward-looking statements
relate to, among other things, expectations of the business environment in which
the Company operates, projections of future performance, perceived opportunities
the market and statements regarding the Company's mission and vision. The
Company's actual results, performance, or achievements may differ significantly
from the results, performance, or achievements expressed or implied in such
forward-looking statements.
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 consolidated statement of operations in 1997 includes the results
of operations of COMC and its wholly-owned subsidiary CCI for the twelve months
ended December 31, 1997. The Company's consolidated statement of operations in
1998 includes the results of operations of COMC and its wholly owned subsidiary
CCI, for the twelve months ended December 31, 1998 and the results of operations
of its wholly-owned subsidiary, ICF, for the four months ended December 31,
1998. CCI's customer base was absorbed by ICF effective August, 1998.
The Company's revenues were $7,927,229 and $2,650,386 for the year ended
December 31, 1998 and 1997, respectively, representing an increase of 199%. This
increase was due primarily to the merger with ICF which was completed on
August 17, 1998. Revenue from ICF for the four months included in the
consolidated revenue amounted to $6,795,293. COMC's revenue, through CCI,
decreased from $2,650,386 in 1997 to $1,131,936 in 1998 due primarily to key
management focusing on expanding the company through mergers and acquisitions.
Cost of revenues for the year ended December 31, 1998 and 1997 were $5,011,512
and $1,579,152, respectively, which is an increase of 217%. COMC's cost of
revenues, pre-ICF merger, remained at 61% for 1997 and 1998. ICF's cost of
revenues of $4,326,472 or 64% of revenues primarily contributed to the increase.
Selling, general and administrative expenses were $2,644,314 and $1,167,095 for
the year ended December 31, 1998 and 1997, respectively, representing an
increase of 127%. This increase was primarily due to the merger with ICF.
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.
Depreciation expenses were $95,878 and $12,772 for the year ended December 31,
1998 and 1997, respectively. This increase was primarily due to the merger with
ICF. 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.
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Excluded from selling, general and administrative expenses section above are
merger and transaction related costs, which totaled $277,636 during the year
ended December 31, 1998. These costs were capitalized as part of goodwill.
Amortization expense of goodwill as a result of the merger with ICF for the
twelve-month ending December 31, 1998 was $185,271. This reflects four month's
worth of amortization. The merger with ICF, which was based on purchase
accounting and generated $11,123,796 in goodwill, will result in an annual
amortization charge of $556,190 over a period of 20 years.
Other expense, net, was a $203,922 and $37,624 for the year ended December 31,
1998 and 1997, respectively. This increase was primarily due to interest expense
of $106,556 related to the notes payable to selling stockholders of ICF.
Effective January 1, 1998, the company and its wholly-owned subsidiaries elected
to file consolidated income tax returns. The company had no income tax expense
for the year ended December 31, 1997. During 1998, CCI changed its accounting
method for income tax purposes for the years ended December 31, 1996 and 1997,
which resulted in income tax expense totaling $41,193. This was included in the
1998 current income tax expense.
The components of income taxes were as follows for the years ended December 31,
1998:
1998 Federal State Total
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Current $30,588 $29,014 $ 59,602
Deferred 58,715 (1,131) 57,584
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$89,303 $27,883 $117,186
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Net loss increased from $146,257 in 1997 to $330,854 in 1998. The net loss
during 1998 was attributed to net loss of CCI of $519,028, amortization of
goodwill of $185,271, reduced by ICF's net income of $373,445.
Liquidity and Capital Resources
Cash and cash equivalents increased to $1,018,534 at December 31, 1998 compared
to $85,082 at December 31, 1997.
For the year ended December 31, 1998, cash used in operating activities was
$209,843 which resulted primarily from the Company's net loss of $330,854,
changes in operating assets and liabilities of $166,231 less non-cash operating
expenses of $287,242.
For the year ended December 31, 1998, cash used in investing activities was
$638,028, as a result of a $1,500,000 payment paid to the selling stockholders
of ICF less $1,149,296 in cash acquired from ICF as a result of the merger. In
addition, there where $277,636 in merger and related expenses, $52,758 in
investment in property and equipment, and $68,984 in advances to officers.
For the year ended December 31, 1998, cash provided by financing activities was
$1,781,323, as a result of a $1,424,000 received from the sale of common stock,
net of offering costs and $339,823 from the Company's credit line less payments
of $51,937.
In April 1997, the Company entered into a $300,000 revolving line of credit with
a bank. Interest is payable monthly at the bank's prime rate plus 2.5% (10.25%
at December 31, 1998). The line of credit expires on May 10, 1999. There was no
outstanding borrowing on this line of credit at December 31, 1997. At December
31, 1998, the Company had an outstanding balance of $297,775. The loan is
secured by the CCI's accounts receivable, inventories and property and
equipment. The Company's Chairman guarantees this loan.
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In April 1996, the Company entered into a $250,000 term loan agreement with a
bank. Principal is payable in monthly installments of $4,167 and interest at the
bank's prime rate plus 2.5% (10.25% at December 31, 1998). The loan matures on
April 15, 2001. At December 31, 1998 and 1997, the Company had outstanding
balances of $116,667 and $166,667, respectively. The Company's Chairman
guarantees this loan.
At December 31, 1998, the Company had a working capital deficiency of
$1,284,445. This includes $1,045,343 of income taxes payable, $816,820 of which
is due to the IRS and $228,523 is due to the State of California. In June 1998,
ICF, the Company's wholly-owned subsidiary, agreed to Income Tax Examination
Changes by the Internal Revenue Service ("IRS") which resulted in additional
income tax liabilities to the IRS for years 1995, 1996 and 1997 of $1,114,827.
At December 31, 1998, ICF had income tax liabilities for those years of $786,409
to the IRS and $217,741 to the State of California. In January of 1999, the IRS
approved the Company's request to pay in installments requiring monthly
payments of $100,000 plus interest and penalties until the total amount is paid
in full. The Company has not entered into any negotiations with the State of
California.
The current liabilities also include $3,500,000 in notes payable to
stockholders, who are former stockholders of ICF. 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 the Company's common stock valued at
$9,000,000 or $1.386 per share. The Company defaulted on the January 4, 1999 and
January 5, 1999 promissory notes. The Company is under current negotiations to
restructure the terms and conditions of all notes currently in default and
outstanding. The Company has reached a preliminary understanding with the
holders of these notes to extend the term of the notes into a three-year note
payable in lump sum amount at the end of the third year. Interest accruing at
10% per annum will be payable monthly.
The Company is currently in discussions with a financial institution 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 Facility for: i) the
balance of income tax payable due the Internal Revenue Service and California
Franchise Tax Board; and ii) working capital purposes including additional
acquisition financing. Interest is expected to accrue at 2% over the prime
rate. 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 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.
Year 2000 Compliance
The Company has reviewed its computer systems to identify those areas
that could be adversely affected by Year 2000 software failures. The Company
uses a number of computer software programs and operating systems in its
operations, including in financial business systems, marketing and various other
administrative functions. To the extent that these software applications contain
source code that is unable to appropriately interpret the upcoming year 2000,
some level of modification or possibly replacement of such applications may be
necessary.
The Company has converted almost all of its information systems to be
Year 2000 compliant. To date, the Company has incurred approximately $140,000
and it believes that approximately $8,500 will be incurred during the fiscal
year 1999 to complete the information system conversions. Although the Company
expects, based on currently
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available information, that any additional expenditures that may be required in
connection with Year 2000 conversions will not be material, there can be no
assurance in this regard. The Company believes that certain of its customers,
may be impacted by the Year 2000 problem, which could in turn affect the
Company. Currently, the Company cannot predict the effect of the Year 2000
problem on entities with which it transacts business and there can be no
assurance it will not have a material adverse effect on the Company's business,
financial condition, results of operations or cash flows. The Company will be
formulating a contingency plan to address the possible effects of any of its
customers experiencing Year 2000 problems.
Item 7. FINANCIAL STATEMENTS
The financial statements are included herein commencing on page F-1.
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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PART III
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Officers and Directors
The officers and directors of the Company are as follows:
Name Age Position
- ---- --- --------
John Ackerman 41 Chairman, Chief Executive Officer
Charles Lincoln 45 President, Director
William M. Burns 40 Chief Operating Officer, Director
Donald Baker 69 Director
Richard F. Horowitz 58 Secretary, Director
Marvin P. Loeb 72 Director
John Ackerman has been the Company's Chairman and Chief Executive
Officer since November 1996. He founded and had been the President and Chief
Executive Officer of Complete Communication, Inc. since its inception in 1987.
Prior thereto he had been an import/export broker at London-based Justwise
Limited, overseeing that firm's European sales and operations.
Charles E. Lincoln co-founded and has been with ICF since its inception
(May, 1989). Prior to that he was employed with Bank of America from 1984
through 1989. Prior to that he was an employee at Intel from 1978 through 1984.
Mr. Lincoln attended California State, Hayward, California from 1974 through
1978 and studied in the department of Finance.
William M. Burns co-founded and has been with ICF since its inception
(May, 1989). Prior to that he was employed with Pacific Telecom, in San
Francisco from 1986 through 1989. Prior to that he was employed at John Jackson
Enterprises and Bill Burns Construction in Sacramento from 1978 through 1986.
Donald Baker has been a director of the Company since 1993. Mr. Baker
recently retired after 39 years as a partner of the law firm of Baker &
McKenzie. Mr. Baker recently retired as Secretary, General Counsel and a
Director of Air South, Inc., an airline formerly operating in the Southeast. He
holds a J.D.S. degree from the University of Chicago Law School. He is a
director of the Mid-America Committee on International Business and Government
Cooperation, Chicago, Trimedyne, Inc. Cardiodyne, Inc. and Cardiomedics, Inc.,
all located in Irvine, California.
Richard F. Horowitz has been a director of the Company since 1993. He
has been a director of Trimedyne since 1983. He was a director of Gynex from
August 1988 to August 1992 and has been a Director of Ultramedics, Inc. since
November 1988 and of Cardiomedics Inc. since 1992. Mr. Horowitz has been a
practicing attorney in New York City for the past 34 years. He has been a member
of the firm of Heller, Horowitz and Feit, P.C. & Feit) since January 1979.
Heller, Horowitz & Feit, P.C. has been securities counsel to the Company and to
other entities with which Mr. Loeb is associated. Mr. Horowitz is a graduate of
Columbia College and Columbia Law School.
Marvin P. Loeb had been the Chairman and the President of the Company
since 1979 and 1980, respectively, until his resignation in November 1996, when
control of that company changed. Since 1980, he has been Chairman of Trimedyne,
Inc., a publicly held corporation involved in the manufacture of medical lasers
("Trimedyne"). He has also been a director of Pharmos, Inc. (formerly Pharmatec,
Inc.), a publicly-held company which is developing drugs and drug delivery
systems since December 1982 and Chairman from that date until October 1992. Mr.
Loeb was a Director of Gynex Pharmaceuticals, Inc. (now Biotechnology General
Corporation), a publicly-held company developing reproductive products, from
April 1986 until August 1993, and was its Chairman from April 1986 to August
1992. From April 1986 to June 1994, he was Chairman and a Director of
Xtramedics, Inc. (now Athena Medical Corporation), a publicly held company which
is engaged in the development of a feminine hygiene product. Mr. Loeb was
Chairman
-12-
<PAGE>
and a director from 1988 to June 1993 of Contracap, Inc.(now Revenge Marine,
Inc.), a publicly held company, which was developing a contraceptive device. Mr.
Loeb was Chairman from 1983 to April 1986 and Vice Chairman from April 1987 to
April 1992 of Petrogen, Inc., a privately held company which was developing
genetically engineered bacteria for oil and toxic waste cleanup and is now
inactive. Since May 1986, he has been Chairman and director of Cardiomedics,
Inc., a privately held company which is developing circulatory assist devices.
Since November 1988, he has been Chairman of Ultramedics, Inc., a privately held
company whose principal interest is its investment in Cardiomedics, Inc. Mr.
Loeb has been President of Master Health Services, Inc., a family held medical
consulting firm, since 1973, and Marvin P. Loeb and Company, a family held
patent licensing firm, since 1983. Mr. Loeb holds an honorary Doctor of Science
Degree from Pacific State University and a Bachelor of Science Degree from the
University of Illinois.
Board of Directors
Each director is elected at the Company's annual meeting of
stockholders and holds office until the next annual meeting of stockholders, or
until his successor is elected and qualified. The bylaws permit the Board of
Directors to fill any vacancy and the new director may serve until the next
annual meeting of stockholders or until his successor is elected and qualified.
Officers are elected by the Board of Directors and their terms of office are,
except to the extent governed by employment contracts, at the discretion of the
Board.
Committees of the Board
The Board of Directors has established an Executive Committee of which
Messrs. Ackerman and Lincoln are members. It also has also established an Audit
Committee and a Compensation Committee each of which consist of Messrs. Baker,
Horowitz and Loeb. In addition, it has an Option Committee consisting of Messrs.
Baker and Loeb.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission.
Officers, directors and greater than ten-percent shareholders are required by
SEC regulation to furnish the Company with copies of all Section 16(a) forms
they file.
Based solely on review of the copies of such forms furnished to the
Company, or written representations that no Forms 5 were required, the Company
believes that during the period from January 1, 1998 through December 31, 1998,
with the exception of a Form 4 for Mr. Ackerman, the Company's Chairman, Ernie
Mauritson, the Company's former Chief Financial Officer, and Albert Vasquez a
former director of the Company, all Section 16(a) filing requirements applicable
to its officers, directors and greater than ten-percent beneficial owners were
complied with.
-13-
<PAGE>
Item 10. EXECUTIVE COMPENSATION
The following table sets forth the compensation paid or accrued by the
Company during the three fiscal years ended December 31, 1998 to its Chief
Executive Officer. No other officer of the Company received compensation in
excess of $100,000.
SUMMARY COMPENSATION TABLE(1)(2)
- --------------------------------------------------------------------------------
Long-Term
Annual Compensation Compensation
- --------------------------------------------------------------------------------
(a) (b) (c) (d) (e)
- --------------------------------------------------------------------------------
Name/Principal Year Ended Salary Bonus Restricted Stock
Position December 31 ($) ($) Awards
================================================================================
John Ackerman 1998 180,261 25,000 -0-
Chairman, President 1997 96,400 -0-
(3) 1996 11,200 -0-
- --------------------------------------------------------------------------------
Charles Lincoln 1998 51,538 25,000
President(4) 1997 -0- -0-
1996 -0- -0-
- --------------------------------------------------------------------------------
Marvin Loeb 1998 -0- -0-
President(5) 1997 -0- -0-
1996 -0- 62,500
- --------------------------------------------------------------------------------
- -------------------------
(1) The above compensation does not include the use of an automobile and
other personal benefits, the total value of which do not exceed, as to
any named officer or director or group of executive officers, the
lesser of $50,000 or 10% of such person's or persons' cash
compensation.
(2) Pursuant to the regulations promulgated by the Commission, the table
omits columns reserved for types of compensation not applicable to the
Company.
(3) Mr. Ackerman resigned as President in August 1998.
(4) Mr. Lincoln became President in August 1998.
(5) Mr. Loeb resigned as President in November 1996.
None of the individuals listed in the table above received any
long-term incentive plan awards during the fiscal year.
-14-
<PAGE>
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The table below sets forth, as of March 31, 1999, information regarding
the beneficial ownership of the Company's Common Stock based upon the most
recent information available to the Company for (i) each person known by the
Company to own beneficially more than five (5%) percent of the Company's
outstanding Common Stock, (ii) each of the Company's officers and directors and
(iii) all officers and directors of the Company as a group. Unless otherwise
indicated in the footnotes, the address for all parties is c/o COMC, Inc., 400
N. Glenoaks Boulevard, Burbank, California 91502.
Shares Owned Beneficially
and of Record(1)
Name and Address No. of Shares % of Total
- ---------------- ------------- ----------
John Ackerman 8,000,000 40%
Charles Lincoln(2) 3,246,753 16%
William Burns(3) 3,246,753 16%
Donald Baker 20,000 *
Richard F. Horowitz(4) 20,075 *
292 Madison Avenue
New York, NY 10017
Marvin P. Loeb(5) 1,544,298 8%
All Officers and Directors as a Group
(6 persons) 16,077,879 80%
- ------------------------------
* Less than 1%
(1) Includes shares issuable within 60 days upon the exercise of
all options and warrants. Shares issuable under options or
warrants are owned beneficially but not of record.
(2) Consists of shares of Common Stock held by a trust of which
Mr. Lincoln is a trustee and beneficiary.
(3) Consists of shares of Common Stock held by a trust of which
Mr. Burns is a trustee and beneficiary.
(4) Held as nominee for the law firm of Heller, Horowitz & Feit,
P.C. of which Mr. Horowitz is a principal.
(5) Includes 56,127 shares of Common Stock held by the Marvin P.
Loeb Irrevocable Living Trust, of which Mr. Loeb is the sole
trustee, 426,300 shares of Common Stock held by Mr. Loeb as
nominee for members of his family and 625,000 shares of Common
Stock held by members of his family and by a trust for that
benefit. Mr. Loeb disclaims beneficial ownership in such
shares.
-15-
<PAGE>
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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, Charles Lincoln and William Burns, 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 ICF; $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 Common Stock valued in
the aggregate at $9,000,000 or $1.386 per share. The Company also agreed to use
its best efforts to register the shares of Common Stock issued in connection
with the Merger.
In addition, under the Agreement, 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
Communications 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 the
Company's Board of Directors.
At December 31, 1998, Mr. Ackerman, the Company's Chairman owed
$114,281 to the Company.
Pursuant to agreements entered into in January 1998, John Ackerman, the
Company's Chairman transferred 1,000,000 shares of Common Stock and 500,000
shares of Common Stock to Albert Vasquez, a former director of the Company, and
Ernie Mauritson, the Company's former Chief Financial Officer, respectively. The
Audit Committee of the Board of Directors has put a value of $.01 per share on
these transactions, representing the then market value of the shares. The
Company's Chairman of the Board and principal stockholder and two Directors of
the Board dispute this valuation.
In October 1998, John Ackerman, the Company's Chairman, transferred
500,000 shares of Common Stock to a former employee of the Company's wholly
owned subsidiary Complete Communications, Inc. in settlement of an employment
dispute between said employee and that Company.
-16-
<PAGE>
PART IV
Item 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K
(a) 1. and 2. Financial Statements and Schedules
The financial statements are listed in the Index to Financial
Statements on page F-1 and are filed as part of this annual report.
3. Exhibits
The Index to Exhibits following the Signature Page indicates the
exhibits which are being filed herewith and the exhibits which are incorporated
herein by reference.
(b) Reports on Form 8-K
On November 2, 1998, the Company filed an amendment to a Current Report
on Form 8-K that was previously filed.
-17-
<PAGE>
COMC, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Auditors F-1
Consolidated Balance Sheets at December 31, 1998 and 1997 F-2
Consolidated Statements of Operations for the years ended December 31, 1998 and 1997 F-3
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1998 and 1997 F-4
Consolidated Statements of Cash Flows for the years ended December 31, 1998 and 1997 F-5
Notes to Consolidated Financial Statements F-6-12
</TABLE>
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
COMC, Inc.
We have audited the accompanying consolidated balance sheets of COMC, Inc. and
subsidiaries as of December 31, 1998 and 1997, 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
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 audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of COMC,
Inc. and subsidiaries as of December 31, 1998 and 1997, and the consolidated
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.
HOLLANDER, LUMER & CO. LLP
Los Angeles, California
February 26, 1999
F-1
<PAGE>
COMC, INC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,018,534 $ 85,082
Accounts receivable and unbilled revenue, net of allowance for
uncollectible accounts of $276,900 (1998) and $62,164 (1997) 3,387,131 360,702
Inventories 124,188 106,806
Loans receivable from officer 114,281 43,885
Refundable income taxes 179,603 -
Deferred income taxes 152,579 -
Prepaid expenses and other current assets 15,591 36,247
----------- ---------
TOTAL CURRENT ASSETS 4,991,907 632,722
PROPERTY AND EQUIPMENT, Net 715,833 110,090
OTHER ASSETS
Goodwill, net 10,938,526 -
Deposits 35,878 17,825
----------- ---------
TOTAL OTHER ASSETS 10,974,404 17,825
----------- ---------
$16,682,144 $ 760,637
=========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank credit line payable $ 297,775 $ -
Bank overdraft 69,437 -
Current portion of long-term debt 60,512 50,000
Notes payable to stockholders 3,500,000 -
Income taxes payable 1,045,343 -
Accounts payable 676,088 200,049
Accrued salaries, vacation and payroll taxes 378,771 14,669
Accrued interest 77,363 -
Customers' deposits - 207,908
Other current liabilities 171,063 28,871
----------- ---------
TOTAL CURRENT LIABILITIES 6,276,352 501,497
LONG-TERM DEBT, net of current portion 96,266 116,667
DEFERRED INCOME TAXES 73,907 -
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; authorized - 40,000,000 shares;
issued and outstanding - 20,054,946 shares (1998) and 12,498,107
shares (1997) 200,549 124,981
Additional paid-in capital 10,558,454 210,022
Accumulated deficit (523,384) (192,530)
----------- ---------
TOTAL STOCKHOLDERS' EQUITY 10,235,619 142,473
----------- ---------
$16,682,144 $ 760,637
=========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
COMC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998 AND 1997
1998 1997
----------- -----------
REVENUE $ 7,927,229 $ 2,650,386
COST AND EXPENSES
Cost of revenue 5,011,512 1,579,152
Selling, general and administrative 2,644,314 1,167,095
Amortization of goodwill 185,271 -
Depreciation 95,878 12,772
----------- -----------
TOTAL COST AND EXPENSES 7,936,975 2,759,019
----------- -----------
LOSS FROM OPERATIONS (9,746) (108,633)
OTHER INCOME (EXPENSE)
Interest income 9,370 3,450
Interest expense (165,627) (50,424)
Other, net (47,665) 9,350
----------- -----------
TOTAL OTHER INCOME (EXPENSE) (203,922) (37,624)
----------- -----------
LOSS BEFORE INCOME TAXES (213,668) (146,257)
INCOME TAXES 117,186 -
----------- -----------
NET LOSS $ (330,854) $ (146,257)
=========== ===========
BASIC AND DILUTED LOSS PER SHARE $ (.02) $ (.02)
====== ======
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 15,011,800 12,498,107
=========== ===========
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
COMC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
Common Stock Additional
------------------------- Paid-in Accumulated
Shares Amount Capital Deficit Total
---------- -------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1997 12,498,107 $124,981 $ 210,022 $ (46,273) $ 288,730
Net loss (146,257) (146,257)
---------- -------- ----------- --------- -----------
Balance, December 31, 1997 12,498,107 124,981 210,022 (192,530) 142,473
Common stock issued 1,063,333 10,633 1,413,367 1,424,000
Common stock issued in purchase
business combination 6,493,506 64,935 8,935,065 9,000,000
Net loss (330,854) (330,854)
---------- -------- ----------- --------- -----------
Balance, December 31, 19989 20,054,946 $200,549 $10,558,454 $(523,384) $10,235,619
========== ======== =========== ========= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
COMC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (330,854) $(146,257)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Amortization of goodwill 185,271 -
Depreciation 95,878 12,772
Loss on disposal of property and equipment 6,093 -
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable 348,289 378,022
Inventories 118,372 (9,766)
Refundable income taxes (41,591)
Prepaid expenses and other current assets 58,198 (15,144)
Increase (decrease) in:
Income taxes payable (193,139) (2,045)
Deferred income taxes 57,583
Customers' deposits (207,908) 207,908
Accounts payable and accrued liabilities (306,035) 3,982
----------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (209,843) 429,472
----------- ---------
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 (183,582) -
Deposits 18,000 -
Loans receivable from officer (68,984) (43,885)
Purchases of property and equipment (52,758) (7,685)
----------- ---------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (638,028) (51,570)
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Sale of common stock, net of offering costs 1,424,000 -
Bank overdraft 69,437 -
Advances from bank loans and other credit institutions 339,823 327,123
Repayments on bank loans and other credit institutions (51,937) (677,123)
----------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 1,781,323 (350,000)
----------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 933,452 27,902
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 85,082 57,180
----------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,018,534 $ 85,082
=========== =========
CASH PAID FOR:
Interest $ 88,464 $ 52,630
Income taxes $ 334,343 $ 2,045
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Common stock and notes payable issued in purchase of ICF $12,500,000
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
COMC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business - COMC, Inc. (the "Company") designs, installs and
maintains various office communication systems.
Principles of Consolidation - The consolidated financial statements include
the accounts of COMC, Inc. and its wholly owned subsidiaries, Complete
Communications, Inc. ("CCI") and ICF Communication Solutions, Inc. ("ICF").
All significant intercompany transactions and balances have been eliminated
in consolidation.
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Cash equivalents - The Company considers all highly liquid investments
purchased with an original maturity of three months or less to be cash
equivalents.
Inventories - Inventories, consisting of various parts and equipment for
sale, are stated at lower of cost (determined on a first-in, first-out
basis) or market.
Property and Equipment - Property and equipment are stated at cost.
Depreciation is computed on the straight-line method over the estimated
useful lives of the assets which range from five to seven years. Leasehold
improvements are amortized on the straight-line method over the term of the
lease or the useful life of the asset, whichever is shorter.
Property and equipment are reviewed for impairment whenever events or
circumstances indicate that the asset's undiscounted expected cash flows
are not sufficient to recover its carrying amount. The Company measures an
impairment loss by comparing the fair value of the asset to its carrying
amount. Fair value of an asset is calculated as the present value of
expected future cash flows.
Concentration of Credit Risk - The Company maintains several bank accounts
at one bank. Accounts at an institution are insured by the Federal Deposit
Insurance Corporation (FDIC) up to $100,000. The amount in excess of the
FDIC limit totaled $871,930 as of December 31, 1998.
Financial Instruments - The Company`s financial instruments include cash,
receivables, payables and accrued expenses. The carrying amount of such
financial instruments approximates fair value because of the short maturity
of these instruments.
Revenue Recognition - Revenues and related costs for short-tern projects
(i.e. projects with duration of less than one month) are recognized as the
projects are completed. Revenues generated by certain long-term contracts
are recognized principally on the percentage-of-completion method in the
ratio that cost incurred bears to estimated cost at completion.
Income Taxes - The Company utilizes the asset and liability method for
income taxes. Under this method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and tax
credit carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected
F-6
<PAGE>
COMC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1998 AND 1997
to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.
Stock-Based Compensation - Statement of Financial Accounting Standards
("SFAS") No. 123, Accounting for Stock-Based Compensation, encourages, but
does not require, companies to record compensation cost for stock-based
employee compensation plans at fair value. The Company has chosen to
continue to account for stock-based compensation using the intrinsic value
method as prescribed in Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations,
under which no compensation cost related to stock options has been
recognized as the exercise price of each option at the date of grant was
equal to the fair value of the underlying common stock.
Basic and Diluted Earnings (Loss) Per Share - Effective December 31, 1997,
the Company adopted SFAS NO. 128, Earnings Per Share, which established
simplified standards for computing and presenting earnings per share
information. Basic earnings (loss) per common share is based upon the net
earnings (loss) applicable to common shares after preferred dividend
requirements and upon the weighted average number of common shares
outstanding during the period. Diluted earnings per common share adjusts
for the effect of convertible securities, stock options and warrants only
in the periods presented in which such effect would have been dilutive.
Reclassifications - Certain reclassifications have been made to 1997
financial statements to conform with the 1998 presentation.
2. ACQUISITION
On August 17, 1998, the Company consummated the acquisition of ICF
Communication Systems, Inc. ("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 the Company'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. The Company defaulted on the January 4, 1999 and January 5,
1999 promissory notes (See Note 6).
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 $ 3,823,693
Property and equipment, net 654,957
Other assets 130,106
Current liabilities (2,604,213)
Common stock issued (20,002)
Retained earnings (3,133,837)
-----------
Cash acquired $ 1,149,296
===========
F-7
<PAGE>
COMC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1998 AND 1997
The transaction resulted in goodwill of $11,123,796, the excess of costs of
$14,277,635 over the net assets acquired of $3,153,839. The goodwill is
being amortized on a straight-line basis over a twenty-year period. The
Company periodically reviews goodwill to assess recoverability.
Pro forma consolidated results of operations of the Company as if the
purchase had occurred as of January 1, 1998 is as follows:
Year Ended
December 31,
1998
-------------
Revenues $ 19,702,128
Net loss $ (470,776)
Basic and diluted loss per share $ (.02)
Weighted average number of common shares outstanding 19,340,800
3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31, 1998 and
1997:
1998 1997
---------- --------
Vehicles $ 359,781 $ -
Furniture and office equipment 409,692 204,493
Computer equipment 274,896 -
Leasehold improvements 36,381 8,639
Software 52,964 -
Security alarm 6,768 -
---------- --------
1,140,482 213,132
Less accumulated depreciation 424,649 103,042
========== ========
$ 715,833 $110,090
========== ========
4. BANK CREDIT LINE PAYABLE AND LONG-TERM DEBT
In April 1997, the Company entered into a $300,000 revolving line of credit
with a bank. Interest is payable monthly at the bank's prime rate plus 2.5%
(10.25% at December 31, 1998). The line of credit expires on May 10, 1999.
There was no outstanding borrowing on this line of credit at December 31,
1997. At December 31, 1998, the Company has an outstanding balance of
$297,775. The loan is secured by the CCI's accounts receivable, inventories
and property and equipment (carrying amounts totaled $112,089 at December
31, 1998). The Company's Chairman of the Board of Directors guarantees this
loan.
In April 1996, the Company entered into a $250,000 term loan agreement with
a bank. Principal is payable in monthly installments of $4,167 and interest
at the bank's prime rate plus 2.5% (10.25% at December 31, 1998). The loan
matures on April 15, 2001. At December 31, 1998 and 1997, the Company had
outstanding balance of $116,667 and $166,667, respectively. The Company's
Chairman of the Board of Directors guarantees this loan.
F-8
<PAGE>
COMC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1998 AND 1997
During 1998, the Company acquired three vehicles for a total purchase price
of $43,440 under a financing arrangement with the vehicles as security. The
loans bear effective interest rate of 9.7% and require monthly payments of
$1,060 for 48 months.
Annual maturities of long-term debt for years ending December 31, are as
follows:
1999 $ 60,512
2000 60,173
2001 27,872
2002 8,221
---------
$ 156,778
=========
5. COMMITMENTS AND CONTINGENCIES
Operating Leases - The Company leases certain offices under operating
leases expiring on various dates through 2002. Total rent expense charged
to operations was $247,703 in 1998 and $45,617 in 1997. At December 31,
1998, the minimum future rental commitments under non-cancelable leases
payable over the remaining terms of the leases are:
Years Ending December 31,
-------------------------
1999 $ 175,643
2000 161,961
2001 115,183
2002 98,043
---------
$ 550,830
=========
Employment Agreements - The Company entered into two-year employment
agreements with Messrs. Lincoln and Burns, providing, among other things,
for annual salaries of $135,000 as well as annual bonuses at the discretion
of the Company's Board of Directors.
6. TRANSACTIONS WITH RELATED PARTIES
At December 31, 1998 and 1997, the Company had a receivable from John
Ackerman, the Company's Chairman and Chief Executive Officer, of $114,281
and $43,885, respectively.
Notes payable to stockholders consisted of the following at December 31,
1998:
Note dated August 17, 1998, to Charles Lincoln, the Company's
President; interest at 8%, 10% in case of default; due on
January 4, 1999, currently in default $ 500,000
Note dated August 17, 1998, to William Burns, the Company's
Chief Operating Officer; interest at 8%, 10% in case of
default; due on January 4, 1999, currently in default 500,000
Note dated August 17, 1998, to Charles Lincoln, the Company's
President; interest at 8%, 10% in case of default; due on
January 5, 1999; secured by accounts receivable, currently
in default 750,000
F-9
<PAGE>
COMC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1998 AND 1997
Note dated August 17, 1998, to William Burns, the Company's
Chief Operating Officer; interest at 8%, 10% in case of
default; due on January 5, 1999; secured by accounts
receivable, currently in default 750,000
Note dated August 17, 1998, to Charles Lincoln, the Company's
President; interest at 8%, 10% in case of default; due on
August 17, 1999 500,000
Note dated August 17, 1998, to William Burns, the Company's
Chief Operating Officer ; interest at 8%, 10% in case of
default; due on August 17, 1999 500,000
-----------
$ 3,500,000
===========
The Company is under current negotiations to restructure the terms and
conditions of the above notes payable. Preliminary understanding between
the Company and the noteholders is to extend the term of the notes into a
three-year notes, payable in lump-sum amount at the end of the third year.
Interest accruing at 10% per annum will be payable monthly.
7. DEFINED CONTRIBUTION PLAN
In April 1994, the Company established a defined contribution plan (the
"Plan") pursuant to Section 401(k) of the Internal Revenue Code. In April
1997, the Plan was amended so that all employees are eligible to
participate in the Plan after completing three months of service (formerly
one year) and attaining the age of 21. To be entitled to an allocation of
employer contributions, a participant must complete 1,000 hours of service
during the Plan year and must be employed by the Company on the last day of
the Plan year. Employees electing to participate in the Plan may contribute
up to 20% of their annual compensation. Contributions to the Plan are
limited to the maximum amount allowable under the provisions of the
Internal Revenue Code. The Company may choose to make contributions to the
Plan at its discretion. No discretionary contributions were made for the
years ended December 31, 1998 and 1997.
8. INCOME TAXES
Effective January 1, 1998, the Company and its wholly-owned subsidiaries
elected to file consolidated income tax returns.
The Company had no income tax expense for the year ended December 31, 1997.
During 1998, CCI changed its accounting method for income tax purposes for
the years ended December 31, 1996 and 1997, which resulted in income tax
expense totaling $41,193. This was included in the 1998 current income tax
expense.
The components of income taxes were as follows for the years ended
December 31, 1998:
1998 Federal State Total
---- ------- ------- --------
Current $30,588 $29,014 $ 59,602
Deferred 58,715 (1,131) 57,584
------- ------- --------
$89,303 $27,883 $117,186
======= ======= ========
F-10
<PAGE>
COMC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1998 AND 1997
The components of deferred tax assets were as follows at December 31, 1998
and 1997:
1998 1997
-------- --------
Deferred tax assets:
Net operating loss carryforwards $ 20,865 $ 76,872
State income taxes 6,259 -
Allowance for uncollectible accounts 108,775 -
Accrued vacation 14,199 -
Others 2,481 -
-------- --------
Gross deferred tax assets 152,579
Less valuation allowance - (64,427)
-------- --------
Net deferred tax asset 152,579 12,445
Deferred tax liabilities
Depreciation 73,907 12,445
-------- --------
$ 78,672 $ -
======== ========
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected
future taxable income and prior taxes paid in making this assessment. Based
upon its evaluation of these factors, management believes that it is more
likely than not the Company will realize the benefits of these deductible
differences, net of the valuation allowance, at December 31, 1998.
The actual tax expense differs from the expected tax expense, computed by
applying the Federal corporate tax rate of 34% to income before income
taxes, as follows:
1998 1997
-------- --------
Expected statutory tax expense $(72,647) $(49,727)
Net tax effect of permanent differences 95,645 11,143
State income taxes, net of federal tax effect 18,403 -
Additional CCI's income tax expense due to change in
in accounting method for income tax purposes 87,611 -
Valuation allowance - 38,584
Others (11,826) -
-------- --------
Income taxes $117,186 $ -
======== ========
In June 1998, ICF, the Company's wholly-owned subsidiary, agreed to Income
Tax Examination Changes by the Internal Revenue Service ("IRS") which
resulted in additional income tax liabilities to the IRS for years 1995,
1996 and 1997 of $1,114,827. At December 31, 1997, ICF had income tax
liabilities for those years of $1,410,032 to the IRS and $376,456 to the
State. At December 31, 1998, ICF had income tax liabilities for those years
of $786,409 to the IRS and $217,741 to the State.
F-11
<PAGE>
COMC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1998 AND 1997
9. STOCKHOLDERS' EQUITY
During 1998, the Company sold 103,333 Units. Each Unit consisted of 10
shares of common stock and 2 warrants to purchase common stock at $2.00 per
share. The Company issued a total of 1,063,333 common shares, including
30,000 common shares issued as partial payment of offering costs, and
206,666 warrants, for total cash proceeds of $1,550,000 less cash offering
costs of $126,000. The Company also agreed to file a registration statement
with respect to the shares included in the Units. The Company also issued
to the placement agent warrants to purchase 100,000 common stock at $1.50
per share.
In addition, the Company issued 6,493,506 valued at $9,000,000 to the
selling stockholders of ICF (See Note 2).
In 1997, the Company's Chairman of the Board and principal stockholder,
agreed to transfer 5% of the stock to which he was entitled to receive from
the merger to a former employee in settlement of an employment dispute
between the Company and the former employee. The 500,000 shares of common
stock were valued at $0.01 per share, its fair value at that time. The
shares were transferred in October 1998. There was no financial impact to
this transaction.
Pursuant to agreements entered into in January 1998, the Company's Chairman
of the Board and principal stockholder transferred 1,000,000 shares of
common stock to a former director of the Company and 500,000 shares of
common stock to the Company's former Chief Financial Officer. The Audit
Committee of the Board of Directors has put a value of $0.01 per share on
these transactions, representing the then fair value of the shares. The
Company's Chairman of the Board and principal stockholder and two
Directors of the Board dispute this valuation.
10. SEGMENT INFORMATION
The Company is in one business segment, the contractors business.
Four customers accounted for 38%, 22%, 11% and 11% of ICF's revenue for the
four months ended December 31, 1998. Two customers accounted for 33% and
17% of CCI's revenue for the year ended December 31, 1997. At December 31,
1998, the Company had significant receivable balances from two customers
totaling approximately $1,263,455.
F-12
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
COMC, INC.
By: /s/ John Ackerman
-------------------------------------
John Ackerman, Chairman
Dated: May 3, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below as of May 3, 1999 by the following persons on
behalf of Registrant and in the capacities indicated.
/s/ John Ackerman
----------------------------------------
John Ackerman, Chairman
(Chief Financial and Accounting Officer)
/s/ Don Baker
----------------------------------------
Don Baker, Director
/s/ Matt Burns
----------------------------------------
Matt Burns, Director
/s/ Richard F. Horowitz
----------------------------------------
Richard F. Horowitz, Director
/s/ Charles Lincoln
----------------------------------------
Charles Lincoln, Director
/s/ Marvin Loeb
----------------------------------------
Marvin Loeb, Director
<PAGE>
EXHIBITS
2.01 Letter Agreement with Complete Communications, Inc. dated as of
June 3, 1996(1)
2.02 Agreement of Merger dated July 19, 1996 between the Company and ICF(2)
3.01 Certificate of Incorporation(3)
3.02 By-laws(4)
16.01 Letter from Oppenheim & Ostrick, CPA's dated January 8, 1997(4).
23.02 Consent by Hollander, Lumer & Co., LLP
- ----------------------------
(1) Incorporated by reference to the Company's Information Statement dated
September 15, 1996
(2) Incorporated by reference to the Company's Form 8-K filed August 31,
1998.
(3) Incorporated by reference to the Company's Registration Statement
declared effective March 25, 1987.
(4) Incorporated by reference to the Current Report on Form 8-K dated
January 9, 1997.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's financial statements for the year ended December 31, 1998 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,018,534
<SECURITIES> 0
<RECEIVABLES> 3,664,031
<ALLOWANCES> 276,900
<INVENTORY> 124,188
<CURRENT-ASSETS> 4,991,907
<PP&E> 1,140,482
<DEPRECIATION> 424,649
<TOTAL-ASSETS> 16,682,144
<CURRENT-LIABILITIES> 6,276,352
<BONDS> 96,266
0
0
<COMMON> 200,549
<OTHER-SE> 10,035,070
<TOTAL-LIABILITY-AND-EQUITY> 16,682,144
<SALES> 0
<TOTAL-REVENUES> 7,927,229
<CGS> 0
<TOTAL-COSTS> 7,936,975
<OTHER-EXPENSES> 47,665
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 165,627
<INCOME-PRETAX> (213,668)
<INCOME-TAX> 117,186
<INCOME-CONTINUING> (330,854)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (330,854)
<EPS-PRIMARY> (0.02)
<EPS-DILUTED> (0.02)
</TABLE>
