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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, 1999 Commission File Number 0-16472
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COMC, INC.
(Exact Name of Registrant as Specified in its Charter)
Illinois 95-4628378
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(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
2840 Howe Road, Suite D
Martinez, California 94553
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number,
including Area Code: (925) 335-4000
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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
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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 the 5,342,591 shares of voting common
stock held by non-affiliates of the registrant as of April 14, 2000 (based upon
the average bid and asked prices of such shares) was approximately $9,181,242.
The number of shares outstanding of Registrant's Common Stock as of
March 31, 2000: 19,401,491 (of which 3,564,987 are held in treasury for the
exercise of stock options)
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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. DECRIPTION OF BUSINESS
DESCRIPTION OF BUSINESS
COMC, Inc. ("COMC", the "Company", "we", or "us") is a technology
service company in the telecommunications industry with a rapidly expanding
national geographic service coverage area. We design, implement, support and
manage LAN/WAN computer network systems, voice communication network systems,
and premise wiring for both data and voice. In addition, we distribute and
maintain equipment on behalf of major telecommunication equipment manufacturers.
Our target clients are primarily Fortune 1000 sized enterprises demanding the
highest level of service under project, master and general maintenance contracts
to support their complex and growing national voice and data network systems. In
servicing these customers, we must provide highly trained and experienced
technicians and design engineers on a rapid-response basis to meet our customers
telecommunications planning, design, installation, maintenance and emergency
needs. As these and other companies continue their geographic growth,
technological expansion and communications modernization, we will provide them
with design, product, maintenance and personnel on a turnkey, outsource basis.
In addition to the services described above, our Recruitment Services
division is providing our customers with permanent and temporary technical
professional recruitment and placement services to fill their internal staffing
needs.
Our assets are our employees. Our investments are in our employees.
While we do not design or take the research and development risk borne by the
manufacturers of the equipment we service, we continue to invest in the latest
training and certification for the networks we support for data products
designed by Cisco Systems, Inc., Lucent Technologies, Inc., Bay Networks (a
division of NorTel Networks) and 3Com, as well as voice products by Lucent
Technologies, Inc. and NorTel Networks, Inc.
To date, our target customers have included banking and financial
institutions, insurance companies, pharmaceutical companies and healthcare
organizations, as well as municipalities. Having refocused our sales and
marketing team in 1999, we are additionally targeting competitive local exchange
carriers ("CLEC").
1999 was a year of integration and rebuilding for us. We reported 1999
revenue, EBITDA and net losses of $21.1 million, $1.5 million and $10.6 million,
respectively. This was up significantly from reported 1998 revenue, EBITDA and
net losses of $7.9 million, $271,400 and $330,900, respectively. 1998
reflected only four months of operations from the acquisition of ICF
Communication Solutions, Inc. ("ICF") our wholly-owned subsidiary, in August
1998. ICF represented 100% of the Company's revenue in 1999.
Matt Burns, one of the former co-owners of ICF, is now the President
and Chief Executive Officer of ICF and a member of our Board of Directors.
Charles Lincoln, the other former co-owner of ICF, is now our President and CEO
and a member of our Board of Directors. John Ackerman is the Chairman of our
Board of Directors, as well as the Board of Directors of ICF. Christopher Smith
joined our executive management team in August 1999 as our Chief Financial
Officer and is a member of our Board of Directors. Mr. Smith will lead our
acquisition strategy and will be in charge of our financial
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management. Mr. Smith is also Executive Vice President of ICF. Mr. Smith comes
to us with over fifteen years of investment banking, financial management and
management consulting experience. Messrs. Burns, Lincoln and Smith are the core
of our operating management team and will be responsible for driving internal
growth and acquisition integration.
We plan to make several additional acquisitions of both data and voice
service/outsourcing businesses, as well as data network consulting and service
companies in key markets. We are currently in discussions with several regional
voice and data networking companies regarding possible acquisitions. We
anticipate financing our acquisitions with a combination of bank debt, seller
financing and common stock.
Industry and Market Opportunities
We believe that we are uniquely positioned to take advantage of the
numerous changes and developments in the communications industry described
above, as well as the following anticipated changes and developments described
immediately below:
o Innovations in Technology
Technological innovations are increasing both the supply of and demand for
high-bandwidth telecommunications transmission capacity while also driving
increased integration in voice and data networks. Innovations in optics
technologies, consisting of both higher quality fiber optic cable and improved
transmission electronics, have increased the capacity and speed of advanced
fiber optic networks while decreasing the unit cost of transmission. This
increased capacity and speed, combined with continuing advancements in
microprocessor power, has resulted in the development of bandwidth-intensive
applications, growth in Internet usage and increases in the number of network
users.
o Increasing Demand for Communications Services
We believe that there is and will continue to be significant growth in
demand for long distance data, Internet, voice and video services. The increase
in computing power, number of computers networked over the Internet, and
connection speeds of networked computers are driving tremendous increases in
communications use for Internet and data services. Prices for cellular and long
distance voice services have decreased, resulting in increased demand for these
services. In addition, cost savings and network efficiencies are driving demand
for more robust voice and data network equipment. We believe video conferencing,
digital television and other multimedia applications being developed will
continue to increase demand for bandwidth.
o Increasing Demand for Outsourced Service
With the rapid increases in demand for communications services, the
acceleration of technologies, the tightening labor market for technical
personnel and the growing cost of information technology/information systems
("IT/IS"), we are experiencing a growing demand for outsourcing and
communications infrastructure personnel from our targeted clients, large and
small. It is becoming increasingly cost beneficial for clients to contract for
their services and personnel, versus managing these teams in-house. By retaining
project and administrative management in-house and sub-contracting their voice
and data network maintenance and emergency response, installations and
conversion projects, our clients can better manage their costs.
o Deregulation Within the Communications Industry.
Around the world, the communications industry is experiencing
liberalization. In the U.S., the long distance market became highly competitive
in the 1980s following the break up of AT&T, and the Telecommunications Act was
designed to open local markets to competition. New companies have formed to
compete for markets that have been traditionally dominated by a very small
number of larger providers. Distribution channels have become more fragmented as
the barriers of entry have been removed and new companies are emerging with new
technologies to challenge the historic gatekeepers of the communications
infrastructure. These emerging companies will need
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distributors and service providers for their new hardware and software products.
Interconnect service providers of data and voice are leveraging their customer
base to provide these companies with a new full service, vendor-neutral channel.
o Increasing Specialization Within the Communications Industry.
We believe industry specialization will continue to occur as communications
companies focus on their core competencies and outsource non-core activities. In
the interconnect markets, we believe that equipment manufacturers will
increasingly divest their service business units and service providers will
expand beyond their sole equipment manufacturer's representation to become more
vendor-neutral and client focused. We believe that this creates a tremendous
opportunity for a communications service provider such as COMC, which we believe
we are well positioned to take advantage of.
Background
We were incorporated in December of 1978, in the State of Illinois,
under the name Automedix Sciences, Inc. Initially, our purpose was to research
and develop medical technologies for the treatment of cancer and other medical
conditions. In the Spring of 1992, Automedix ceased operations due to the fact
that we were unable to raise capital to continue clinical trials with respect to
a medical device for cancer treatment that Automedix designed. As a consequence,
our then Board of Directors began to investigate the possibility of a new
business direction and to search for viable acquisition or merger candidates
that would enable us to maximize value to our shareholders. In November of 1996,
we consummated the acquisition of Complete Communications, Inc., a California
corporation ("CCI"). At the time, CCI was primarily engaged in the business of
providing computer network and telephone system services, which included the
design and installation of such networks and systems. As consideration for the
acquisition of CCI, we issued 10,000,000 shares of our Common Stock to John
Ackerman, the sole shareholder of CCI. As a result of this transaction, Mr.
Ackerman owned 80% of our securities. In connection with this transaction, we
changed our name to COMC, Inc.
In August of 1998, we acquired ICF, a California corporation based in
Martinez, California. At the time that we acquired ICF, ICF was a telephone
service provider with operations that focused on the Bay Area and the western
United States. ICF's operations focused on the design, installation,
maintenance, and servicing of data and voice networks. ICF's customer base
included primarily large financial institutions as well as municipalities
located in the greater San Francisco area. Our acquisition of ICF was part of
our strategy to expand operations and revenues through acquisitions 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,
such as the western and southwestern United States. ICF has become our base of
operations and the source from which all of our revenues are generated. CCI's
customer base was absorbed by ICF effective August of 1998.
ICF Communication Solutions
Through ICF's interconnect services division, we provide voice
communications and data network design, equipment sales, installation, systems
integration consulting, and maintenance to Fortune 1000 size companies
and municipalities. In addition, through ICF's Recruitment Services division, we
provide technical employee recruitment, leasing and permanent placement
services.
Founded in 1989 to provide telephone systems and services to Bank of
America, ICF is currently servicing in excess of 250 customers at over 4,000
customer location sites. ICF employs over 150 service professionals and is
headquartered in Martinez, California. ICF has additional sales and service
offices in Burbank, Fresno, and Santa Rosa, California, as well as Houston,
Texas, and Phoenix, Arizona.
Our expertise in voice communications and data networks permits us to
offer customers a wide range of professional services, including network
planning, design, implementation, management, maintenance and optimization. Our
broad range of distribution of various voice and data equipment manufacturers
allows us to serve our customers as a vendor-neutral, single-source provider of
communications equipment and service.
Through ICF, we currently market our products in the following industry
segments or arenas:
o Banking, Insurance and Financial Services
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o Federal, State and Local Government Agencies
o Local and Higher Education
o Healthcare, Medical, and Pharmaceutical institutions
o Retail and Service Companies
From its inception, ICF has provided statewide and nationwide support
for such clients as Bank of America, Wells Fargo Bank, the University of
California-Berkeley, Orchard Supply Hardware, County of Sonoma and the City of
El Monte.
Through ICF we distribute the products and services of a number of
leading communications suppliers. In voice systems, we are an authorized dealer
for Lucent Technologies, NorTel Networks, and NEC, but also sell and support
Toshiba, VSR and T-Metrics. In data systems, we sell and support Cisco Systems,
Lucent Technologies, Bay Networks, and 3Com. In wiring systems, we sell and
support Lucent, IBM, Siemens, Krone-Belden and Ortronics. By offering equipment
from a variety of vendors, we can provide businesses with tailored, scalable
solutions.
In 1996, ICF created a Recruitment Services division to provide ICF's
clients with short- and long-term technical consultants, as well as permanent
placement of technical personnel. We specialize in telecommunications and
information systems personnel placements on a national basis, particularly in
the areas of telecom design, administration and maintenance, application
development, project management, operations, facilities engineering, technical
sales and marketing.
Approximately $16.3 million and $6.0 million of revenues were recorded
for data and voice services during 1999 and 1998, respectively. Approximately
$4.8 million and $1.9 million of revenues were recorded for Recruitment Services
placement fees during 1999 and 1998, respectively.
Sales and Marketing
We believe that we have built a strong base of Fortune 1000
corporations as clients. The 500 largest U.S. companies generally have annual
budgets that range between $1 million and $100 million for the purchase of voice
and data products and services to support national and regional internal
operations, as well as achieve efficiencies and cost savings. Other clients we
target have budgets ranging from $300,000 to $1 million per year.
We believe that long-term relationships based on quality customer
service, short response time and competitive pricing are the most effective way
of attaining our business objectives. Presently, we are balancing the expansion
of our client base through a more targeted solicitation of new clients in our
existing geographic markets, as well as strategic acquisitions into new
geographic markets. Through a proactive campaign we will also cross-market
telecommunication services with our clients in an attempt to capture a larger
share of our clients' business. Our plan is to establish cross-marketing
agreements with certain local and long distance carriers, hardware and software
development companies, electrical service suppliers and custom data network
consulting firms.
We work with our clients to transition their communications departments
from in-house personnel to outsourcing whenever possible. Unlike other
competitors, we focus on large corporations that have diversified needs and
substantial pent up demand to outsource their maintenance and service
requirements.
Our sales personnel are divided between local office sales calls to
coordinated National Account sales programs. Where local sale personnel rely on
relationships and leads, National Account sales personnel approach the Fortune
1000 customer or municipality as a team, including design engineers and project
managers. We intend to hire additional sales personnel to meet our growing local
and national sales efforts. We hope to increase the size of our sales force
significantly through acquisitions as well as an aggressive hiring campaign. It
is anticipated that such sales personnel will be compensated strictly on a
commission basis utilizing leads generated through referrals, periodic mailings,
telemarketing and cold calls. We believe that building 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 our clients are performed primarily under master
contracts. Each master contract contemplates hundreds of individual construction
and maintenance projects valued generally at less that $100,000
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each. These contracts typically are awarded on a competitive bid basis. We also
have contracts similar to master contracts with certain other clients. In
addition to services rendered pursuant to master contracts, we provide
construction and maintenance on individual projects awarded on a competitive bid
basis. While such projects are generally substantially larger than individual
projects covered by master contracts, such projects typically require the
provision of services similar to those rendered under master contracts. Master
contracts may extend for between one and three years. Service agreements are
generally cancelable by the customer at any time.
Our client relationships are with senior executives, chief information
or technology officers, IT/IS managers, or customer purchasing departments. With
our larger customers, we are often one of a few preferred vendors. Once on a
preferred vendor list, our sales personnel are eligible to work directly with
project managers or in-house consultants for additional work orders.
To date, most of our business has been generated through referrals,
personal sales calls, direct mailings and telemarketing. However, we intend to
expand our marketing efforts to include:
o improved graphic user interface and development of an advertising presence
on the World Wide Web;
o solicitation from manufacturers for on-line advertising and promotional
plans;
o trade magazine advertising; and,
o regular participation in user group conferences and business trade shows.
In addition, we will attempt to increase our client base by an
aggressive pricing policy and by acquiring additional distributors thereby
broadening our product offering. We also intend to add technicians qualified to
service these new products and services and increase our flexibility in both
pricing and in service offerings.
Products and Services
We provide a comprehensive array of communications products and
services. Our products and services fall into three categories:
o Professional Services
o Network Service and Equipment Sales
o Recruitment Services
Professional Services. We design, build and operate advanced voice,
data and integrated networks. We plan to leverage our technical and recruiting
expertise to provide additional professional service offerings including
outsourcing, advanced call center applications, network engineering and network
consulting. We will continue to expand these services as client demand for
advanced communications solutions continues to grow.
We employ highly skilled network engineers with an expertise in data as
well as integrated voice and data networking. Our Network Engineering group
designs networking solutions, implements those solutions and provides ongoing
operational support utilizing standard technologies. We also provide engineers
on a fee-for-service basis for clients who seek to augment their own resources.
We are actively recruiting additional engineers to service our expanding client
base.
Our network consultants coordinate the operational plans of our clients
with their existing network capacity and capability in order to determine the
communications environment necessary to meet their business needs. Our
consultants provide a complete analysis of existing network status and predict
the impact of future changes on a network and also develop sophisticated
Internet applications.
Network Service and Equipment Sales. We provide service, maintenance
and support for our clients' growing data and voice communications networks, as
well as sell and install data and voice communications equipment. We maintain
and service our clients' networks primarily through annual maintenance plans or
through project-specific plans based on time and materials. We can remotely
monitor and manage the voice and
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data equipment and network connectivity of our customers 365 days a year, 24
hours a day through our advanced network management center.
We also design, build and operate data networks, integrated voice and
data networks and computer telephony integration. To meet our clients' needs,
we evaluate technologies such as Internet protocol, frame relay, DSL and ATM,
and then select, integrate and deploy the appropriate routers, switches, access
devices and other required equipment. The networks we build range from small
local area networks (LAN's) supporting less than 50 users to wide area networks
(Wand's) supporting thousands of users and multiple technologies.
We offer our clients a variety of voice telephone and video equipment
for the office environment. We also install, configure and integrate all of the
equipment we purchase on behalf of clients, primarily telephones, switches,
lines and computer servers. The voice systems range from between 15 and 50,000
internal telephone lines. This equipment includes PBX and key systems, building
wiring, call centers, voice mail systems and premise (as opposed to mobile)
wireless systems. We have the capability to install all connection lines
including twisted pair copper (Cat III, V and VII), ISDN, coaxial cable and
fiber optic, but often sub-contract this activity as well as any electrical
wiring needs a client may have in connection with the installation of our
equipment. However, we intend to bring more of this activity in-house.
Recruitment Services Group. Our Recruitment Services group provides our
clients with short- and long-term technical consultants, as well as permanent
placement of technical personnel. We specialize in telecommunications and
information systems industry nationwide placements, particularly in the areas of
telecom design, administration and maintenance, application development, project
management, operations, facilities engineering, technical sales and marketing.
We recruit our candidates from a variety of sources utilizing our own web site,
electronic and print employment bulletin boards, cold calling and recruiter
networking. Approximately 80% of our Recruitment Services revenues are from
leasing employees on a temporary basis to our clients and 20% of our Recruitment
Services revenues are from permanent placement fees.
Vendor Relationships
We have agreements with the voice and data equipment manufacturers
listed immediately below.
o Lucent Technologies - authorized dealer since 1/98; entire voice and data
product lines;
o NorTel Networks - authorized distributor since 1/94; products have changed
to Meridian from Norstar lines;
o Cisco Systems - authorized distributor since 1/97; entire product line
including switches and routers;
o Bay Networks - NorTel Networks data subsidiary product lines;
o NEC - authorized distributor since 1/94; entire voice and data network
product line; and,
o 3Com - authorized distributor since 1/97; entire product line including NIC
cards, HUB's and routers.
Our agreements with the above-referenced voice and data equipment
manufacturers provide for the distribution, resale or integration of products,
and/or acting as agents for these equipment manufacturers. Normally, we receive
volume purchase discounts on these manufacturers' products or service. We
estimate that revenues based on service and equipment sales of Lucent and NorTel
products accounted for approximately 46% and 42%, respectively, of our data and
voice revenues of $16.3 million in 1999, and approximately 36% and 33% of our
total revenues.
Customers
We currently support approximately 250 clients at over 4,000 of their
customer sites across a broad range of industries, including banking, retail
distribution and manufacturing, as well as educational, local and federal
governmental and non-profit institutions. Our clients consist primarily of
Fortune 1000 sized companies with employees and workstations between 10,000 and
100,000. In 2000, we will also focus on small to medium sized customers with
employees and workstations between 50 and 10,000. We believe that our high level
of customer service has and will continue to enable us to capture an increasing
portion of each of our clients' communications budget in the future.
Our current customers include Bank of America, Wells Fargo Bank, Bank
of the West, the Good Guys, The University of California-Berkeley, Orchard
Supply Hardware, The City of El Monte, City of Upland, Burbank
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Unified School District, Blue Cross, Western Carlson Design and Ameriflight. We
also have subcontract relationships with Southwestern Bell, Lucent Technologies,
Ameritech, Williams Communications, and Sprint Communications.
In 1999, the City of Los Angeles contract which was operating on a
month to month basis from February to November of 1999 was not renewed. During
1999, we recognized appoximately $1.6 million in revenue from the City of Los
Angeles contract. Also, in February of 2000, we were informed by the County of
Sonoma that we would no longer provide service maintenance after May of 2000.
During 1999, we recognized approximately $1.8 million in revenue from the
relationship. We believe that the revenue and contribution profits lost from
these clients will be offset by the growth in revenues and contribution profit
from our existing clients, and further offset by new clients.
Employees
As of December 31, 1999, we employed 169 persons at a total of six
different sales and service locations throughout the U.S. Of these 169 persons,
four were executive officers, 144 were technicians, six were engineering
personnel, six were engaged in sales, and nine were engaged in administrative
and clerical activities. None of our employees were represented by a union or
collective bargaining agreement, and we have not experienced any work stoppages.
In November 1999, our Board of Directors determined that it was in the
best interests of COMC to adopt the COMC, Inc. 1999 Stock Option Plan (the "1999
Plan"). The 1999 Plan was adopted by our Board of Directors on November 30,
1999, and 240,000 shares of our common stock were reserved for issuance under
the 1999 Plan. Our Board of Directors plans to present the 1999 Plan for
approval to our stockholders at their 2000 annual meeting. Subject to the
approval of our stockholders, in November, 1999, we granted incentive stock
options to our employees ot acquire a total of shares of our common stock at an
exercise price of $.50 per share, with the right to exercies such options
vesting over a five year period.
Competition
The size of a client, the geographic scope and product platform
preferences of the target client base dictates the competition we face. The
market for both data network and voice communications services and products
sales is highly competitive on a local, regional and national basis. The level
of competition intensifies, while the number of qualified competitors diminishes
as the level of technological and design expertise rises and product
distribution rights narrows. As we are predominately a service company focusing
on maintenance contracts and installation projects, as well as the fact that
most of the customers we target are large enough to purchase direct, we seldom
compete with larger equipment distributors on the initial sale of equipment.
We are trained and certified on most of the legacy and current release
equipment manufactured by Lucent Technologies, NorTel Networks, NEC and Toshiba
for voice networks as well as Cisco Systems, Lucent, Bay Networks and 3Com for
data networks. Maintaining expertise in these systems, while remaining vendor
neutral, allows us to competitively bid for service contracts representing
approximately 80% of the installed US base of voice and data network systems. We
obtain a competitive advantage in that many of the largest targeted customers
operate their systems on multiple-vendor platforms (for instance Lucent and
NorTel voice switches and Cisco and 3Com data hubs and routers at the same time)
which we can service and maintain under one general contract. Many of our
competitors are limited to only one major voice and/or one major data vendor
relationship and service.
Our goal as a service company is to continuously expand our geographic
service coverage to a national level, as well as expand upon our growing
expertise within the above highlighted voice and data equipment platforms.
We face competition in our targeted Fortune 1000 sized and municipal
clients from GTE, Electronic Data Systems, Williams Communications, IBM Global,
Claricom, Inacom and AT&T Global. This competition covers larger voice and data
network design, installation, maintenance and monitoring projects and contracts
on a national basis. On a regional basis, we compete with NetsWork, Metro and
Syzergy. This competition covers cabling and voice service contracts as well as
project work for medium and large sized clients in California, Arizona, Nevada,
New Mexico and Utah.
Overview of the Industry
Telecommunications is the transmission of data, voice or video signals
across a distance. Data signals connect computers through local area networks,
wide area networks, and the Internet, or connect peripheral devices, such as
facsimile machines and printers. Voice signals usually connect people in
telephone conversations. Video signals include video conferencing and television
signals. Telecommunications services are typically divided into long distance
and local services. The telecommunications industry includes the configuration,
sale, installation and
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maintenance of communications equipment, and technical services for the design
and operations of communication networks handling voice, data and video traffic.
Recently, the telecommunications industry has been characterized by
rapid technological change, changes in the industry structure and increased
demand for services and equipment. The demand for all types of
telecommunications services has been increasing, with rapid growth in high-speed
data services, including the Internet.
Many of the largest equipment and service providers have achieved
growth through acquisitions and mergers. These combinations have provided access
to new markets, new products, and economies of scale. Despite this
consolidation, the number of new entrants is increasing and new entrants are
gaining market share from the large and established providers. In this highly
competitive environment, telecommunications providers are increasingly focusing
on core competencies and outsourcing non-core activities to other providers. In
the telecommunications equipment market segment, both Lucent Technologies and
NorTel Networks have attempted to divest their service and maintenance units in
the past two years to focus on equipment development and sales. This trend is a
significant departure from the traditional integrated model that has prevailed
in the industry since its inception, and represents an opportunity for us.
Advances in Telecommunications and Networking Technology
Telecommunications providers transmit voice, data and video signals
primarily over copper, coaxial and fiber optic cables, microwave systems and
satellites. Beginning in the 1960s, microwave systems began to replace copper
cable. By 1990, fiber optic cables had largely replaced copper cable for long
distance transmission. Fiber optic cables use light to transmit information in
digital format through ultra-thin strands of glass. Compared to copper, fiber
optic cables provide significantly greater capacity at lower cost with fewer
errors and increased reliability.
Several advances in switching and electronics have further increased
the bandwidth, or transmission capacity, of telecommunications networks. Dense
wavelength division multiplexing (DWDM) transmits multiple light signals through
a single optical fiber and can currently increase the bandwidth of fiber optic
cables by up to 128 times the original fiber optic technology.
Historically, carriers have built telecommunications networks based on
circuit switching. Circuit switching establishes and keeps open a dedicated path
until the call is terminated. While circuit switching has worked well for
decades to provide voice communications, it does not efficiently use
transmission capacity. Once a circuit is dedicated, it is unavailable to
transmit any other information, even when the particular users of that circuit
are not speaking or otherwise transmitting information. Packet switching is
replacing circuit switching. Packet switching divides signals into small
"packets" which are then independently transmitted to their destination via the
quickest path. Upon their arrival, the packets are reassembled. Packet switching
provides more efficient use of the capacity in the network because the network
does not establish inefficient dedicated circuits, which waste unused capacity.
New packet networking technologies include Internet protocol (IP),
asynchronous transfer mode (ATM) and frame relay. These technologies operate at
very high speeds ranging from 1.544 megabits per second (or DS-1) to 2.488
gigabits per second (or OC-48) and beyond. By comparison, one voice call
requires roughly 64 kilobits per second. Packet networks are especially
efficient at carrying data signals. ATM service quality controls support
high-quality voice and video signals. Similar quality controls are being
developed for IP.
Data traffic, whether accommodated by circuit switching or packet
networking, is growing more rapidly than voice traffic. Annual growth in data
traffic is estimated at 25% to 40% per year, whereas voice is growing at 6%,
albeit on a much greater usage base. It is further estimated that by the year
2002, data will account for 95% of all global traffic. The drivers of this
growth are (i) the success of the Internet, (ii) cost and performance
improvements in computing, storage and modems, and (iii) embedded information
and applications (including e-commerce, electronic media, business intranets and
virtual private networks (VPR's)).
Convergence of Data and Voice Services
Telecommunications network designs have traditionally created separate
networks using separate equipment for voice, data and video signals. The
evolution from `analog' to `digital' technologies, which convert voice and other
signals into a stream of "1"s and "0"s, eliminates the traditional distinctions
between data, voice and
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video transmission services. High-bandwidth networks that use advanced
packet-switched technology transmit mixed digital voice, data and video signals
over the same network. This enables telecommunications customers to use a single
device for voice, data and video communications. Although these devices are new
to the market, customer interest and acceptance are rapidly growing.
Each evolution, from copper to fiber optic cables, from one to many
light signals, from circuit-switching to packet-switching and from analog to
digital signals, has produced significant increases in network capacity. When
considered together, these evolutions have produced enormous increases in the
ability to transfer large amounts of information across vast distances almost
instantaneously. With each new leap in transmission capacity, end-users have
come to rely on their ability to access and manipulate ever-greater amounts of
information quickly and easily. This reliance has consistently created demand
that outstrips the available capacity.
Equipment Manufacturing and Distribution Market
The telecommunications equipment industry in the U.S. has grown
substantially in the last several years through sales to local and long distance
carriers, end-users, Internet and other data service providers. The dramatic
growth of the telecommunications and data networking equipment industry stems in
part from: (a) the development of new technologies which allow systems to
provide integrated voice and data services, and (b) from increased corporate and
household bandwidth demand, which require both established and new carriers to
expand and upgrade their facilities. Manufacturers distribute telecommunications
equipment through their own sales forces as well as through interconnect service
providers as third parties.
Interconnect Services (Communications and Data Solutions) Market
Businesses seek solutions to the challenges of selecting, maintaining
and upgrading information and communications technologies and services amid
rapid technological advances. As a result, the demand for consultants' services
in systems integration and communications networks has been growing rapidly.
Businesses such as Williams Communications, Norstan, Inc. and International
Network Services on a national level and COMC on a regional level, assess
customers' communications and information technology needs, evaluate equipment
and services options, procure equipment and services, implement efficient
network solutions and manage the combination of technologies.
ITEM 2. DESCRIPTION OF PROPERTY
Our headquarters are located at 2840 Howe Road, Suite D, Martinez,
California. We occupy 8,000 square feet, of which approximately 7,000 square
feet are dedicated to office space and 1,000 square feet are dedicated to
warehouse space, for which we pay monthly rent of $8,241 under a lease that will
expire in November 2002. ICF has recently leased an additional 3,700 square feet
of office space and 3,200 square feet of warehouse space at 2840 Howe Road. ICF
will pay a monthly rent of $6,750 under the new lease that was signed in April
2000 and will expire November 2002. ICF occupies a 2,700 square feet space in a
commercial building at 400 N. Glenoaks Boulevard, Burbank, California. ICF pays
a monthly rent of $3,907 under a lease that was signed in April 1995 and that
expired in March 2000. We are currently identifying larger space for lease in
the area and will continue to lease the existing facility on a month to month
basis. ICF also occupies an office in a commercial building at 5201
<PAGE>
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 for this property located in Houston
under a lease that will expire in October 2000. ICF also occupies an office in a
commercial building at 2810 S. 24th Street, Suite 111, Phoenix, Arizona, of
which 3,693 square feet is office space and 1,729 square feet is warehouse
space. ICF pays a monthly rent of $3,546 for this property located in Phoenix
under a lease that will expire in September 2003. Finally, ICF occupies an
office in a commercial building at 1788 N. Helm, Suite 107, Fresno, California,
of which approximately 1,800 square feet is office space and 700 square feet is
warehouse space. ICF pays a monthly rent of $1,000 for this property located in
Fresno under a lease that will expire in December 2001.
ITEM 3. LEGAL PROCEEDINGS
We are not involved in any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market for Common Equity
Our Common Stock is quoted Over The Counter on the electronic Bulletin
Board. The following table sets forth the high and low bid quotations for our
Common Stock through the quarter ended March 31, 2000. Prior to the fiscal
quarter ended March 31, 1998, no trading market existed for our 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
-------------- ------ ------
March 31, 1999 $2.125 $.50
June 30, 1999 $1.50 $1.00
September 30, 1999 $1.50 $.75
December 31, 1999 $1.5625 $.125
March 31, 2000 $2.00 $.625
On December 31, 1999, the closing price for our Common Stock on the
Bulletin Board was $1.125 and there were approximately 2,986 registered holders
of record of our Common Stock. This does not include beneficial shareholders
whose Common Stock is held in street name.
Dividend Policy
We have never declared or paid a cash dividend on our Common Stock. We
intend to retain all earnings for the foreseeable future for use in the
operation and expansion of our business and, accordingly, we do not contemplate
declaring or paying any cash dividends on our Common Stock in the near future.
Payment of future dividends, if any, will be at the discretion of our Board of
Directors after taking into account various factors, including our financial
condition, operating results and current and anticipated cash needs.
Sales of Unregistered Securities
<PAGE>
In July 1998, pursuant to a private placement, we 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 our Common
Stock at $2.00 per share until July 31, 2000. These issuance's were exempt from
registration under Rule 506 promulgated under the Securities Act. The total
gross cash proceeds of this offering were $1,500,000. In the same month, an
additional 33,334 shares of our Common Stock and 6,666 warrants were sold to one
U.S. investor on the same terms.
In connection with the aforementioned private placement, we 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 that
provided assistance with the completion of this offering. These issuance's were
exempt from registration pursuant to Section 4(2) of the Securities Act.
In August 1998, we issued an aggregate of 6,493,506 shares of Common
Stock to Messrs. Lincoln and Burns in connection with our acquisition of ICF.
These issuance's were exempt from registration pursuant to Section 4(2) of the
Securities Act.
In August of 1999, we issued options to acquire a total of 3,651,948
shares of Common Stock in connection with the restructuring of certain debt
obligations to Messrs. Burns and Lincoln and in connection with the hiring of
Mr. Smith. Specifically, Messrs. Burns and Lincoln received options to acquire a
total of 376,623 shares of our Common Stock each, Mr. Smith received options to
acquire a total of 2,463,896 shares of our Common Stock, and Gramercy National
Partners, for its assistance in connection with the aforementioned debt
restructuring and the hiring of Mr. Smith, received options to acquire a total
of 434,806 shares of our Common Stock. These issuances were exempt from
registration pursuant to Section 4(2) of the Securities Act. Simultaneous with
these option grants, Mr. Ackerman contributed into our treasury 3,651,948 shares
of Common Stock from his personal holdings in order to fund these grants.
Subsequently, in October of 1999, an option for 86,961 shares of Common Stock
was exercised and 86,961 shares of Common Stock was issued from our treasury. As
of December 31, 1999 we held 3,564,987 shares of Common Stock held in treasury.
In November 1999, our Board of Directors determined that it was in the
best interests of COMC to adopt the COMC, Inc. 1999 Stock Option Plan (the "1999
Plan"). The 1999 Plan was adopted by our Board of Directors on November 30,
1999, and 240,000 shares of our common stock were reserved for issuance under
the 1999 Plan. Our Board of Directors plans to present the 1999 Plan for
approval to our stockholders at their 2000 annual meeting. Subject to the
approval of our stockholders, in November, 1999, we granted incentive stock
options to our employees ot acquire a total of shares of our common stock at an
exercise price of $.50 per share, with the right to exercies such options
vesting over a five year period.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
AND RESULTS OF OPERATIONS
The following discussion of the financial condition and our results of
operations should be read in conjunction with the audited Consolidated Financial
Statements and the Notes thereto included elsewhere in this report. This
discussion contains forward-looking statements that involve risks and
uncertainties.
Overview
We are a technology service company in the telecommunications industry
with a rapidly expanding national geographic service coverage area. We design,
implement, support and manage LAN/WAN computer network systems, voice
communication network systems, and premise wiring for both data and voice. In
addition, we distribute and maintain equipment on behalf of major
telecommunication equipment manufacturers. Service-related revenues, maintenance
and client outsourcing services, through our wholly owned subsidiary, ICF, now
represents 100% of our total revenues. Our gross margin varies significantly
depending on the percentage of service revenues versus revenues from the sale
and installation of products (with respect to which we obtain a lower margin).
For our major customers, we typically provide these services under contracts
with a duration of one or more years.
Under an acquisition and consolidation strategy, we intend to build our
operations and to expand our presence primarily in high growth markets of the
United States.
Results of Operations
Our consolidated statement of operations in 1997 includes our results
and the results of our wholly-owned subsidiary CCI for the twelve months ended
December 31, 1997. Our consolidated statement of operations in 1998 includes our
results and the results of our wholly-owned subsidiary CCI for the twelve months
ended December 31,
<PAGE>
1998, as well as the results of operations of ICF for the four months ended
December 31, 1998. CCI's customer base was absorbed by ICF effective August of
1998. Our consolidated statement of operations in 1999 includes our results and
the results of our wholly-owned subsidiary ICF for the twelve months ended
December 31, 1999.
Dollars in Thousands 1999 1998 1997
-------------------- ---- ---- ----
Net Revenues
Data & Voice Services $16,267 $6,037 $2,650
Recruitment Services $4,829 $1,890 0
------ ------ ------
Total Revenues $21,096 $7,927 $2,650
======= ====== ======
Revenues in 1999 grew by over 166% over the comparable 1998 period.
Data and Voice Services revenue grew by 169% over the prior year primarily due
to the inclusion of ICF for a full 12 month period versus only four months in
1998. Secondarily, a more focused sales effort was initiated to take advantage
of increased demand for services among our target customers. This increased
demand continues to be the result of favorable economic conditions, as well as
increased merger and acquisition activity in the banking and finance industries
that affected our most significant customers. Recruitment Services revenue
increased by 155% primarily due to the inclusion of ICF for a full 12 month
period versus only four months in 1998, but offset by increased competition and
a tightening labor pool for telecommunications specialists which we target.
<TABLE>
<CAPTION>
Gross Gross Gross
Profit Profit Profit
Dollars in Thousands 1999 Margin 1998 Margin 1997 Margin
-------------------- ---- ------ ---- ------ ---- ------
<S> <C> <C> <C> <C> <C> <C>
Gross Profits
Data & Voice Services $5,733 35.2% $2,343 38.8% $1,071 40.4%
Recruitment Services $1,373 28.4% $573 30.3% 0 0.0%
------ ------- ------
Total Gross Profits $7,105 33.7% $2,916 36.8% $1,071 40.4%
====== ====== ======
</TABLE>
Cost of revenues increased 179% from 1999 over 1998. Data and Voice
cost of services increased 185%, while Recruitment costs of services grew by
162%, due primarily to the inclusion of ICF cost of services for a full 12 month
period versus only four months in comparable 1998. Gross profits grew an overall
143% during 1999 as compared with the Pro forma 1998. Data & Voice Services
gross profits grew by 144%, with gross margin decreasing from 38.8% of sales in
Pro forma 1998 to 35.2% of sales in 1999. The decrease in gross margin is the
result of the inclusion of only four months of ICF, which has slightly lower
margin on higher volume of service revenue as compared with CCI in 1998.
Recruitment Services gross profits increased 139%, with gross margins decreasing
from 30.3% in 1998 to 28.4% in 1999. The gross margin reported for 1998 was not
indicative of an annualized profit margin for Recruitment services, but rather
the result of a higher concentration of higher margin permanent placement
revenue in the last four months of 1998.
Selling, general and administrative expenses increased from $2,644,300
to $5,676,400, or 114% from 1998 to 1999. This was due to the inclusion of ICF's
selling, general and administrative expenses for a full 12 month period in 1999
versus only four months in 1998. Our holding company expenses declined from
$981,700 in 1998 to $613,100 in 1999 due to significant cost cutting and expense
rationalization during 1999. SG&A expenses for ICF's operations increased from
$1,662,600 for the four months of 1998 to $4,858,900 for the 12 months of 1999
in which ICF opened an addition service office in Fresno, California, added key
service technician, engineers and sales personnel, and increased sales
commissions and training expenses. In addition, a noncash charge of $204,400 for
a consulting expense was recognized within general and administrative expenses
relating to stock options granted to a consultant at below fair market value for
services rendered to us on the restructuring of related-party notes payable to
unsecured subordinated debt. This charge represents the difference between the
fair market value at the grant date and the exercise price.
Noncash expenses include depreciation, amortization, and a charge for
the impairment of long-term asset as discussed below:
Depreciation: Depreciation expense was $207,500 for 1999, compared with
$95,900 in 1998. The increase is due to the inclusion of ICF for a full 12 month
period versus only four months in 1998.
<PAGE>
Amortization of Goodwill: Amortization of goodwill resulting from the
purchase of ICF increased to $556,200 in 1999 from $185,300 in 1998 due
amortizing four months in 1998 compared with 12 months in 1999.
Impairment of Long-term Asset: In December 1999, under the guidelines
of Statement of Financial Accounting Standards No. 121, we assessed the
recoverability of certain of our long-lived assets, namely Goodwill. We
estimated the fair value of our Goodwill based on comparable assets within the
industry, our economic outlook and discounted future cashflows. These procedures
resulted in the determination that the aforementioned asset had been permanently
impaired, and a charge to earnings of $10,382,300 resulted in 1999.
Interest Income remained unchanged in 1999 as compared with 1998 due to
the average daily cash balances and interests rates earned remaining relatively
constant on average throughout 1998 and 1999.
Interest Expense increased in 1999 to $221,900 due to increased
borrowing of our working capital line of credit which was utilized to accelerate
the repayment of ICF's income tax liabilities relating to years prior to 1998,
as well as to fund the growth in our working capital. This resulted in cash
interest expense of $171,700 in 1999. In addition, a noncash charge of $50,200
was recognized in 1999 relating to stock options granted to our President and
Chief Operating Officer as part of the restructuring of notes payable to them by
us into three-year, interest-only unsecured subordinated notes. The charge
represents the difference between the fair market value at the grant date and
the exercise price, divided by 36 months, the life of the new loan. We
recognized five months of expense in 1999 of the 36 months.
Interest Expense - Related Party increased due to the inclusion of ICF
acquisition-related debt for a full 12 month period versus only four months in
1998.
Other Expense is comprised mostly of bank fees and charges associated
with our line of credit, and declined in 1999 to $18,200 from $47,700 in 1998
primarily due to an offsetting insurance claim income of $29.
Income Taxes increased to $146,000 in 1999 from $117,200 in 1998 due
greater reportable income from operations after adding back certain noncash
charges which were not deductible for taxes. The components of income taxes were
as follows for the years ended December 31, 1999:
1999 Federal State Total
---- -------- ----- -----
Current $214,000 $56,000 $270,000
Deferred ($42,300) ($3,000) ($45,300)
---------- --------- ----------
$171,700 $53,000 $224,700
======== ======= ========
Net Loss increased to $10,570,200 due primarily to the extensive
noncash charge from the write-off of substantially all of our goodwill. Adjusted
for the noncash charges, our net income would have been approximately $572,700
in 1999 versus a Net Loss of $145,600 in 1998.
Results of 1999 Operations as Compared with Pro forma 1998 Operations
Our consolidated statement of operations in 1998 includes our results
and the results of our wholly-owned subsidiary CCI for the twelve months ended
December 31, 1998, as well as the results of operations of ICF for the four
months ended December 31, 1998. CCI's customer base was absorbed by ICF
effective August of 1998. Our consolidated statement of operations in 1999
includes our results and the results of our wholly-owned subsidiary ICF for the
twelve months ended December 31, 1999. Due to 100% of our revenues being
generated by ICF, the Company and Management have also compared the results of
our 1999 operations with those of 1998 as if ICF had been acquired on January 1,
1998 ("Pro forma 1998").
Pro forma
Dollars in Thousands 1999 1998
- -------------------- ---- ----
Net Revenues
Data & Voice Services $16,267 $14,278
Recruitment Services $4,829 $5,424
----- -----
Total Revenues $21,096 $19,702
======= =======
<PAGE>
Revenues in 1999 grew in excess of 7% over the Pro forma 1998 revenues.
Data and Voice Services grew by 13.9% over the prior year as a more focused
sales effort was initiated to take advantage of increased demand for services
among our target customers. This increased demand continues to be the result of
favorable economic conditions, as well as increased merger and acquisition
activity in the banking industries which affected our most significant
customers. Recruitment Services revenues declined by 10% due to increased
competition and a tightening labor pool for telecommunications specialists which
we target.
<TABLE>
<CAPTION>
Gross Gross
Profit Pro forma Profit
Dollars in Thousands 1999 Margin 1998 Margin
-------------------- ---- ------ ---- -----
<S> <C> <C> <C> <C>
Gross Profits
Data & Voice Services $5,733 35.2% $4,742 33.2%
Recruitment Services $1,373 28.4% $1,527 28.1%
------ ------
Total Gross Profits $7,106 33.7% $6,269 31.8%
====== ======
</TABLE>
Gross profits grew an overall 13.3% during 1999 as compared with the
Pro forma 1998. Data & Voice Services gross profits grew by 20.8%, with gross
margin increasing from 33.2% of sales in Pro forma 1998 to 35.2% of sales in
1999. The increase in gross margin is the result of a more efficient scheduling
of our technical staff availability causing a reduction in downtime, and a
decline in the percentage of equipment sales to overall sales which have a lower
profit margin than service revenues. Recruitment Services gross profits declined
10%, with gross margins increasing slightly from 28.1% in Pro forma 1998 to
28.4% in 1999. Margins improved slightly due to favorable increase in permanent
placements which carry a higher profit margin versus temporary placement
revenues which are slightly less.
Selling, general and administrative expenses increased only slightly
from $5,676,400 to $5,755,100, or 4% from Pro forma 1998 to 1999. Cost cutting
and expense rationalization in our holding company and corporate activities
reduced our holding company expenses from $981,700 in Pro forma 1998 to $613,100
in 1999. SG&A expenses for ICF's operations increased from $4,494,700 in Pro
forma 1998 to $4,858,900 in 1999. This increase was the result of opening an
addition service office in Fresno, California, the addition key service
technician, engineers and sales personnel, and increased sales commissions and
training expense. Additionally, other general and administrative expenses
included a noncash charge of $204,400 for a consulting expense was recognized
within general and administrative expenses relating to stock options granted to
a consultant at below fair market value for services rendered to us on the
restructuring of related-party notes payable to unsecured subordinated debt.
This charge represents the difference between the fair market value at the grant
date and the exercise price.
Earnings before interest, taxes, depreciation, amortization and other
non-cash charges ("EBITDA") increased from $792,700 in Pro forma 1998 to in
excess of $1,633,400 in 1999. Adding back expenses related to our holding
company and general corporate activities related to being a public company, our
EBITDA would have exceeded $2,246,500 in 1999.
Depreciation expense was $207,500 for 1999, compared with $202,000 in
Pro forma 1998. The slight increase is due to the purchase of additional
computer, testing and office equipment which is depreciated over a short period
than other fixed assets.
All other financial information related to Consulting expense,
Amortization expense, charge for Impairment of Long-term Asset, Interest
expense, and Other Income (Expense) are the same as above.
Liquidity and Capital Resources
Cash and cash equivalents decreased to $385,100 at December 31, 1999
compared to $1,018,500 at December 31, 1998.
<PAGE>
Cash Flows From Operating Activities: For the year ended December 31,
1999, cash used in operating activities was $1,082,600 which resulted primarily
from our net loss of $10,570,200, offset by noncash expenses of $11,376,200,
increases in operating assets of $1,080,700 and liabilities of $807,900.
Accounts receivables increased $1,130,500 due to greater activity in
the fourth quarter as well as overall growth in business. Payables and accruals
declined slightly due to taking advantage of purchase discounts.
Income taxes payable were eliminated in 1999, declining $775,300 in
September of 1999. In June of 1998, ICF agreed to Income Tax Examination Changes
by the IRS which resulted in additional income tax liabilities to the IRS for
the 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 our request to pay
this tax liability in installments requiring monthly payments of $100,000 plus
interest and penalties until the total amount was paid in full.
Cash Flows From Investing Activities: For the year ended December 31,
1999, net cash received from investing activities was $85,700, as a result of a
$114,300 repayment from loans receivable from an officer, offset by capital
expenditures of $28,600.
Cash Flows From Financing Activities: For the year ended December 31,
1999, net cash generated from our financing activities was $393,500, as a result
of $7,400 received from the exercise and purchase of stock options, and
$6,644,100 from net borrowings on our credit line less payments of $6,132,100 as
well as a repayment of a long-term liability of $125,900.
In September of 1999, ICF secured a $3 million Line of Credit facility
("Line of Credit Facility") with Coast Business Credit, a division of Southern
Pacific Bank. This credit facility has a two-year term and all amounts borrowed
will accrue interest at 2% over the prime rate. The Line of Credit Facility is
secured by substantially all of ICF's assets and contains customary covenants
and restrictions. The Line of Credit Facility is being used to support working
capital and may be used to finance smaller acquisitions. Specific uses of the
Line of Credit Facility included: (i) the payment of the balance of income taxes
due to the IRS and California Franchise Tax Board; (ii) the consolidation of
various notes payable; and (iii) various working capital purposes including
additional acquisition financing.
Our long-term liabilities also include $3,500,000 in Related Party
Notes Payable. In consideration for the sale of ICF to us, the two principal
owners of ICF, Messrs. Burns and Lincoln, received an aggregate of $14,000,000,
payable 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
of our accounts receivable; $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 our common stock valued at $9,000,000 or $1.386 per
share. We were unable to pay off the January 4, 1999, and January 5, 1999,
promissory notes as of their maturity dates. On August 10, 1999, we entered into
an agreement with the Messrs. Burns and Lincoln, to refinance these notes with
new notes under different terms and conditions. Specifically, we agreed with
Messrs. Burns and Lincoln to extend the term of each note to three years,
payable in full on the third anniversary (i.e., August 10, 2002). Interest is
accruing at 10% per annum and paid monthly.
<PAGE>
Our net working capital at December 31, 1999 was a positive $2,975,000.
We believe that our current cash flow from operations plus our present sources
of liquidity from current assets, and funds from the Line of Credit Facility,
will be sufficient to finance operations for the foreseeable future and meet our
short-term obligations.
We intend to continue our search for additional merger and acquisition
candidates that will expand our existing markets in related products and
services. These potential acquisitions are anticipated being funded with a
combination of additional bank debt, debt provided by the sellers of the
companies we purchase, and from the private or public sale of additional equity
securities.
We have depended on a few large customers for the majority of our
revenue to date. A loss of any one could have a material effect on our
liquidity. Due to the quality of our major customers, the collectibility of
accounts receivable has not been a problem.
Year 2000 Compliance
Throughout 1999, we reviewed our computer systems to identify those
areas that could be adversely affected by Year 2000 software failures. We used a
number of computer software programs and operating systems in our operations,
including financial business systems, marketing and various other administrative
functions. To the extent that these software applications contained source code
that was unable to appropriately interpret the upcoming year 2000, some level of
modification and replacement of such applications was necessary.
We converted all of our information systems to be Year 2000 compliant.
During 1999, we incurred approximately $140,000 to complete the information
system conversions. To date, we have not incurred any complications or adverse
effects on our business from Year 2000 software failures.
Seasonality and Inflation
Our business is generally not impacted by seasonality, however, the
first quarter of the calendar and our fiscal year is generally our slowest
period. Our management does not believe that the effects of inflation will have
a material impact on us, nor is our management aware of changes in prices of
materials or other operating costs or in the selling price of our services and
products that will materially effect us.
ITEM 7. FINANCIAL STATEMENTS
The financial statements are included herein commencing in Part IV of
this report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Effective February 2, 2000, our Board of Directors decided to dismiss
Hollander, Lumer & Co. LLP ("Hollander") as our independent public accountants.
We believe and have been advised by Hollander that it concurs, that for
the two fiscal years ended December 31, 1998, and the subsequent interim period
through February 2, 2000, we did not have any disagreement with Hollander on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreement, if not resolved to the
satisfaction of Hollander, would have caused Hollander to make reference in
connection with its report on our financial statements to the subject matter of
the disagreement.
The report of Hollander on our financial statements for the years
ending December 31, 1997 and December 31, 1998 did not contain an adverse
opinion or disclaimer of opinion, and was not qualified or modified as to
uncertainty, audit scope or accounting principles. During that period, there
were no "reportable events" within the meaning of Item 304(a)(1)(v) of
Regulation S-K promulgated under the Securities Act of 1933.
<PAGE>
Hollander furnished a letter addressed to the Securities and Exchange
Commission stating that Hollander agreed with the above statements, which was
attached as Exhibit 1 to our Form 8-K describing the above referenced changes,
filed on February 25, 2000.
On February 2, 2000, we engaged Deloitte & Touche LLP ("Deloitte") to
replace Hollander as our independent public accountants. On February 15, 2000,
Deloitte resigned as our independent auditors because Deloitte determined that,
prior to its engagement as auditors, it had performed certain valuation services
that could impact its independence. During the period of Deloitte's engagement,
we did not have any disagreement on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope of procedure with
Deloitte, which disagreement, if not resolved to the satisfaction of Deloitte,
would have caused it to make reference in connection with its report on our
financial statements to the subject matter of the disagreement. Deloitte did not
issue any reports on our financial statements.
Deloitte furnished a letter addressed to the Securities and Exchange
Commission stating that Deloitte agreed with the above statements, which was
attached as Exhibit 2 to our Form 8-K describing the above referenced changes,
filed on February 25, 2000.
Between February 25, 2000, and March 27, 2000, we received and reviewed
engagement proposals from other nationally recognized independent accounting
firms. On March 27, 2000, our Board of Directors decided to retain BDO Seidman,
LLP as our new independent public accountants to replace Deloitte. We formally
retained BDO Seidman, LLP as our independent public accountants on March 28,
2000. No other independent accounting firms were consulted by us on any
accounting and/or reporting matters between February 15, 2000, and March 28,
2000.
Additional details concerning these changes in our independent public
accountants may be found in Form 8K Current Reports that we filed with the SEC
on February 25, 2000 and March 29, 2000.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Officers and Directors
Our officers and directors are as follows:
Name Age Position
------- --- --------
John Ackerman 42 Chairman of the Board
Charles Lincoln 46 Chief Executive Officer, President,
Director
William M. Burns 41 Chief Operating Officer, Director
Christopher R. Smith 36 Chief Financial Officer, Director
Donald Baker 70 Director
John Ackerman has been our Chairman since November 1996, and served as
our Chief Executive Officer from November 1996 until October 1999. Mr. Ackerman
founded and had been the President and Chief Executive Officer of CCI since its
inception in 1987. From 1984-1987, Mr. Ackerman was employed as a technician at
Sunglo Electric. Mr. Ackerman was also formerly employed as a Production Manager
at International Television Services, and was an import/export broker at
London-based Justwise Limited, overseeing that firm's European sales and
operations.
Mr. Lincoln is our President and CEO, and has been a Director since
1998. Mr. Lincoln is also co-founder of ICF and has worked in the voice and data
network telecommunications field for the past 20 years. Before co-
<PAGE>
founding ICF, Mr. Lincoln held technical and management positions at Bank of
America, Intel Corporation, and IBM. Mr. Lincoln attended West Valley Jr.
College, Saratoga, California and California State University at Hayward where
he majored in Business and Finance.
Mr. Burns is our Chief Operating Officer, and a Director. Mr. Burns was
also a co-founder of and is the President and CEO of ICF. Mr. Burns has over
eighteen years of experience in the communications industry, starting ICF in
1988. Prior to that, he held technical and management positions at the
PacTel-PacBell Company. Prior to that he was employed at John Jackson
Enterprises in Sacramento from 1978 through 1986. Mr. Burns attended four years
of college at Rockland, California.
Mr. Smith is our Chief Financial Officer and is responsible for
acquisitions, strategic planning and financial reporting on our behalf and on
behalf of our subsidiaries. Mr. Smith is also a Director. Prior to joining us in
1999, Mr. Smith spent over seven years as a Managing Director with Wafra
Partners, L.P., a New York-based private equity investment fund. Prior to Wafra,
Mr. Smith was a Vice President with Kouri Capital, Inc., a private merchant bank
group. Mr. Smith also held senior positions with Lambert Brussels Capital Corp.
(an affiliate of Drexel Burnham Lambert) and First Union Corporation. Mr. Smith
earned his degree in finance and accounting from Florida State University in
1985.
Mr. Baker has been one of our Directors 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 operating in the Southeast. Mr. Baker 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 Corporation,
Chicago, and Cardiometrics, Inc., Santa Ana, California.
Board of Directors
Our By-laws provide that the Board of Directors shall be composed of
five to seven members. Each director is elected at our annual meeting of
stockholders and holds office until the next annual meeting of stockholders, or
until his successor is elected and qualified. Our By-laws 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.
Currently our Board of Directors consists of John J. Ackerman, Chairman, Donald
Baker, William M. Burns, Charles E. Lincoln and Christopher R. Smith.
Committees of the Board
We are presently in the process of selecting members for standing
committees previously established by the Board of Directors. Specifically, we
are in the process of selecting members for our Executive Committee, our Audit
Committee, our Compensation Committee, and our Option Committee.
Officers
Officers are elected by our Board of Directors and their terms of
office are, except to the extent governed by employment contracts, at the
discretion of the Board. Presently, John J. Ackerman is our Chairman, Charles E.
Lincoln is our President and Chief Executive Officer, William M. Burns is our
Chief Operations Officer and Christopher R. Smith is our Chief Financial
Officer.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires our
officers and directors, and persons who own more than ten percent of a
registered class of our 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 us with copies of all Section 16(a) forms they file. Mr.
Ackerman, the Burns Trust and the Lincoln Trust have recently made necessary
Section 16(a) filings, and are now in compliance with all Section 16(a) filing
requirements. Marvin Loeb and Albert Vasquez, who were both formerly
<PAGE>
officers and directors, have not complied with all applicable Section 16(a)
filing requirements. Mr. Loeb and Mr. Vasquez resigned from all of their officer
and director positions in the early part of 1999.
ITEM 10. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
Summary Compensation
The following table sets forth the compensation we and/or ICF have paid
or accrued to all executive officers during the fiscal years ended December 31,
1997, 1998 and 1999:
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE(1)(2)
- -------------------------------------------------------------------------------------------------------------------------
Annual Compensation Long-Term Compensation
- --------------------------------------------------------------------------------------- ---------------------------------
(a) (b) (c) (d) (e)
- ------------------------- ------------------- -------------------- -------------------- ---------------------------------
Year Ended
Name/Principal Position December 31 Salary ($) Bonus ($) Restricted Stock Awards
========================= =================== ==================== ==================== =================================
<S> <C> <C> <C> <C>
John Ackerman 1999 137,692 -0- -0-
Chairman, COMC and ICF ------------------- -------------------- ---------------------------------
(3) 1998 180,262 25,000 -0-
------------------- -------------------- ---------------------------------
1997 96,400 -0- -0-
- -------------------------------------------------------------------------------------------------------------------------
William M Burns 1999 135,000 -0- 376,623
President and CEO, ICF ------------------- -------------------- ---------------------------------
1998 31,731 40,000 -0-
------------------- -------------------- ---------------------------------
1997 -0- -0- -0-
- -------------------------------------------------------------------------------------------------------------------------
Charles E. Lincoln 1999 135,000 -0- 376,623
President, CEO, COMC ------------------- -------------------- -------------------- ---------------------------------
1998 31,731 40,000 -0-
------------------- -------------------- -------------------- ---------------------------------
1997 -0- -0- -0-
- -------------------------------------------------------------------------------------------------------------------------
Christopher R. Smith 1999 44,135 -0- 2,463,896
Chief Financial ------------------- -------------------- -------------------- ---------------------------------
Officer, COMC, Exec. 1998 -0- -0- -0-
Vice President ICF ------------------- -------------------- -------------------- ---------------------------------
1997 -0- -0- -0-
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(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 us.
(3) Mr. Ackerman resigned as President in August 1998. Mr. Ackerman
resigned as Chief Executive Officer in October 1999. Since October
1999, Mr. Ackerman has acted solely as the Chairman of our Board of
Directors.
For discussion on options held and employment contracts for executive
officers, see Item 11 below.
Aggregate Option Exercises in 1999 and Fiscal Year-End Option Values
The following table sets forth information for our executive officers
who received salary compensation of more than $100,000 in 1999, relating to
option exercises in 1999 and the number and value of securities underlying
exercisable and unexercisable options held at December 31, 1999.
<TABLE>
<CAPTION>
Number of Securities
Underlying Value of Unexercised
Unexercised Options at In-The-Money Options at
Shares December 31, 1999 December 31, 1999(2)
Acquired Value --------------------------- ----------------------------
Name on Exercise Realized(1) Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
William M. Burns 0 0 376,623 0 $ 393,571 0
Charle E. Lincoln 0 0 376,623 0 $ 393,571 0
Christhopher R,. Smith 0 0 2,463,896 0 $2,574,777 0
</TABLE>
(1) Value realized reflects the fair market value of our common stock
underlying the option on the date of exercise minus the aggregate exercise
price of the option.
(2) Value of unexercised in-the-money options are based on a value of $1.125
per share, the fair market value of our common stock on December 31, 1999
as determined by our Board of Directors. Amounts reflected are based on the
value of $1.125 per share, minus the per share exercise price, multiplied
by the number of shares underlying the option.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The table below sets forth, as of December 31, 1999, information
regarding the beneficial ownership of our Common Stock based upon the most
recent information available to us for: (i) each person known by us to own
beneficially more than five (5%) percent of our outstanding Common Stock after
giving effect to all exercisable stock options and warrants, (ii) each of our
officers and directors and (iii) all of our officers and directors as a group.
<PAGE>
Unless otherwise indicated in the footnotes, the address for all parties is c/o
COMC, Inc., 400 N. Glenoaks Boulevard, Burbank, California 91502.
<TABLE>
<CAPTION>
Shares Owned Beneficially
and of Record (1)
----------------------------------------------
Name and Address No. of Shares % of Total
- ---------------- ------------- ----------
<S> <C> <C>
John Ackerman 3,333,252 16.9%
Charles Lincoln (2) 3,623,376 18.3%
William Burns (3) 3,623,376 18.3%
Christopher R. Smith (4) 3,478,896 17.7%
Marvin P. Loeb (5) 1,544,298 7.8%
Albert Vasquez 770,000 3.9%
One East Putnam Avenue
Greenwich, CT 06830
Donald Baker 20,000 --
All Five Percent Holders, Officers and Directors 16,393,198 83.2%
as a Group(7 persons)
</TABLE>
- ---------------------------------------------------
(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 3,246,753 shares of Common Stock held by a trust of which
Mr. Lincoln is a trustee and beneficiary, and includes 376,623 shares
of which Mr. Lincoln has a right to purchase upon exercise of options
that are currently exercisable.
(3) Consists of 3,246,753 shares of Common Stock held by a trust of which
Mr. Burns is a trustee and beneficiary, and includes 376,623 shares of
which Mr. Burns has a right to purchase upon exercise of options that
are currently exercisable.
(4) Consists of 200,000 shares of Common Stock owned directly by Mr. Smith,
2,463,896 shares of Common Stock that Mr. Smith has a right to purchase
upon exercise of options that are currently exercisable, and 815,000
shares which Mr. Smith has the power to vote pursuant to irrevocable
proxies granted to Mr. Smith by certain accredited investors.
(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 and by
Mr. Loeb as nominee for his children. Mr. Loeb disclaims beneficial
ownership in such shares.
Shares Available for Future Sale
In general, under Rule 144 as currently in effect, subject to the
satisfaction of certain other conditions, a person, including one of our
affiliates (or persons whose shares are aggregated with an affiliate of ours),
who has owned restricted shares of Common Stock beneficially for at least one
year is entitled to sell, within any three-month period, a number of shares that
does not exceed the greater of 1% of the total number of outstanding shares of
the same class or the average weekly trading volume of our Common Stock on all
exchanges and/or reported through the automated quotation system of a registered
securities association during the four calendar weeks preceding the date on
which notice of the sale is filed with the Commission. Sales under Rule 144 are
also subject to certain manner of sale provisions, notice requirements and the
availability of current public information about us. A person who has not been
one of our affiliates for at least the three months immediately preceding the
sale and who has
<PAGE>
beneficially owned shares of Common Stock for at least two years is entitled to
sell such shares under Rule 144 without regard to any of the limitations
described above.
All 14,058,900 shares of Common Stock held or beneficially owned by
Messrs. Ackerman, Burns, Lincoln, and Smith included herein are subject to a
Stockholders Agreements by and between us, Messrs. Ackerman and Smith, the Burns
Trust, and the Lincoln Trust, providing for among other things:
(A) the ability of the Burns Trust (3,246,753 shares directly;
3,623,376 shares on a fully diluted basis), the Lincoln Trust (3,246,753 shares
directly; 3,623,376 shares on a fully diluted basis), Mr. Smith (200,000 shares
directly; 2,663,896 shares on a fully diluted basis; voting proxy for an
additional 815,000 shares), and Mr. Ackerman (3,333,052 shares) to nominate one
member of the Board of Directors at each annual meeting and the four of them
together to nominate a fifth member of the Board of Directors;
(B) an agreement to vote for the election of those five
nominated directors; and,
(C) certain rights of first refusal on sales of Common Stock
by the parties to the agreement.
Transfer Agent
American Stock Transfer & Trust Company, 40 Wall Street, New York, New
York 10005, acts as Transfer Agent for our Common Stock.
Market for Our Securities
The Common Stock is currently included for quotation on the OTC
Bulletin Board under the symbol CINJ.
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain Relationships and Related Transactions
Pursuant to consulting, and purchase and sale agreements entered into
in January of 1998, John Ackerman, our Chairman, transferred 1,000,000 shares of
Common Stock and 500,000 shares of Common Stock at a price of $.01 per share
from his personal holdings to Albert Vasquez, one of our former directors, and
Ernie Mauritson, our former Chief Financial Officer, respectively. In April of
1999, the then Audit Committee of our Board of Directors has placed a value of
$.01 per share on these transactions deeming the sale to be at fair market value
and consequently the excess consideration zero.
In October of 1998, John Ackerman transferred 500,000 shares of Common
Stock to a former employee of our wholly owned subsidiary CCI in settlement of
an employment dispute between CCI and said employee arising in 1996 and 1997.
The shares were transferred at a value of $.01 per share, the fair market value
of CCI at the time of the dispute.
On August 17, 1998, we 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 our wholly owned
subsidiary, COMC Acquisition Corp., which we created for purposes of this
transaction (the "Merger"). Immediately following the Merger, we changed the
name of COMC Acquisition Corp. to ICF Communication Solutions, Inc. As
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. We also agreed
to use our best efforts to register the shares of Common Stock issued in
connection with the Merger.
Under the Agreement, and pursuant to separate two-year employment
agreements, Messrs. Lincoln and Burns were elected to our Board of Directors.
Mr. Lincoln was also elected as our President and as the Chief Executive Officer
of ICF. Mr. Burns was elected as our Chief Operations Officer and as the
President of ICF.
<PAGE>
Messrs. Burn's and Lincoln's employment agreements provided, among
other things, that they would each receive annual salaries of $135,000, as well
as annual bonuses at the discretion of the our Board of Directors. Messrs. Burns
and Lincoln have both recently changed their positions with us and ICF as a
result of a recent restructuring, which is described below.
In August of 1999, and as part of an overall restructuring of certain
of our outstanding debt obligations to Messrs. Burns and Lincoln, we entered
into a series of agreements related to such debt obligations. We also entered
into an employment agreement with Mr. Smith on August 10, 1999, which provided
for Mr. Smith to commence employment as our Chief Financial Officer on August
23, 1999, along with another group of related agreements. The agreements which
we entered into as of August 10, 1999, may be summarized as follows:
(i) two separate loan agreements, one between us and Mr.
Burns, and the other between us and Mr. Lincoln, pursuant to which we
restructured our debt obligations to Messrs. Burns and Lincoln and extended the
re-payment term of our debt obligations to August 10, 2002;
(ii) two separate promissory notes, pursuant to which we
memorialized our obligation, as restructured, to repay a total of $1,750,000 to
Mr. Burns and $1,750,000 to Mr. Lincoln;
(iii) an employment agreement with Mr. Burns, pursuant to
which we agreed to employ Mr. Burns for a term of two years as our Secretary and
Chief Operations Officer, and President of ICF;
(iv) an employment agreement with Mr. Lincoln, pursuant to
which we agreed to employ Mr. Lincoln for a term of two years as our President,
and CEO of ICF;
(v) nine separate Stock Purchase Agreements, pursuant to which
various accredited investors, including Mr. Smith, acquired a total of 1,015,000
shares of Common Stock from Mr. Ackerman;
(vi) a Contribution Agreement by and between us and Mr.
Ackerman pursuant to which Mr. Ackerman contributed 3,651,948 outstanding shares
of Common Stock to us in order to fund options we granted to Messrs. Burns,
Lincoln and Smith, and Gramercy National Partners, LLC ("Gramercy");
(vii) four separate stock option agreements, pursuant to which
we granted Messrs. Burns, Lincoln, Smith, and Gramercy options to acquire a
total of 3,651,948 shares of Common Stock;
(viii) a Registration Rights Agreement, pursuant to which we
granted certain registration rights to Messrs. Burns, Lincoln and Smith, and
certain other accredited investors with respect to their shares of Common Stock;
(ix) a Stockholders Agreement by and between us, William M.
Burns and Nellie J. Burns, Trustees of the Burns Family Trust (the "Burns
Trust"), Charles E. Lincoln and Carolyn D. Lincoln, Trustees of the Lincoln
Family Trust (the "Lincoln Trust"), and Messrs. Ackerman and Smith, providing
for, among other things:
(A) the ability of the Burns Trust (3,246,753 shares
directly; 3,623,376 shares on a fully diluted basis), the Lincoln Trust
(3,246,753 shares directly; 3,623,376 shares on a fully diluted basis,) and
Messrs. Ackerman (3,333,052 shares) and Smith (200,000 shares directly;
2,663,896 shares on a fully diluted basis; and voting proxy for an additional
815,000 shares) to nominate one member of our Board of Directors at each annual
meeting and the four of them together to nominate a fifth member of our Board of
Directors,
(B) an agreement to vote for the election of those
five nominated directors, and
(C) certain rights of first refusal on sales of
Common Stock by the parties to the agreement.
(x) an employment agreement with Mr. Smith, pursuant to
which we agreed to employ Mr. Smith for a term of two
years as our Chief Financial Officer and Executive Vice
President of ICF;
Based upon the above referenced transactions entered into on August 10,
1999, the total number of our shares issued and outstanding was 19,401,491. Mr.
Ackerman's stock ownership decreased from 8,000,200 to 3,333,252. Mr. Smith now
owns 200,000 shares and the option to purchase an additional 2,463,896 shares.
Other accredited investors purchased a total of 800,000 shares from Mr. Ackerman
at $.50 per share. Mr. Ackerman used a portion of the proceeds from such sales
to re-pay the balance of a loan that we made to Mr. Ackerman, which, at the time
of re-payment, equaled $114,281. Gramercy purchased 15,000 shares from Mr.
Ackerman at $.50 per share and acquired the option to purchase an additional
434,806 shares from us. Messrs. Burns and Lincoln were granted options to
purchase 376,623 shares each from us.
<PAGE>
Effective October 11, 1999, we instituted a number of organizational
and administrative changes involving certain key personnel. Specifically, John
Ackerman resigned from his position as our Chief Executive Officer and was
appointed the Chairman of the Board of ICF. Mr. Ackerman will continue to serve
as our Chairman of the Board. Charlie Lincoln was appointed our Chief Executive
Officer and will continue to serve as our President. Matt Burns was appointed as
the President and CEO of ICF. These changes were motivated by a desire to
streamline our management, as well as the management of ICF, and to allow these
key employees to focus on those areas where their strengths are greatest.
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
We filed reports on Form 8-K during the last quarter of the period
covered by this report as follows:
(1) Form 8-K - October 15, 1999. This Form 8-K reported the
restructuring of certain of our outstanding debt obligations to Messrs.
Burns & Lincoln and certain related transactions, all of which took place
in August of 1999.
Between December 31, 1999 and the date of this report, we filed the
following reports on Form 8-K:
(1) Form 8-K - February 25, 2000. This Form 8-K reported changes in
our accountants which took place in February, 2000.
(2) Form 8-K - March 29, 2000. This Form 8-K reported our retention of
BDO Seidman, LLP as our independent public accountants effective as of
March 28, 2000.
(3) Form 8-K - April 14, 2000. This Form 8-K reported that as a result
of recent changes in our independent public accountants, our financial
statements had not yet been completed, and therefore we would not be able
to fill our Form 10-KSB by April 14, 2000, as anticipated.
COMC, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
COMC, Inc. and Subsidiaries
================================================================================
Consolidated Financial Statements
Years Ended December 31, 1999, 1998, and 1997
<PAGE>
COMC, Inc. and Subsidiaries
Contents
================================================================================
Independent Auditors' Report 3
Financial Statements
Consolidated Balance Sheets 4 - 5
Consolidated Statements of Operations 6
Consolidated Statement of Shareholders' Equity 7
Consolidated Statements of Cash Flows 8
Notes to Consolidated Financial Statements 9 - 25
2
<PAGE>
Independent Auditors' Report
The Board of Directors and Shareholders of
COMC, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of COMC, Inc. and
subsidiaries as of December 31, 1999, and the related consolidated statements of
operations, shareholders' equity, and cash flows for the year then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform our audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated 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 audit provides 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, 1999, and the results of their
consolidated operations and cash flows for the year then ended, in conformity
with generally accepted accounting principles.
BDO Seidman LLP
San Jose, California
April 2, 2000
3
<PAGE>
COMC, Inc. and Subsidiaries
Consolidated Balance Sheets
================================================================================
<TABLE>
<CAPTION>
December 31, 1999 1998
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current:
Cash and cash equivalents (Note 11) $ 385,100 $ 1,018,500
Accounts receivable, less allowance for doubtful
accounts of $273,100 and $276,900, respectively
(Notes 4, 11, and 12) 4,521,400 3,387,100
Inventories (Note 4) 194,000 124,200
Loans receivable from officer - 114,300
Prepaid expenses and other current assets 34,900 195,200
Deferred income taxes (Note 9) 213,500 152,600
- ------------------------------------------------------------------------------------------
Total Current Assets 5,348,900 4,991,900
Property and Equipment, net (Notes 3 and 4) 561,200 715,800
Goodwill, net (Note 2) - 10,938,500
Other Assets (Note 7) 368,900 35,900
- ------------------------------------------------------------------------------------------
$ 6,279,000 $ 16,682,100
==========================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
COMC, Inc. and Subsidiaries
Consolidated Balance Sheets
================================================================================
<TABLE>
<CAPTION>
December 31, 1999 1998
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Liabilities and Shareholders' Equity
Current Liabilities:
Bank borrowings (Note 4) $ 879,200 $ 367,200
Accounts payable 648,000 676,100
Accrued expenses (Note 5) 572,800 378,800
Current portion of long-term debt (Note 4) 10,500 60,500
Notes payable to shareholders (Notes 2 and 7) - 3,500,000
Accrued interest due related party 30,100 77,400
Income taxes payable (Note 9) 270,000 1,045,300
Other current liabilities 19,800 171,000
- ---------------------------------------------------------------------------------------------------------
Total Current Liabilities 2,430,400 6,276,300
Long-term Debt, less current portion (Note 4) 20,400 -
Related Party Notes Payable (Note 7) 3,500,000 96,300
Deferred Income Taxes (Note 9) 89,500 73,900
- ---------------------------------------------------------------------------------------------------------
Total Liabilities 6,040,300 6,446,500
- ---------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Notes 4, 6, 8, and 10)
Shareholders' Equity (Notes 10 and 11):
Common stock, $.01 par value; 40,000,000 shares authorized;
19,401,491 shares and 20,054,946 issued and outstanding,
respectively 194,000 200,500
Additional paid-in capital 12,918,100 10,558,500
Accumulated deficit (11,093,600) (523,400)
Treasury stock at cost; 3,564,987 and no shares, respectively (1,779,800) -
- ---------------------------------------------------------------------------------------------------------
Total Shareholder's Equity 238,700 10,235,600
- ---------------------------------------------------------------------------------------------------------
$ 6,279,000 $ 16,682,100
=========================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
COMC, Inc. and Subsidiaries
Consolidated Statements of Operations
================================================================================
<TABLE>
<CAPTION>
Years Ended December 31, 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues (Note 12):
Data and voice services $ 16,266,500 $ 6,037,200 $ 2,650,400
Recruitment services 4,829,000 1,890,000 -
- ---------------------------------------------------------------------------------------------------------------
21,095,500 7,927,200 2,650,400
Cost of Revenues:
Data and voice services 10,533,700 3,695,000 1,579,100
Recruitment services 3,456,400 1,316,500 -
- ---------------------------------------------------------------------------------------------------------------
13,990,100 5,011,500 1,579,100
- ---------------------------------------------------------------------------------------------------------------
Gross Profit 7,105,400 2,915,700 1,071,300
- ---------------------------------------------------------------------------------------------------------------
Operating Expenses:
Selling, general, and administrative 5,676,400 2,644,300 1,167,100
Noncash expenses:
Impairment of long-term asset (Note 2) 10,382,300 - -
Amortization of goodwill 556,200 185,300 -
Depreciation and amortization 207,500 95,900 12,800
- ---------------------------------------------------------------------------------------------------------------
16,822,400 2,925,500 1,179,900
- ---------------------------------------------------------------------------------------------------------------
Loss From Operations (9,717,000) (9,800) (108,600)
- ---------------------------------------------------------------------------------------------------------------
Other Income (Expense):
Interest income 9,000 9,400 3,500
Interest expense (Note 7) (221,900) - -
Interest expense, related party (397,400) (165,600) (50,400)
Other (18,200) (47,700) 9,300
- ---------------------------------------------------------------------------------------------------------------
(628,500) (203,900) (37,600)
- ---------------------------------------------------------------------------------------------------------------
Loss Before Provision for Income Taxes (10,345,500) (213,700) (146,200)
Provision for Income Taxes (Note 9) (224,700) (117,200) -
- ---------------------------------------------------------------------------------------------------------------
Net Loss $ (10,570,200) $ (330,900) $ (146,200)
===============================================================================================================
Basic and Diluted Loss per Common Share $(0.55) $(.02) $(.02)
===============================================================================================================
Basic and Diluted Weighted-Average Common Shares
Outstanding 19,153,992 15,011,800 12,498,107
===============================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
COMC, Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity
================================================================================
<TABLE>
<CAPTION>
Common Stock Additional
---------------------------- Paid-in Accumulated
Shares Amount Capital Deficit
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balances, January 1, 1997 12,498,107 $ 125,000 $ 210,000 $ (46,300)
Net loss - - - (146,200)
- ------------------------------------------------------------------------------------------------------------
Balances, December 31, 1997 12,498,107 125,000 210,000 (192,500)
Common stock issued in purchase
business combination (Note 2) 6,493,506 64,900 8,935,100 -
Issuance of common stock 1,063,333 10,600 1,413,400 -
Net loss - - - (330,900)
- ------------------------------------------------------------------------------------------------------------
Balances, December 31, 1998 20,054,946 200,500 10,558,500 (523,400)
Treasury stock - - 1,826,000 -
Proceeds from exercise of stock
options - - (38,800) -
Compensation expense related to options
granted - - 204,400 -
Interest related to options granted - - 361,500 -
Cancellation of shares outstanding (653,455) (6,500) 6,500 -
Net loss - - - (10,570,200)
- ------------------------------------------------------------------------------------------------------------
Balances, December 31, 1999 19,401,491 $ 194,000 $ 12,918,100 $ (11,093,600)
============================================================================================================
<CAPTION>
Treasury Stock
-------------------------------------
Shares Amount Total
---------------------------------------------------------
<S> <C> <C> <C>
Balances, January 1, 1997 - $ - $ 288,700
Net loss - - (146,200)
- ---------------------------------------------------------------------------------------------------
Balances, December 31, 1997 - - 142,500
Common stock issued in purchase
business combination (Note 2) - - 9,000,000
Issuance of common stock - - 1,424,000
Net loss - - (330,900)
- ---------------------------------------------------------------------------------------------------
Balances, December 31, 1998 - - 10,235,600
Treasury stock (3,651,948) (1,826,000) -
Proceeds from exercise of stock
options 86,961 46,200 7,400
Compensation expense related to options
granted - - 204,400
Interest related to options granted - - 361,500
Cancellation of shares outstanding - - -
Net loss - - (10,570,200)
- ---------------------------------------------------------------------------------------------------
Balances, December 31, 1999 (3,564,987) $ (1,779,800) 238,700
===================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE>
COMC, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Note 13)
================================================================================
<TABLE>
<CAPTION>
Years Ended December 31, 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net Loss $ (10,570,200) $ (330,900) $ (146,300)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Impairment of long-term assets 10,382,300 - -
Stock-based compensation 204,400 - -
Amortization of deferred finance charge 50,100 - -
Amortization of goodwill 556,200 185,300 -
Depreciation 183,200 95,900 12,800
Allowance for doubtful accounts (3,800) - -
Loss on disposition of capital equipment - 6,100 -
Deferred income tax (45,300) 57,600 -
Changes in operating assets and liabilities,
net of business acquisition:
Accounts receivable (1,130,500) 348,300 378,000
Other receivable (5,400) - -
Inventories (69,800) 118,400 (9,800)
Refundable income tax - (41,600) -
Prepaid expenses and other current assets 174,100 58,200 (15,100)
Accounts payable (28,100) (306,000) 4,000
Accrued expenses 194,000
Income taxes payable (775,300) (193,200) (2,000)
Customer's deposits - (207,900) 207,900
Other current liabilities (151,200) - -
Accrued interest due related party (47,300) - -
- -------------------------------------------------------------------------------------------------------------
Net Cash Provided By (Used in) Operating Activities (1,082,600) (209,800) 429,500
- -------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities:
Cash acquired from purchase business combination - 1,149,300 -
Cash paid to selling stockholders of ICF - (1,500,000) -
Expenses related to purchase of ICF - (183,600) -
Repayment of loan receivable from shareholder 114,300 - -
Deposits - 18,000 -
Loans receivable from officer - (69,000) (43,900)
Purchase of property and equipment (28,600) (52,800) (7,700)
- -------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used In) Investing Activities 85,700 (638,100) (51,600)
- -------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities
Sale of common stock, net of offering costs 7,400 1,424,000 -
Bank overdraft (69,400) 69,400 -
Advances from bank loans and other credit
institutions 6,713,500 339,800 327,100
Repayments on bank loans and other credit
institutions (6,132,100) (51,900) (677,100)
Payment for long-term debt (125,900) - -
- -------------------------------------------------------------------------------------------------------------
Net Cash Provided By (Used in) Financing Activities 393,500 1,781,300 (350,000)
- -------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents (633,400) 933,400 27,900
Cash and Cash Equivalents, beginning of period 1,018,500 85,100 57,200
- -------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents, end of period 385,100 1,018,500 85,100
- -------------------------------------------------------------------------------------------------------------
Cash Paid For:
Interest $ 397,300 $ 88,500 $ 52,600
Income taxes $ 1,004,100 $ 334,300 $ 2,000
Non-Cash Investing and Financing Activities:
Common stock and notes payable issued in purchase
of ICF $ 361,500 $ 12,500,000 $ -
Options issued for debt fees $ 1,826,000 $ - $ -
Common stock contributed to the Company $ - $ - $ -
=============================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
8
<PAGE>
COMC, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
1. Summary of The Company
Accounting
Policies COMC, Inc. and Subsidiaries (the Company) is a
technology service company in the
telecommunications industry with a rapidly
expanding national geographic service coverage
area. The Company designs, implements, supports,
and manages LAN/WAN computer network systems voice
communication network systems, and premise wiring
for both data and voice. In addition, the Company
provides customers with permanent and temporary
technical professional recruitment and placement
services to fill their internal staffing needs.
Principles of Consolidation
The accompanying consolidated financial statements
include the accounts of the Company and its wholly
owned subsidiaries, Complete Communications, Inc.
(CCI) and ICF Communication Solutions, Inc. (ICF).
All significant intercompany accounts and
transactions have been eliminated.
Uses of Estimates
The preparation of financial statements in
conformity with generally accepted accounting
principles requires management to make estimates
and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial
statements, and the reported amounts of revenues
and expenses during the reporting period. Actual
results could differ from those estimates.
Cash and 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 costs
(determined on a first-in, first-out) or market.
9
<PAGE>
COMC, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
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.
Long-Live Assets
Long-lived assets are assessed for possible
impairment whenever events or changes in
circumstances indicate that the carrying amounts
may not be recoverable, or whenever management has
committed to a plan to dispose of the assets. Such
assets are carried at the lower of book value or
fair value as estimated by management based on
appraisals, current market value, comparable sales
value, and undiscounted future cash flows as
appropriate. Assets to be held and used affected by
such impairment loss are depreciated or amortized
at their new carrying amount over the remaining
estimated life; assets to be sold or otherwise
disposed of are not subject to further depreciation
or amortization.
Revenue Recognition
Revenues and related costs for short-term 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. As of December 31, 1999, all such
contracts were short-term.
Advertising Costs
The cost of advertising is expensed as incurred.
Advertising costs for the years ended December 31,
1999, 1998, and 1997, were approximately $24,300,
$39,800, and $26,900, respectively.
10
<PAGE>
COMC, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Income Taxes
Income taxes are calculated using the liability
method of accounting for income taxes specified by
SFAS No. 109, Accounting for Income Taxes. Deferred
income taxes are recognized for the tax
consequences of temporary differences between the
financial statements and income tax bases of
assets, liabilities and carryforwards using enacted
tax rates. Valuation allowances are established
when necessary, to reduce deferred tax assets to
the amount expected to be realized. Realization is
dependent upon future pre-tax earnings, the
reversal of temporary differences between book and
tax income, and the expected tax rates in effect in
future periods.
Fair Value of Financial Instruments
The following methods and assumptions were used by
the Company in estimating its fair value
disclosures for financial instruments:
Cash and Cash Equivalents
The carrying amount reported on the balance
sheet for cash and cash equivalents
approximates fair value.
Short-Term Debt
The fair value of short-term debt is estimated
based on current interest notes available to
the Company for debt instruments with similar
terms and maturities.
Long-Term Debt
As of December 31, 1999 and 1998, the fair
values of the Company's financial instruments
approximate their historical carrying amounts.
11
<PAGE>
COMC, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Stock-Based Compensation
SFAS No. 123, Accounting for Stock-Based
Compensation, encourages entities to recognize
compensation costs for stock-based employee
compensation plans using the fair value-based
method of accounting defined in SFAS No. 123, but
allows for the continued use of the intrinsic value
based method of accounting prescribed by Accounting
Principles Board (APB) Opinion No. 25, Accounting
for Stock Issued to Employees. The Company
continues to use the accounting prescribed by APB
Opinion No. 25 and as such is required to disclose
pro forma net income and earnings per share as if
the fair value-based method of accounting had been
applied.
Earnings Per Common Share
In February 1997, the FASB issued SFAS No. 128,
Earnings Per Share, which became effective December
28, 1997. Conforming to SFAS No. 128, the Company
changed its method of computing earnings per share
and restated all prior periods included in the
financial statements. Under SFAS No. 128, the
dilutive effect of stock options is excluded from
the calculation of basic earnings per share. The
number of potential common shares not included in
diluted earning per share, due to their being
antidilutive was 3,564,987 for the year ended
December 31, 1999.
Comprehensive Income
In June 1997, the FASB issued SFAS No. 130,
Reporting Comprehensive Income. SFAS No. 130
establishes standards for reporting comprehensive
income and its components in a financial statement
that is displayed with the same prominence as other
financial statements. Comprehensive income, as
defined, includes all changes in equity (net
assets) during the period from non-owner sources.
Examples of items to be included in comprehensive
income, which are excluded from net income, include
foreign currency translation adjustments and
unrealizable gain/loss of available-for-sate
securities. The individual components of
comprehensive income (loss) are reflected in the
statements of shareholders' equity. As of December
31, 1999, the Company did not have any accumulated
other comprehensive income loss.
12
<PAGE>
COMC, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Adoption of New Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging
Activities. SFAS No. 133 requires companies to
recognize all derivatives contracts as either
assets or liabilities on the balance sheet and to
measure them at fair value. If certain conditions
are met, a derivative may be specifically
designated as a hedge, the objective of which is to
match the timing of gain or loss recognition on the
hedging derivative with the recognition of (i) the
changes in the fair value of the hedged asset or
liability that are attributable to the hedged risk
or (ii) the earnings effect of the hedged
forecasted transaction. For a derivative not
designated as a hedging instrument, the gain or
loss is recognized as income in the period of
change. In June 1999, the FASB issued SFAS No. 137,
Accounting for Derivative Instruments and Hedging
Activities - Deferral of Effective Date of FASB
Statement No. 133, which amends SFAS No. 133 to be
effective for all fiscal quarters of all fiscal
years beginning after June 15, 2000.
Historically, the Company has not entered into
derivative contracts either to hedge existing risk
or for speculative purposes. Accordingly, the
Company does not expect adoption of the new
standard to have a material impact on the Company's
results from operations, financial position or cash
flows.
Reclassifications
Certain amounts in the 1998 and 1997 consolidated
financial statements have been reclassified to
conform with the 1999 presentation.
13
<PAGE>
COMC, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
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, 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 approximately $14,000,000, as
follows: $1,500,000 in cash at the closing of the
transaction; $3,500,000 in promissory notes due and
payable throughout 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 various payments of the promissory
notes in 1999, and restructured the notes (see Note
7).
The above merger was accounted for using the
purchase method of accounting. The new balance
sheet of ICF as of August 31, 1998 was as follows:
---------------------------------------------------
Cash acquired $ 1,149,300
Current assets other than cash 3,823,700
Property and equipment 655,000
Other assets 130,000
Current liabilities (2,624,200)
---------------------------------------------------
Net asset acquired 3,133,800
---------------------------------------------------
Goodwill 11,123,800
---------------------------------------------------
Total consideration $ 14,257,600
===================================================
14
<PAGE>
COMC, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Unaudited pro forma consolidated results of
operations of the Company as if the purchase had
occurred as of January 1, 1998 is as follows. The
unaudited pro forma results are not necessarily
indicative of the results which would have been
obtained had the acquisition actually occurred as
of the date indicated nor are they indicative of
future results.
<TABLE>
<CAPTION>
1998 1997
-------------------------------------------------------------------
<S> <C> <C>
Revenues $ 19,702,100 $ 17,929,300
Net (loss) income (470,800) 282,600
Basic and diluted (loss) income per
share $ (0.02) $ 0.02
-------------------------------------------------------------------
Weighted-average number of common
shares outstanding 15,011,800 12,498,107
===================================================================
</TABLE>
Goodwill was being amortized on a straight-line
basis over a twenty-year period, with the Company
periodically reviewing goodwill to assess its
recoverability.
As required by Statement of Financial Accounting
Standards (SFAS) No. 121, the Company recorded in
December 1999 a loss on the long-lived asset of
goodwill when the events and circumstances
indicated the asset was impaired. The Company
estimated the fair value of this asset based on
comparable assets within the industry, the
Company's economic outlook and discounted future
cash flows. The impairment resulted in a charge to
earnings of $10,382,300 in 1999.
15
<PAGE>
COMC, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
3. Property and Property and equipment consisted of the following
Equipment as of December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
--------------------------------------------------------------------
<S> <C> <C>
Furniture and office equipment $ 445,800 409,700
Vehicles 331,700 359,800
Computer equipment 285,500 274,900
Software 53,000 52,900
Leasehold improvements 44,800 36,400
Other 8,300 6,800
--------------------------------------------------------------------
1,169,100 1,140,500
Less accumulated depreciation and
amortization 607,900 424,700
--------------------------------------------------------------------
$ 561,200 $ 715,800
====================================================================
</TABLE>
4. Financings Line of Credit
The Company has a $3,000,000 revolving line of
credit with a bank that expires in September 2001.
The borrowings under the line of credit bear
interest at the bank's prime rate plus 2% (10.5% as
of December 31, 1999) and is secured by the
Company's accounts receivable, inventories, and
property and equipment. As of December 31, 1999,
there was $2,120,800 available under the line of
credit.
Debt Financing
During 1998, the Company acquired three vehicles
for a total purchase price of $44,000 under a
financing arrangement with the vehicles as
security. The loans bear interest at 9.7% and
require monthly payments of $1,100 for 48 months.
16
<PAGE>
COMC, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Annual maturities of the debt financing discussed
above for years ending December 31, are as follows:
2000 $ 10,500
2001 11,200
2002 9,200
---------------------------------------------------
$ 30,900
===================================================
5. Accrued Accrued expenses consisted of the following as of
Expenses December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
--------------------------------------------------------------------
<S> <C> <C>
Accrued payroll and related expenses $ 317,800 253,200
Accrued vacation 137,600 81,700
Accrued commissions 49,000 43,900
Other 68,400 -
--------------------------------------------------------------------
$ 572,800 $ 378,800
====================================================================
</TABLE>
6. Commitments Operating Leases
and
Contingencies The Company leases certain offices under operating
leases expiring on various dates through 2002.
Total rent expense charged to operations was
$255,800, $247,700, and $45,600 in 1999, 1998, and
1997, respectively. As of December 31, 1999, the
minimum future rental commitments under
non-cancelable operating leases payable over the
remaining terms of the operating leases are:
Year ending December 31, Amount
---------------------------------------------------
2000 $ 159,700
2001 133,300
2002 116,800
2003 12,700
---------------------------------------------------
$ 422,500
===================================================
17
<PAGE>
COMC, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Employment Agreements
In 1998, the Company entered into two-year
employment agreements with two employees 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.
In 1999, the Company entered into a two-year
employment agreement with its Chief Financial
Officer, providing among other things, an annual
salary of $135,000, 2,463,896 options to purchase
common stock (Note 9), as well as annual bonuses at
the discretion of the Company's Board of Directors.
7. Transactions In August 1998, the Company entered into a series
With Related of six notes aggregating $3,500,000 with the
Parties Company's President and the Company's Chief
Operating Officer as part of the Merger discussed
in Note 2. These notes bore interest at 10%, and
had original maturity dates of either January 1999
or August 1999. In 1999, the Company canceled the
aforementioned notes and issued two unsecured 10%
notes payable for $1,750,000 each to the President
and the Chief Operating Officer. Under the new
notes, the term of the notes was extended for two
additional years (due August 2002), payable in a
lump-sum amount at the end, with interest payable
monthly. Should the Company default on the new
notes or their interest payments, the noteholders
have the right to convert the notes to common stock
of the Company at $0.50 per share.
Interest expense associated with the above notes
aggregated $347,159 and $147,390, 1999 and 1998,
respectively. As of December 31, 1999 and 1998,
accrued interest on these notes aggregated $30,138
and $16,474, respectively.
In connection with the restructuring of the notes,
the noteholders received 753,246 options (Note 9)
to purchase common stock. These options were issued
at below fair market value resulting in a deferred
finance charge of approximately $361,600, which is
included in other assets. The deferred finance
charge is being amortized as interest expense over
three years, with amortization expense for 1999
being $50,200.
18
<PAGE>
COMC, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
8. Defined In April 1997, the Company amended its defined
Contribution contribution plan (the Plan) such that all
Plan employees were eligible to participate in the Plan
after completing three months of service 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, 1999, 1998, and 1997.
9. Income Taxes 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 $41,200.
This was included in the 1998 current income tax
expense.
The components of income taxes were as follows for
the years ended December 31, 1999:
1999 Current Deferred Total
--------------------------------------------------
State $ 56,000 $ (3,000) $ 53,000
Federal 214,000 (42,300) 171,700
--------------------------------------------------
$ 270,000 $ (45,300) $ 224,700
==================================================
1998 Current Deferred Total
--------------------------------------------------
State $ 29,000 $ (1,100) $ 27,900
Federal 30,600 58,700 89,300
--------------------------------------------------
$ 59,600 $ 57,600 $ 117,200
==================================================
19
<PAGE>
COMC, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
The components of deferred tax assets and
liabilities were as follows at December 31, 1999
and 1998:
<TABLE>
<CAPTION>
1999 1998
----------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets
Net operating loss carryforwards $ - $ 20,900
State income taxes 19,000 6,300
Allowance for uncollectable accounts 109,000 108,800
Accrued vacation 66,000 14,200
Others 19,000 2,400
----------------------------------------------------------------------
Gross deferred tax asset 213,000 152,600
Deferred tax liability:
Depreciation 89,000 73,900
----------------------------------------------------------------------
$ 124,000 $ 78,700
======================================================================
</TABLE>
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.
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:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------------------------------------------------------
<S> <C> <C> <C>
Expected statutory tax expense $ (3,517,500) $ (72,600) $ (49,800)
Net tax effect of permanent
differences 4,347,800 95,600 11,200
State income taxes, net of federal
tax effect (620,800) 18,400 -
Additional CCI's income tax expense
due to change in accounting
method for income tax purposes - 87,600 -
Valuation allowance - - 38,600
Others 15,200 (11,800) -
--------------------------------------------------------------------------
Income taxes $ 224,700 $ 117,200 $ -
==========================================================================
</TABLE>
20
<PAGE>
COMC, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
In June 1998, ICF, the Company's wholly owned
subsidiary, agreed to certain 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 $1,114,000. At December 31, 1997, ICF had
income tax liabilities for those years of
$1,410,032 to the IRS and $376,500 to the State. At
December 31, 1998, ICF had income tax liabilities
for those years of $786,400 to the IRS and $217,700
to the State, which were paid in 1999.
10. Shareholders' Common Stock
Equity
In August 1999, the Company's Chairman of the Board
and principal stockholder contributed back to the
Company 3,651,948 shares of his common stock
holdings. These shares are to be reserved for
issuance to key employees under the Company' stock
option plan. At the time of their contribution to
the Company, the shares had a fair market value of
$0.50 per share. In the accompanying consolidated
financial statements, these shares have been
reflected as treasury stock. In 1999, 86,961 of
these shares were issued from the exercise of
vested stock options.
In 1996, the Company verbally granted a consultant
approximately 625,000 shares of common stock, at
the then fair market value of $0.01 per share, for
services rendered. Though recorded on the Company's
books of record, these shares were never issued. As
the statute of limitations for a verbal commitment
has run on the issuance of these shares, and no
claim has been made for such shares, the Company
reflected the cancellation of these shares on its
books of record as of December 1999.
During 1998, the Company sold 103,333 Units in a
private placement. 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 in 1998, the Company issued 6,493,506
common shares valued at $9,000,000 to the selling
stockholders of ICF (Note 2).
21
<PAGE>
COMC, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
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
acquisition discussed in Note 2 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 recorded with 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 his common stock to a former director of the
Company and 500,000 shares of his 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.
Stock Purchase Warrants
As of December 31, 1999, the following common stock
warrants were issued and outstanding:
<TABLE>
<CAPTION>
Shares Subject Exercise Expiration
Issued with respect to: to Warrant Price Date
------------------------------------------------------------------
<S> <C> <C> <C>
Financing 206,666 $ 2.00 2003
Financing 100,000 $ 1.50 2003
</TABLE>
Stock Option Plan
In November 1999, the Company adopted a Stock
Option Plan (The Plan). The Plan is restricted to
employees, officers, and consultants of the
Company. Options granted under the Plan vest over
five years and are exercisable over ten years.
Non-statutory options are granted at prices not
less than 85% of the estimated fair value of the
stock on the date of grant as determined by the
Board of Directors. Incentive options are granted
at prices not less than 100% of the estimated fair
value of stock on the date of grant. However,
options granted to shareholders who own greater
than 10% of the outstanding stock are established
at no less than 110% of the estimated fair value of
the stock on the date of grant.
22
<PAGE>
COMC, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
A summary of the status of the Company's
outstanding stock options as of December 31, 1999,
and changes during the year then ended is presented
in the following table:
<TABLE>
<CAPTION>
Options Outstanding
------------------------------------------
Shares Under Wtd. Avg.
Shares the Plan Ex. Price
------------------------------------------
<S> <C> <C> <C>
Beginning balances - - $ -
Granted - 240,000 0.08
Granted 3,651,948 - 0.50
Exercised (86,961) - 0.08
-------------------------------------------------------------------
Ending balances 3,564,987 240,000 0.10
===================================================================
Exercisable at year-end 3,564,987
===================================================================
Weighted-average fair
value of options granted
during the period: 0.48
==========
</TABLE>
Options granted under the Plan were for employees
of the Company, whereas, the balance of the options
granted were pre-plan and issued to officers and
directors of the Company.
The following table summarizes information about
stock options outstanding as of December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------- -------------------------------
Wtd. Avg.
Number Remaining Wtd. Avg. Number
Range of Outstanding at Contractual Exercise Exercisable Wtd. Avg.
Exercise Prices 12/31/99 Life Price at 12/31/99 Exercise Price
-------------- -------------- -------------- ------------ ------------- -----------------
<S> <C> <C> <C> <C> <C>
$ 0.01-0.10 240,000 9.8 years $ 0.08 - $ 0.08
$ 0.11-0.50 3,564,987 9.9 years $ 0.50 3,564,987 $ 0.50
-------------- --------------------------
3,804,987 $ 0.10 3,564,987 $ 0.50
============== ==========================
</TABLE>
23
<PAGE>
COMC, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
In connection with the grant of certain warrants
and stock options in 1999, the Company recorded
consulting expense of $204,400, representing the
difference between the deemed fair market value and
the exercise price of the stock options as
determined by the Board of Directors on the date of
grant. The deferred interest is being amortized
over three years, and in 1999, the Company
recognized $50,200 of interest expense associated
with these options.
SFAS No. 123, Accounting for Stock-Based
Compensation, requires the Company to provide pro
forma information regarding net (loss) income and
(loss) earnings per share as if compensation cost
for the Company's stock option plan had been
determined in accordance with the fair value based
method prescribed in SFAS No.123. The Company
estimates the fair value of stock options at the
grant date by using the Black-Scholes option
pricing-model with the following weighted average
assumptions used for grants in 1999: dividend yield
of 0; expected volatility of 130%; risk-free
interest rate of 5.6%; and expected lives of years
for all plan options. The Company adopted its Stock
Option Plan in 1999 and consequently had no stock
options granted in 1998 or 1997. Under the
accounting provisions of SFAS No. 123, the
Company's pro forma net loss and the basic and
diluted net loss per common share would have been
adjusted to the pro forma amounts below.
<TABLE>
<CAPTION>
1999
------------------------------------------------------------------
<S> <C>
Net loss:
As reported $ (10,570,200)
Pro forma $ (10,811,500)
Basic and diluted earnings (loss) per share:
As reported $ (0.55)
Pro forma $ (0.56)
</TABLE>
24
<PAGE>
COMC, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
11. Concentration of Financial instruments, which potentially subject
Credit Risk the Company to concentration of credit risk,
consist principally of cash and cash equivalents,
and trade receivables. The Company places its cash
and cash equivalents with high quality financial
institutions and, by policy, limits the amounts of
credit exposure to any one financial institution.
The Company's accounts receivable are derived from
many customers in various industries. The Company
believes any risk of accounting loss is
significantly reduced due to the diversity of its
end-customers and geographic sales areas. The
Company performs credit evaluation of its
customers' financial condition whenever necessary,
and generally does not require cash collateral or
other security to support customer receivables.
12. Major For the ended December 31, 1999, two customers
Customers accounted for approximately 33% and 26% of total
revenues, respectively, with related accounts
receivable as of December 31, 1999 of $2,105,600
and $451,900, respectively.
For the year ended December 31, 1998, four
customers accounted for approximately 38%, 22%,
11%, and 11% of total revenues, respectively.
For the year ended December 31, 1997, two customers
accounted for approximately 33% and 17% of total
revenues.
25
<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: April 15, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below as of April 28, 2000 by the following persons
on behalf of Registrant and in the capacities indicated.
/s/ John Ackerman
----------------------------------------
John Ackerman, Chairman
/s/ Donald Baker
----------------------------------------
Don Baker, Director
/s/ Matt Burns
----------------------------------------
Matt Burns, Director
/s/ Charles Lincoln
----------------------------------------
Charles Lincoln, Director
/s/ Christopher Smith
----------------------------------------
Christopher Smith, 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)
10.01 Loan Agreement between COMC and Mr. Burns dated August 10, 1999.(5)
10.02 Loan Agreement between COMC and Mr. Lincoln dated August 10, 1999.(5)
10.03 Stock Purchase Agreement by and among COMC, Mr. Ackerman and Mr. Smith
dated August 10, 1999.(5)
10.04 Contributing Agreement by and between COMC and Mr. Ackerman dated
August 10, 1999.(5)
10.05 Stock Option Agreement by and between COMC and Mr. Burns dated August
10, 1999.(5)
10.06 Stock Option Agreement by and between COMC and Mr. Lincoln dated August
10, 1999.(5)
10.07 Stock Option Agreement by and between COMC and Mr. Smith dated August
10, 1999.(5)
10.08 Stock Option Agreement by and between COMC and Gramercy dated August
10, 1999.(5)
10.09 Registration Rights Agreement by and between COMC, Messrs. Burns,
Lincoln and Smith dated August 10, 1999.(5)
10.10 Stockholders Agreement by and between COMC, the Burns Trust, the
Lincoln Trust and Messrs. Ackerman and Smith dated August 10, 1999.(5)
10.11 COMC 1999 Stock Option Plan and form of Incentive Stock Option
Agreement.
16.01 Letter dated February 23, 2000 from Hollander, Lermer and Co. LLP to
the office of the Chief Accountant, Division of Corporation Finance.(6)
16.02 Letter dated February 21, 2000 from Deloitte and Touche LLP to the
Commission.(6)
- ----------------------------
(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.
(5) Incorporation by reference to the Current Report on Form 8-K dated
October 15, 1999.
(6) Incorporation by reference to the Current Report on Form 8-K dated
February 25, 2000.
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
COMC, Inc.
We have audited the accompanying consolidated balance sheet of COMC, Inc. and
subsidiaries as of December 31, 1998, and the related consolidated statements
of operations, stockholders' equity, and cash flows for each of the years in the
two 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 the consolidated results of
their operations and their cash flows for each of the years in the two years
then ended, in conformity with generally accepted accounting principles.
/s/ Hollander, Lumar & Co. LLP
HOLLANDER, LUMAR & CO. LLP
Los Angeles, California
February 26, 1999
