-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OVXw1jYpRclfdE1K2dB1i8gHceHs8QitkAKG4GbucHmO3v7Gbie1DNNMXEO2WxQt TTGPWXRQSLUX2J1tKW3svg== 0001015402-00-000988.txt : 20000417 0001015402-00-000988.hdr.sgml : 20000417 ACCESSION NUMBER: 0001015402-00-000988 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000414 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMTECH CONSOLIDATION GROUP INC/DE CENTRAL INDEX KEY: 0001086474 STANDARD INDUSTRIAL CLASSIFICATION: BLANK CHECKS [6770] IRS NUMBER: 760544385 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 000-26111 FILM NUMBER: 601597 BUSINESS ADDRESS: STREET 1: 10497 TOWN & COUNTRY WAY STREET 2: SUITE 460 CITY: HOUSTON STATE: TX ZIP: 77024 BUSINESS PHONE: 7135542244 MAIL ADDRESS: STREET 1: 10497 TOWN & COUNTRY WAY STREET 2: SUITE 460 CITY: HOUSTON STATE: TX ZIP: 77024 10KSB 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-KSB ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 Commission File No. 000-26111 COMTECH CONSOLIDATION GROUP, INC. --------------------------------- (Name of small business issuer in its charter) Delaware 76-0544385 -------- ---------- (State or jurisdiction of incorporation (I.R.S. Employer or organization) Identification No.) 10497 Town & Country Way, Suite 460 Houston, TX 77024 713-554-2244 (Address, including zip code and telephone number, including area code, of registrant's executive offices) Securities registered under Section 12 (b) of the Exchange Act: NONE Securities registered under to Section 12(g) of the Exchange Act: Common Stock (Title of class) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Company was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X NO --- --- Check if disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to be best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. X --- Issuer's revenues for its most recent fiscal year: $9,452,081 ---------- State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked price of such stock, as of a specified date within the past 60 days: As of February 16, 2000: $12,821,248 ----------- State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: As of February 16, 2000, they were 22,105,600 shares of the Company's common stock issued and outstanding. Documents Incorporated by Reference: None 2 TABLE OF CONTENTS FORM 10 - KSB ANNUAL REPORT COMTECH CONSOLIDATION GROUP, INC. PAGE ---- Facing Page Index PART I. Item 1. Description of Business 4 Item 2. Description of Property 5 Item 3. Legal Proceedings 6 Item 4. Submission of Matters to a Vote of Security Holders 7 PART II Item 5. Market for the Registrant's Common Equity And Related Stockholder Matters 8 Item 6. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Item 7. Financial Statements 11 Item 8. Changes in and Disagreements on Accounting and Financial Disclosures 11 PART III Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16 (a) of The Exchange Act 12 Item 10. Executive Compensation 13 Item 11. Security Ownership of Certain Beneficial Owners and Management 14 Item 12. Certain Relationships and Related Transactions 15 PART IV Item 13. Exhibits and Reports of Form 8-K 16 SIGNATURES 35 3 PART I ITEM 1. DESCRIPTION OF BUSINESS. Comtech Consolidation Group, Inc., f/k/a Venning Group, Inc. (ComTech or the Company) was incorporated on July 13, 1987 under the laws of the State of Delaware, to engage in any lawful corporate undertaking, including but not limited to selected mergers and acquisitions. The Company had been in the development stage from inception until August 12, 1997, at which time it acquired all of the capital stock of Networks On-Line, Inc., a network integrator and Internet service provider and began operations under its business plan. Networks On-Line, Inc. provides Internet access services to individuals and businesses in the Houston, Texas area and provides website hosting and Internet consulting on a nationwide basis. The Company business is the acquisition and consolidation of the business operations of small companies. It combines these small entities into larger organizations that can take advantage of their collective size and achieve economies of scale. To date the Company has acquired and was consolidating business operations in two industries, Internet services and Healthcare. In January of 1998, the Company formed a new wholly owned subsidiary named EISP Corporation (Enhanced Internet Service Provider), a Texas corporation. EISP's mission was to develop market enhanced Internet services, i.e. video teleconferencing, faxing to be bundled with its standard Internet services. The Company transferred ownership of Networks On-Line, Inc. to EISP Corporation, creating a full Network services division. In February of 1998, the Company acquired Professional Management Providers, Inc. (PMP), a Baton Rouge, Louisiana based corporation. PMP is a management consulting company for home health care providers, with customers located in Texas and Louisiana. PMP was established as a subsidiary holding company for acquisitions of home health care agencies. During 1998, PMP made a significant amount of acquisitions with annualized revenues of approximately $17 million. In April 1998, the Company acquired Unique Dawning, Inc. (UDI), a Texas corporation. UDI, headquartered in Houston, operated specialized health care center (partial hospitals) providing services to outpatients, with centers located in Texas and Louisiana. UDI was established as a subsidiary holding company for acquisitions of partial hospitals. During 1998 and 1999, UDI made a significant amount of acquisitions with annualized revenues of approximately $6 million. ComTech was originally in the business of growing sales revenues and earnings through consolidation (acquisition) of privately held operating entities under its two tier corporate holding structure. As acquisitions were made, the Company formed a Subsidiary Holding Company, specifically structured as a financing vehicle to fund ongoing expansion around the business initially acquired. This two tier corporate holding structure was established to provide a means of raising operating capital without dilution to the Company shareholders. It also allowed the Subsidiary Holding Company to develop its own market identity, separate and apart from that of the Company. The objective of this system was to continue to grow the business of its Subsidiary Holding Company, thereby increasing sales revenue and earnings. 4 In summary, ComTech was a holding company that had developed a strategy that: - Enhances the values of its assets (equity in Subsidiary Holding Companies). - Provides management with incentives to continue to grow the businesses. - Provides management with the corporate structure to obtain ongoing growth. In second quarter of 1999, ComTech decided to abandon the Subsidiary Holding Company concept because of its lack of control over the Subsidiary Holding Companies. The Company did not realize how much control it had actually lost until it tried to change its method of managing the day-to-day operations of the company. In doing so, the Company lost a significant amount of operations in the health care division. In July 1999, the Company lost seven of the eight operating health care facilities of PMP. The only surviving operating health care entity of PMP was A-1 Bayou, a home health care agency located in Jeanerette, Louisiana. In late 1999, the Board of Directors of ComTech voted to transfer the ownership of A-1 Bayou directly to ComTech. In September 1999, the Company closed four of the five operating health care facilities of UDI. As of December 1999, ComTech has only three operating subsidiaries, one engaged in health care and two engaged in Internet related businesses. These entities generate approximately $2 million in annual revenues. Due to the significant management problems noted in 1999, the Company has changed its method of managing it subsidiaries. ComTech, the holding company, now directly managed the financial and administrative operations of all of its subsidiaries. VISION/MISSION In early 2000, the new management team of ComTech decided to refocus the Company to take advantage of the tremendous growth of the Internet. The fact that ComTech already owns NOL and EISP (Internet service providers) makes this move even easier. ComTech will play a major role in the technology arena and will grow rapidly by acquisitions. Management feels that by changing the direction of the Company to focus purely on technology related companies; ComTech will be opening the door to endless business possibilities. MARKET ANALYSIS The multi-billion dollar U.S. Internet industry is currently going through a massive restructuring, which is creating virtually unlimited acquisition and merger possibilities. Opportunities for Internet and technology firms abound, 5 our Internet companies will be key to our move toward growth and expansion in technology related industries. MARKETING PLAN The Company intends to implement a cost-effective marketing strategy through a process of developing a public relations campaign to take advantage of the opportunities that will be presented by the move to become a pure player technology company. FINANCIAL PLAN Management's goals are to increase revenues and shareholder value through acquisitions. ComTech will attempt to secure relationships with Investment Banking firms to assist with capital needs. ComTech will prepare an SB-2 filing to register stock to facilitate acquisitions and private placement of stock as well as fund an Employee Stock Option Plan. COMPETITION The market for the company's Internet products is highly competitive, and ComTech expects this competition to increase. Many of the Company's competitors have significantly greater research and development, marketing and financial resources than the Company, and therefore, represent significant competition. The Company believes that the primary competitive factors in the market for the Company's services are price, performance and technical support. ITEM 2. DESCRIPTION OF PROPERTY The Company leases a total of approximately 3,000 square feet of office space for the Company's headquarters and Internet operations. The Company's headquarters is located at 10497 Town & Country Way, Suite 460, Houston, Texas. In addition, the Company leases approximately 2,000 square feet of space for its health care operations in Louisiana. The operating lease at the Company's headquarters expires on May 31, 2001. ITEM 3. LEGAL PROCEEDINGS As noted in the notes to the (note 11) Company's financial statements, the Company had been involved in a significant amount of legal proceeding during 1999. A significant amount of litigation, both filed and threatened, is pending against the Company. Almost all of the claims were incurred in the acquisition and operations of health care facilities located in Louisiana and Texas. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of security holders during the fourth quarter of 1999. 6 PART III ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS The Company's common stock is traded on the OTC Bulletin Board under the symbol "CCGI." The Company' authorized capital stock consist of 30,000,000 shares of common stock, $.00967 par value, of which 22,105,000 shares were issued and outstanding as of February 16, 2000 and 1,000,000 shares of preferred stock, $.01 par value, of which 31,046 shares were issued and outstanding. As of December 31, 1999, the approximate number of holders of record of the common stock of the Company was 3,600. The Company has never paid any cash dividends in the past and anticipates that for the foreseeable future all earnings, if any, will be retained to finance growth and to meet working capital requirements. ITEM 6. MANAGEMENT 'S DISCUSSION AND ANALYSIS OF FINANCIAL CONITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS BEFORE EXTRAORDINARY LOSSES: 1999 COMPARED TO 1998 Total revenues for 1999 of $9,452,081 represents an increase of $656,134 or 7.46% increase from revenues of $8,795,947 in 1998. This increase is due to revenue from health care facilities being reported for six months in 1999 as compared to five months in 1998. The Company reported a net loss before extraordinary items of $352,924 in 1999 as compared to net income of $715,585 in 1998. The $1,096,616 decrease from 1998 is primarily due to an increase of $969,396 in corporate expenses. The increase in corporate expenses is due to the accrual of approximately $400,000 in expenses related to settled and pending litigation, $71,000 in legal expenses, $374,000 in expenses for investor relations paid in stock, $86,000 in bad debts related to loans to subsidiaries, $113,000 in compensation to officers. EXTRAORDINARY LOSSES During 1999, a number of the health care facilities (6) in Louisiana owned by the Company's subsidiary, Professional Management Providers, Inc. were operating under Chapter 11 of the U.S. Bankruptcy Code. As a result of several disputes and lawsuits with former management of the subsidiary, the Trustee in bankruptcy closed the six subsidiary corporations of Home Care Center, Inc. in July 1999. Thereafter, the Company closed three of the remaining four facilities in Louisiana, and transferred ownership of the remaining one to the parent company. The one remaining facility was still in operation at December 31, 1999. 7 In addition, the Company made several acquisitions during 1999 through its Unique Dawning, Inc. (UDI) subsidiary without board approval or corporate involvement. These facilities proved unmanageable, and as a result, Unique Dawning, Inc. was placed in Chapter 11 of the Bankruptcy Code in September 1999. Subsequently, the Trustee transferred the filing to Chapter 7, which provides for liquidation. The Chief Financial Officer at the time and most of management disagreed with a two-member Board decision to place Unique Dawning, Inc into bankruptcy. The Board not only placed UDI into bankruptcy, the interim President actually asked the bankruptcy court to appoint a trustee to manage the operations of UDI, which was an act guaranteed to close the "profitable facility" down. No financial analysis was performed to ascertain the necessity of destroying this profitable health care facility. UDI was placed into bankruptcy based on an internal conflict between two board members. Once the trustee was appointed, their doctors transferred the patients to other health care facilities; therefore, the trustee was forced to close the facility. As a result of these events, the Company recognized losses on the closing and disposal of the twelve facilities (nine under Professional Management Providers, Inc. and three under Unique Dawning, Inc.). The losses were as follows: Professional Management Providers, Inc. $2,088,367 Unique Dawning, Inc. 639,273 ---------- $2,727,640 ========== The current management of the Company is certain that controls are in place that will assure shareholders that sound business practices will be used in the future. FUTURE OPERATIONS As noted in the description of the business section of the document, management has changed the focus of the Company to pursue the technology industry with emphasis on Internet related businesses. The Company intends to acquire Internet related companies by issuing shares of the Company's stock after a secondary offering. As of the date of this report, management of the Company has had preliminary discussions with potential merger or acquisition candidates, but there is no definitive agreement between the Company and any merger candidates. In the event the Company does enter into an agreement with such a third party, the new Board of Directors does intend to obtain certain assurances of the value of the target entity assets prior to consummating such a transaction. Current management has established a due diligence team to ascertain that the mistakes of the past will never happen again. LIQUIDITY AND CAPITAL RESOURCES The Company's current assets represented 15% of current liabilities at December 31, 1999 as compared to 74% at December 31, 1998. Current liabilities exceeded current liabilities by $733,063 at December 31, 1999. At December 31, 1999, the Company primarily had two operational subsidiaries: one health care subsidiary located in Louisiana and one Internet Service Provider located in Houston, Texas. The net income from these operations is not sufficient to support 8 corporate expenses and pay current liabilities. Based on this liquidity problem, the Company's external auditors' report on the 1999 consolidated financial statements included a fourth paragraph noting a going concern problem. Based on discussions with the external auditors, if the Company is able to resolve this problem by obtaining additional equity funding, the auditors are willing to review the Company's current situation and if conditions have improved, the firm is willing to reissue their report without noting the going concern problem. Management believes that actions presently being taken to obtain additional equity financing through a secondary offering and pursuing acquisitions and increasing sales in the technology sector will provide the Company the opportunity to continue as a going concern. ITEM 7. FINANCIAL STATEMENTS The Company's Consolidated Financial Statements, Notes to Consolidated Financial Statements and the report of R. E. Bassie & Co., P.C., independent auditors, with respect thereto, referred to in the Index to Financial Statements, appear elsewhere in this Form 10-KSB. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 9-. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth information concerning executive officers and directors of the Company, including their ages and positions with the Company as of March 24, 1999. MANAGEMENT Name Age Position ---- --- -------- Walter D. Davis 48 Chairman of the Board, President, Chief Executive Officer and Director Lamont Waddell 57 Chief Financial Officer and Director Vincent E. Alexander 38 Director and Chairman of the Audit Committee Beatrice Beasley 55 Director and Chairman of the Compensation Committee Jesse Funchess 69 Director Walter D. Davis, 48, has been chairman of the board and the chief executive officer/president of CCGI since 1/20/00. He served as the chief financial officer from 9/1/99-1/20/00. He also serves as trustee on the Houston Municipal Pension Board. 9 Lamont Waddell, 57, is a director and has been the Chief Financial Officer since 1/20/00. He formerly served as comptroller of CCGI from October 1, 1999 to January 20, 2000, and prior to that he was the Vice President of Finance/Human Resource/Comptroller of the Faro Pharmaceutical Corp. Vincent E. Alexander, 38, serves as director and chair of the audit committee. He was elected to the board in 12/99. He is a financial officer of the Infinity Brokerage Corporation. He is also a member of the greater Houston partnership. Dr. Beatrice Beasley, 55, has been a member of the board since 1/20/00 and the chair of the compensation committee. She is a tenured professor at Texas Southern University and is president of Beasley & Associates, a business training and consulting firm. Dr. Beasley also serves on the board of the Harris County Children's Protective Services Agency. Attorney Jesse Funchess, 69, was elected to the board in 2/00. He is managing partner of Jesse Funchess & Associates Attorneys at Law in Houston and Beaumont, Texas. Attorney Funchess is also the Chairman of the board of the South Central Houston Community Action Council, Inc. SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934 requires the Company's directors, executive officers and persons who own more than five percent of a registered class of the Company's equity securities, to file with the Securities and Exchange Commission (the SEC) initial reports of ownership and reports changes in ownership of Common Stock and other equity securities of the Company. Officers, directors and greater than ten-percent beneficial owners are required by SEC regulation to furnish the Company with copies of all Section 16(a) reports they file. The Company is in compliance. ITEM 10. EXECUTIVE COMPENSATION SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION Name and Annual Principal Position Year Compensation - ------------------- ---- ------------ Richard Belhman 1999 $ 48,000 Chief Executive Officer 1998 $ 48,000 Winfred Fields 1999 $ 96,000 Chief Executive Officer 10 OPTION GRANTS IN LAST FISCAL YEAR None FISCAL YEAR-END OPTION VALUES None DIRECTORS REMUNERATION In 1999 Directors were not paid a fee for servicing on the Board. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth as of February 16, 2000, information with respect to (a) each person (including "group" as that term is used in section 13(d)(3) of the Securities Exchange Act of 1934 who is known to the Company to be the beneficial owner of more than five percent (5%) of the outstanding Common Stock of the Company and (b) the number and percentage of the Company's Common Stock owned by (i) each of the directors and the executive officers named on the Summary Compensation Table above and (ii) all directors and executive officers of the Company as a group. The Company believes that, unless otherwise indicated, each of the shareholders has sole voting and investment power with respect to the shares beneficially owned. CLASS NAME AND ADDRESS AMOUNT PERCENT - ----- ------------------ ------ ------- Common Arlie Enterprise, Inc. 1,363,619 6.2% 11500 NE 76th St., A3#66 Vancouver, WA 98662 Common Dorothy M. Stewart 1,366,000 6.2% 1143 Bayou Island Drive Houston, TX 77063 Common Officers and Directors 53,600 0.2% (One Officer) The balance of the Company's outstanding Common Shares is held by approximately 4,000 persons. 11 ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Related transactions are noted in the Company's Consolidated Financial Statements and Notes to the Consolidated Financial Statements. ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, ALND REPORTS ON FORM 8-K. 1) Documents filed as part of the report: 1) The financial statements filed as part of this report are listed separately in the Index to Financial Statements. 2) The Company filed one report on Form 8-K during the last quarter of 1999. The report dated November 5, 1999 noted "Other Event." On or about September 30, 1999, the management of the Company filed for Chapte 11 reorganization of three of its subsidiaries, namely, Unique Dawning, I nc., Unique Dawning CMHC, Inc. land Summit Quality Health Services, Inc. 3) Lists of Exhibits: Exhibit 27 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. COMTECH CONSOLIDATION GROUP, INC. Date: April 13, 2000 By: /s/ Walter D. Davis ---------------------- Walter D. Davis Chairman of the Board, Chief Executive Officer, President Date: April 13, 2000 By: /s/ Lamont J. Waddell ------------------------ Lamont J. Waddell Chief Financial Officer, Vice President of Finance 12 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title --------- ----- By: /s/ Walter D. Davis Chairman of the Board and Chief ---------------------- Executive Officer, President and Walter D. Davis Director By: /S/ Lamont J. Waddell Board Member and Chief Financial ------------------------ Officer and Vice President of Finance Lamont J. Waddell By: /s/ Vincent E. Alexander Board Member and Chairman of the ------------------------ Audit Committee Vincent E. Alexander By: /s/ Dr. Beatrice Beasley Board Member and Chairman of the ------------------------ Compensation Committee Dr. Beatrice Beasley By: /s/ Jesse Funchess Board Member -------------------- Jesse Funchess, JD Signature Date --------- ---- By: /s/ Walter D. Davis April 13, 2000 ---------------------- Walter D. Davis By: /S/ Lamont J. Waddell April 13, 2000 ------------------------ Lamont J. Waddell By: /s/ Vincent E. Alexander April 13, 2000 --------------------------- Vincent E. Alexander By: /s/ Dr. Beatrice Beasley April 13, 2000 --------------------------- Dr. Beatrice Beasley By: /s/ Jesse Funchess April 13, 2000 -------------------- Jesse Funchess, JD 13 INDEX TO FINANCIAL STATEMENTS COMTECH CONSOLIDATION GROUP, INC. AND SUBSIDIARIES INDEX Independent Auditors' Report Consolidated Financial Statements: Balance Sheets - December 31, 1999 and 1998 Statements of Operations - Years ended December 31, 1999 and 1998 Statements of Stockholders' Equity - Years ended December 31, 1999 and 1998 Statements of Cash Flows - Years ended December 31, 1999 and 1998 Notes to Consolidated Financial Statements R. E. BASSIE & CO., P.C. CERTIFIED PUBLIC ACCOUNTANTS A PROFESSIONAL CORPORATION - -------------------------------------------------------------------------------- COMTECH CONSOLIDATION GROUP, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999 AND 1998 (WITH INDEPENDENT AUDITORS' REPORT THEREON) R. E. BASSIE & CO., P.C. CERTIFIED PUBLIC ACCOUNTANTS A PROFESSIONAL CORPORATION - -------------------------------------------------------------------------------- 7171 Harwin Drive, Suite 306 Houston, Texas 77036-2197 Tel: (713)266-0691 Fax: (713)266-0692 E-Mail: Rebassie@aol.com INDEPENDENT AUDITORS' REPORT ---------------------------- The Board of Directors Comtech Consolidation Group, Inc.: We have audited the consolidated financial statements of ComTech Consolidation Group, Inc. and subsidiaries as listed in the accompanying index. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Comtech Consolidation Group, Inc. and subsidiaries as of December 31, 1999 and 1998, and the results of their operations and their cash flows for the two-year period ended December 31, 1999, in conformity with generally accepted accounting principles. As shown in the consolidated financial statements, the Company incurred a net loss of $3,091,578 in 1999. At December 31, 1999, current liabilities exceed current assets by $733,063. These factors, and others discussed in Note 13, raise substantial doubt about the Company's ability to continue as a going concern. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classification of liabilities that might be necessary in the event the Company cannot continue in existence. /s/ R. E. Bassie & Co., P.C. Houston, Texas March 24, 2000
COMTECH CONSOLIDATION GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 1999 and 1998 Assets 1999 1998 - ------------------------------------------------------------------------- --------------- ------------- Current assets: Cash (note 3) $21,710 $150,624 Accounts receivable, less allowances for contractual adjustments and doubtful accounts of $1,000 in 1999 and $4,310,771 in 1998 (note 12) 110,007 3,097,506 Prepaid expenses - 262,463 --------------- ------------- Total current assets 131,717 3,510,593 --------------- ------------- Note receivable (note 2) 20,000 - Property and equipment, net of accumulated depreciation and amortization (notes 4 and 5) 146,014 595,687 Excess of cost over net assets of businesses acquired, less accumulated amortization of $34,000 in 1999 and $22,171 in 1998 (notes 2 and 12) 646,000 2,457,829 Other assets 4,340 244,457 --------------- ------------- Total assets $948,071 $6,808,566 =============== ============= Liabilities and Stockholders' Equity ------------------------------------ Current liabilities: Accounts payable and accrued expenses 617,392 1,287,893 Accrued salaries and related liabilities 131,686 1,232,006 Due to third-party payors - 1,503,623 Loans payable to shareholders 42,482 277,882 Notes payable 10,000 186,888 Convertible subordinated debentures (note 8) - 195,000 Current installments of long-term debt (note 5) 63,220 39,562 --------------- ------------- Total current liabilities (note 12) 864,780 4,722,854 Long-term debt, less current installments (note 5) 545,114 443,943 --------------- ------------- Total liabilities 1,409,894 5,166,797 --------------- ------------- Stockholders' equity (notes 2, 3, 6, 8, 12 and 14): Preferred stock, $.01 par value. Authorized 1,000,000 shares: issued and outstanding, 31,028 shares in 1999 and 31,450 in 1998 Class B, 8% cumulative and convertible 310 324 Common stock, $.00967 par value. Authorized 30,000,000 shares: issued and outstanding, 22,077,072 shares in 1999 and 16,970,849 shares in 1998 213,485 164,108 Additional paid-in capital 2,024,806 1,033,383 Retained earnings (deficit) (2,700,424) 443,954 --------------- ------------- Total stockholders' equity (deficit) (461,823) 1,641,769 Commitments and contingent liabilities (notes 6, 8, 9, 11, 13, 14 and 15) --------------- ------------- Total liabilities and stockholders' equity $ 948,071 $ 6,808,566 =============== =============
See accompanying notes to consolidated financial statements.
COMTECH CONSOLIDATION GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Years ended December 31, 1999 and 1998 1999 1998 -------------------- -------------------- Revenues: Net patient service revenue $ 8,861,052 $ 6,772,967 Management fees - 1,271,422 Internet service revenue 591,029 751,558 -------------------- -------------------- Total revenues 9,452,081 8,795,947 -------------------- -------------------- Operating expenses: Health care operations 7,953,888 6,960,452 Internet operations 578,323 763,542 Corporate operations 1,221,083 251,687 Amortization 25,996 19,817 Depreciation 25,715 56,757 -------------------- -------------------- Total operating expenses 9,805,005 8,052,255 -------------------- -------------------- Operating income (loss) (352,924) 743,692 Other income (expenses): Interest income - 3,040 Interest expense (11,014) (31,147) -------------------- -------------------- Total other income (expenses) (11,014) (28,107) -------------------- -------------------- Net income (losses) before extraordinary losses (363,938) 715,585 Extraordinary losses (note 12) (2,727,640) - -------------------- -------------------- Net earnings (loss) (note 8) $ (3,091,578) $ 715,585 ==================== ==================== Earnings per share from continuing operations: (Before extraordinary items) Primary $ (0.02) $ 0.05 ==================== ==================== Fully diluted $ (0.01) $ 0.04 ==================== ==================== Weighted average common shares Primary 19,954,922 14,719,450 ==================== ==================== Fully diluted 24,634,045 16,312,361 ==================== ====================
See accompanying notes to consolidated financial statements.
COMTECH CONSOLIDATION GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, 1999 and 1998 1999 1998 ------------ ------------ Cash flows from operating activities: Net earnings (loss) $(3,091,578) $ 715,585 Less losses from extraordinary item (note 12) 2,727,640 - ------------ ------------ Net earnings (loss) from continuing operations (363,938) 715,585 Adjustments to reconcile net earnings (loss) to net cash used in operating activities: Depreciation and amortization of property and equipment 25,715 56,757 Amortization of excess of cost over net assets of businesses acquired 25,966 19,817 Bad debt expense 86,000 211,497 Stock issued for various services 366,221 - Loss on disposal of equipment 2,963 - (Increase) decrease in accounts receivable (667,749) (1,705,145) Increase in prepaid expenses 25,953 (210,137) Increase in other assets 74,837 (241,784) Increase (decrease) in accounts payable and accrued expenses 536,356 (102,039) Increase (decrease) in accrued salaries and related liabilities (314,393) 564,532 Decrease in amount due to third-party payors (40,735) (40,532) ------------ ------------ Net cash used in operating activities (242,804) (731,449) ------------ ------------ Cash flows from investing activities: Purchase of property and equipment (11,647) (69,172) Cash received from acquired subsidiaries - 520,034 ------------ ------------ Net cash provided by (used in) investing activities (11,647) 450,862 ------------ ------------ Cash flows from financing activities: Proceeds from borrowing from shareholders - 33,750 Repayments to shareholders - (37,038) Proceeds from long-term debt - 79,850 Principal payments on long-term debt (13,588) (30,477) Proceeds from short-term note payable 10,000 - Principal payments on short-term notes payable - (18,896) Proceeds from issuance of shares under private placement 129,125 1,499 Proceeds from sales of subordinated debentures - 400,000 ------------ ------------ Net cash provided by financing activities 125,537 428,688 ------------ ------------ Net increase (decrease) in cash (128,914) 148,101 Cash at beginning of year 150,624 2,523 ------------ ------------ Cash at end of year $ 21,710 $ 150,624 ============ ============ Supplemental schedule of cash flow information: Interest paid $ 11,014 $ 31,147 ============ ============ Supplemental disclosures: Noncash investing and financing activities (notes 2, 3, 8 and 12))
See accompanying notes to consolidated financial statements.
COMTECH CONSOLIDATION GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years ended December 31, 1999 and 1998 Total Additional Retained stockholders' Preferred Common paid-in earnings equity stock stock capital (deficit) (deficit) ------------ ---------- --------------- ------------ ------------- Balance, December 31, 1997 $ - $124,996 $75,978 $(271,631) $(70,657) Issuance of 1,029,410 shares for acquisitions (note 2) 324 9,670 743,948 - 753,942 Issuance of 1,499,138 shares under private placement (note 3) - 14,497 (12,998) - 1,499 Issuance of 182,000 shares - for marketing services - 1,760 34,640 - 36,400 Conversion of debentures for 1,363,511 shares of common stock (note 9) - 13,185 191,815 - 205,000 Net earnings - - - 715,585 715,585 ------------ ---------- --------------- ------------ ------------ Balance, December 31, 1998 324 164,108 1,033,383 443,954 1,641,769 Issuance of 3,500 shares of preferred stock for acquisitions (note 2) 35 - 62,166 - 62,201 Issuance of 645,625 shares of common stock under private placement (note 3) - 6,243 122,882 - 129,125 Issuance of 1,251,995 shares of common stock for retirement of debt (note 3) - 12,108 238,291 - 250,399 Conversion of debentures for 1,223,787 shares of common stock (note 9) - 11,834 183,166 - 195,000 Issuance of 376,078 shares for investor relations 15 3,622 300,184 - 303,821 Issuance of 183,600 shares of common stock for contractual services (note 3) - 1,775 45,665 - 47,440 Conversion of 6,400 shares of preferred stock for 1,530,222 shares of common stock (note 6) (64) 14,797 (14,733) - - Issuance of 96,392 shares of common stock for preferred stock dividends (note 6) - 932 51,868 (52,800) - Retirement of 200,000 shares of common stock (note 3) - (1,934) 1,934 - - Net loss - - - (3,091,578) (3,091,578) ------------ ---------- --------------- ------------ ------------ Balance, December 31, 1999 $310 $213,485 $2,024,806 $(2,700,424) $(461,823) ============ ========== =============== ============ ============
See accompanying notes to consolidated financial statements. COMTECH CONSOLIDATION GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999 and 1998 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES THE COMPANY ComTech Consolidation Group, Inc., a Delaware corporation, was incorporated on July 13, 1987. The Company is a Houston, Texas based consolidation company that is focused on acquiring and building growth oriented businesses through acquisitions in the technology related industries. The Company has operations in Texas and Louisiana. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Comtech Consolidation Group, Inc. and its wholly-owned subsidiaries (the Company). All material intercompany profits, transactions and balances have been eliminated. The accounts of purchased companies are included in the consolidated financial statements from the dates of acquisition. The excess of cost over the fair value of net assets of businesses acquired is being amortized using the straight-line method over a 40-year period commencing with the dates of acquisition. PROPERTY AND EQUIPMENT AND DEPRECIATION Property and equipment are stated at cost. Depreciation of property and equipment is calculated using the straight-line method over the estimated useful lives of the assets, which range from three to ten years. EARNINGS PER SHARE Earnings (losses) per common share have been computed by dividing net earnings (losses) by the weighted average number of common shares outstanding during the respective periods. STATEMENTS OF CASH FLOWS For purposes of the statements of cash flows, the Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. COMTECH CONSOLIDATION GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. PATIENT SERVICE REVENUE The Company's health care subsidiaries have agreements with third-party payors (primarily Medicare and Medicaid programs) that provide for payments to the Company at amounts different from its established rate for services and supplies. Payment arrangements include prospectively determined rates, reimbursed costs, discounted charges, and other arrangements. Patient service revenue is reported at the estimated net realizable amounts from patients, third-party payors, and others for services rendered, including estimated retroactive adjustments under reimbursement agreements with third-party payors. Retroactive adjustments are recorded on an estimated basis in the period the related services are rendered and adjusted in the future periods, as final settlements with the payors are determined. CONCENTRATION OF CREDIT RISK Medicare and Medicaid Programs Net revenue from the majority of the Company's subsidiaries is generated from services rendered to Medicare and Medicaid program (the Programs) beneficiaries. The reimbursement from the Programs is determined under cost-based reimbursement formulas. The ultimate reimbursement to which the Company is entitled is based on the submission of annual cost reports, which are subject to audit, by the Programs through the Programs intermediaries. Management has made allowances for potential cost disallowances. Differences between allowances and final settlements are reported as modification to net patient service revenue in the year of settlement. Since the Company receives a substantial portion of its funding from the Programs, it is dependent on funding from the Medicare and Medicaid programs to support fifty percent of its operations. RECLASSIFICATIONS Certain 1998 amounts have been reclassified to conform to the 1999 presentation. 2 COMTECH CONSOLIDATION GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (2) ACQUISITIONS Effective January 1, 1999, the Company, through its wholly-owned subsidiary, PMP, issued 1,000 shares of its Class B preferred stock (see note 6) for all of the outstanding stock of Clinical Concepts, Inc., a Louisiana health care corporation. On the same day, the Company sold Clinical Concepts Inc. to an individual for a long-term note receivable in the amount of $30,000. The note receivable is due in six annual installments of $5,000. Effective March 26, 1999, the Company, through its wholly-owned subsidiary, Unique Dawning, Inc., issued 2,500 shares of its Class B preferred stock (see note 6) for all of the outstanding stock of two Texas health care corporations. Effective February 15, 1998, the Company issued 500,000 shares of its common stock in exchange for all of the outstanding stock of Professional Management Providers, Inc. (PMP), a Louisiana health care management corporation. Effective April 1, 1998, the Company issued 500,000 shares of its common stock in exchange for all of the outstanding stock of Unique Dawning, Inc., a Texas health care corporation. Effective June 30, 1998, the Company, through its wholly-owned subsidiary, PMP, issued 2,000 shares of its Class B preferred stock for all of the outstanding stock of Superior Quality Health Care, Inc., a Texas health care corporation. Effective July 30, 1998, the Company, through its wholly-owned subsidiary, PMP, issued 11,000 shares of its Class B preferred stock for all of the outstanding stock of Home Care Center, Inc., a Louisiana health care corporation (see note 11). Effective August 13, 1998, the Company, through its wholly-owned subsidiary, PMP, issued 1,300 shares of its Class B preferred stock for all of the outstanding stock of Magnolia Home Health, Inc., a Louisiana health care corporation. Effective October 3, 1998, the Company, through its wholly-owned subsidiary, PMP, issued 600 shares of its Class B preferred stock for all of the outstanding stock of A-1 Bayou Health 2000, Inc., a Louisiana health care corporation. 3 COMTECH CONSOLIDATION GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Between July 1, 1998 and December 29, 1998, the Company, through its wholly-owned subsidiary, PMP, issued 16,550 shares of its Class B preferred stock for certain net assets of twelve Louisiana health care corporations. All of the above acquisitions have been accounted for using the purchase method with the purchase price allocated to the acquired assets and liabilities based on their respective estimated fair values at the acquisition dates. Such allocations were based on evaluations and estimations. A valuation adjustment in the amount of $2,000,000 has been assigned to the value of existing contracts for entities acquired in 1998. The purchase allocation is summarized as follows: 1999 1998 ---- ---- Current assets $133,849 $3,630,796 Noncurrent assets 25,000 - Property and equipment - 439,745 Excess of cost over net assets of businesses acquired - 2,000,000 Current liabilities (96,648) (5,229,128) Long-term liabilities - (87,471) --------- ----------- $62,201 $753,942 ========= =========== Goodwill is being amortized over a period of 40 years. (3) RELATED PARTY TRANSACTIONS In January 1999, the Company sold 645,625 shares of common stock for $129,125 ($.20 per share) to a company owned by a relative of the Chairman of the Board at the time (the Chairman was subsequently removed by the Board). The Chairman of the Board charged the Company a fee in the amount of $5,125 to consummate this transaction. This private placement was never approved by the Board of Directors. In January 1999, the Company issued 1,251,995 shares of common stock to companies owned by relatives of the Chairman of the Board at the time. The shares were issued to retire loans made to the Company by the Chairman of the Board and a company owned by the deceased former Chairman of the Board. The Board of Directors never approved these transactions. The Board subsequently removed the Chairman from the Board. The shares were never returned and are still outstanding. In March 2000, the Company signed a settlement agreement and mutual release in return for another private placement of stock (see note 14). In addition, the former President of the Company agreed to return 200,000 shares of common stock in settlement of his involvement in the issuance of the shares. 4 COMTECH CONSOLIDATION GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In April 1999, the Company issued 130,000 shares ($.20 per share) of common stock to the Chairman of the Board at the time for compensation for services performed. In December 1999, the Company issued 53,600 shares ($.40 per share) of common stock to the Chief Financial Officer for compensation for services performed and the repayment of $11,500 in loans made to the Company, On July 2, 1998, the Company completed a private offering of 1,500,000 shares of its common stock at an offering price of $.001 per share. Of the 1,500,000 offered, 1,499,138 shares were issued and sold. 283,000 shares were sold to a company owned by the son of the Chairman of the Board at the time, 666,138 shares were sold to the Chairman of the Board at the end of 1998, and 500,000 shares were sold to a close business associate of the Chairman of the Board, of which, 320,000 shares were subsequently transferred to the Chairman of the Board. The shares were issued for less than the par value of the shares. The excess of the par value over the proceeds from the placement has been charged to Additional paid-in capital. The Company has not determined whether the issuance met the requirements of state law. At December 31, 1998, $40,000 of the cash balance was pledged as collateral for a personal loan made by the president of PMP. The Board of Directors of the Company did not approve this transaction. (4) PROPERTY AND EQUIPMENT Property and equipment is summarized as follows: December 31, ------------------------- 1999 1998 --------- --------- Equipment $240,317 $301,922 Furniture and fixtures 1,600 429,087 Leasehold improvements - 336,163 --------- --------- Total property and equipment 241,917 1,067,172 Less accumulated depreciation and amortization 95,903 471,485 --------- --------- Net property and equipment $146,014 $595,687 ========= ========= 5 COMTECH CONSOLIDATION GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (5) LONG-TERM DEBT Long-term debt is summarized as follows:
December 31, ------------------ 1999 1998 -------- -------- Notes payable (8), due March 10, 2001, with interest at 6.5% (see note 11) $251,100 $ - Note payable in monthly installments of $868 through September 2003; with interest at 10.5%, unsecured 34,075 40,393 Note payable in monthly installments of $970 through September 2004, with monthly installments increasing to $5,500 through August 2005, with interest, unsecured 115,126 119,006 Note payable in monthly installments of $3,700 through August 2004, unsecured 208,033 219,169 Note payable to a bank, with interest at the lender's prime rate plus 2%, due March 5, 2000 (note 12), - 67,322 Note payable, with interest at 13.24%, due January 2003; collateralized by transpor- tation equipment (note 12) - 16,235 Note payable, with interest at 3.90%, due November 2003; collateralized by transpor- tation equipment (note 12) - 21,380 -------- -------- Total long-term debt 608,334 483,505 Less current installments 63,220 39,562 -------- -------- Long-term debt, less current installments $545,114 $443,943 ======== ========
Aggregate yearly maturities of long-term debt for the periods after December 31, 1999 are as follows: Years ----- 2000 $63,220 2001 315,111 2002 64,889 2003 66,115 2004 60,193 Thereafer 38,806 -------- $608,334 ======== 6 COMTECH CONSOLIDATION GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (6) PREFERRED STOCK In 1999, the Company issued 3,500 shares of its Class B preferred stock in exchange for all of the outstanding stock of three health care companies (see note 2). In 1998, the Company issued 31,450 shares of its Class B preferred stock in exchange for all of the outstanding stock of four health care companies and certain net assets of twelve health care companies (see note 2). The Class B preferred shares have a face value of $100 per share, with an annual cumulative dividend equal to 8%, with a term of 24 months. The Class B preferred shares are convertible by the shareholders for the Company's common stock at anytime after 12 months from the date of issuance at a conversion rate equal to 80% of the then market price of the Company's common stock. The Class B preferred shares are redeemable by the Company at anytime in exchange for cash payment equal to the full-face amount of the shares plus accumulated dividends. At the end of the 24 month term, if not redeemed by the Company for cash equal to the face amount of the preferred shares, the shares automatically convert to common stock at a conversion rate equal to 80% of the then market bid price of the Company's common stock. See note 14 for subsequent events related to the creation and subsequent sale of the Company's Class E preferred stock. (7) FEDERAL INCOME TAX EXPENSE The estimated federal income tax expense for the year ended December 31, 1998 is eliminated by net operating loss carryforwards. (8) CONVERTIBLE SUBORDINATED DEBENTURES On August 3, 1998, the Company entered into an agreement to issue, as needed, $750,000 of 8% senior subordinated convertible redeemable debentures (the Debentures) due August 3, 1999. Interest on the outstanding balance is due and payable monthly commencing September 3, 1998. The Debentures may be converted into shares of the Company's stock at the lower of 75% of the closing bid price of the Company's stock the day immediately preceding the date of receipt by the Company of notice of conversion or by 75% of the closing bid price of the Company's stock on the five days immediately preceding the date of subscription by the holder as reported by the National Association of Securities Dealers Electronic Bulletin Board ("NASDAQ"). As of December 31, 1998, the Company had borrowed $400,000 of the $750,000. And, the holders of the Debentures converted $205,000 of the borrowings into 1,363,511 shares of the Company's common stock. The remaining $195,000 is recorded as a current liability at December 31, 1998. In 1999, the Company converted the remaining $195,000 into 1,223,787 shares of the Company's common stock. 7 COMTECH CONSOLIDATION GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (9) LEASES The Company leases certain office space, furniture and equipment under operating leases. Future minimum lease payments under noncancellable operating leases at December 31, 1999 are as follows: Year ---- 2000 $73,633 2001 19,168 ------ Total $92,801 ====== (10) INDUSTRY SEGMENTS The Company operated in two industries (health care and internet service providers) and two geographical locations (Texas and Louisiana) during 1999 and 1998. Professional Management Providers, Inc. provided health care services in the state of Louisiana (see note 12), and Unique Dawning, Inc. provided health care services in the state of Texas (see note 12). Networks On-Line, Inc. is an Internet service provider (ISP) in Texas. Segment and geographical information for the years ended December 31, 1999 and 1998 is as follows: 1999 1998 ---------- ----------- Net revenues: Health care - Louisiana $7,198,930 $7,253,787 Health care - Texas 1,662,122 790,602 ISP - Texas 591,029 751,558 ---------- ----------- $9,452,081 $8,795,947 ========== =========== Operating income (loss): Health care - Louisiana $775,039 $992,443 Health care - Texas 122,885 57,557 ISP - Texas (29,765) (54,621) Corporate expenses (1,221,083) (251,687) ---------- ----------- $(352,924) $743,692 ========== =========== Identifiable assets: Health care - Louisiana $292,103 $5,221,722 Health care - Texas - 780,408 ISP - Texas 630,916 644,874 Corporate 25,052 161,562 ---------- ----------- $948,071 $6,808,566 ========== =========== 8 COMTECH CONSOLIDATION GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Corporate expenses for the year ended December 31, 1999 are summarized as follows: Settled and pending litigation $400,000 Investor relations 373,702 Contractual services 112,727 Bad debt expenses 86,000 Legal fees 71,198 Accounting and audit fees 47,696 Salaries and payroll taxes 38,131 Other administrative expenses 91,629 ----------- Total $1,221,083 =========== (11) LITIGATION The Company has certain pending and threatened litigation and claims incurred in the ordinary course of business (primarily related to acquisitions and disposition of subsidiaries and related employment agreements). Management has not determined whether or not the probable resolution of such contingencies will have any additional material affect on the financial position of the Company or the results of operations. Included in long-term debt is $251,100 of liabilities related to settled litigation. In addition, approximately $150,000 is included in accounts payable and accrued expenses for pending litigation. (12) DISPOSAL OF HEALTH CARE FACILITIES During 1999, a number of the facilities (6) in Louisiana owned by the Company's subsidiary, Professional Management Providers, Inc. were operating under Chapter 11 of the U.S. Bankruptcy Code. As a result of several disputes and lawsuits with former management of the subsidiary, the Trustee in bankruptcy closed the six subsidiary corporations of Home Care Center, Inc. in July 1999. Thereafter, the Company closed three of the remaining four facilities in Louisiana, and transferred ownership of the remaining one to the parent company. The one remaining facility was still in operation at December 31, 1999. In addition, the Company made several acquisitions during 1999 through its Unique Dawning, Inc. subsidiary without board approval or corporate involvement. These facilities proved unmanageable, and as a result, Unique Dawning, Inc. was placed in Chapter 11 of the Bankruptcy Code in September 1999. Subsequently, the Trustee transferred the filing to Chapter 7, which provides for liquidation. 9 COMTECH CONSOLIDATION GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As a result of these events, the Company recognized losses on the closing and disposal of the twelve facilities (nine under Professional Management Providers, Inc. and three under Unique Dawning, Inc.). The losses were as follows: Professional Management Providers, Inc. $2,088,367 Unique Dawning, Inc. 639,273 ---------- $2,727,640 ========== The loss has been reflected in the accompanying statement of income as an extraordinary item. No income tax credit has been provided against the loss due to the unavailability of recoverable taxes in prior periods. (13) OPERATIONAL STATUS The current company is the survivor of a reverse merger, which occurred in 1997 and has expanded since then through both internal growth and acquisitions. During this growth period, the Company reported significant revenues in 1998 and 1999; however, the revenues reported for both years represented approximately one-half of a year's operations. This situation was due to significant acquisitions occurring in mid-year 1998 and the disposition (note 12) of a majority of those businesses in mid-year 1999. The management of the acquisition process and the management of those subsequent operations exposed the Company to significant legal liabilities (note 11). At December 31, 1999, current liabilities exceeded current assets by $733,063. At December 31, 1999, the Company primarily had two operational subsidiaries: one health care subsidiary located in Louisiana and one Internet Service Provider located in Houston, Texas. The net income from these operations is not sufficient to support corporate expenses and pay current liabilities. In view of these matters, realization of a major portion of the assets in the accompanying consolidated balance sheet is dependent upon continued operations of the Company, the success of a secondary placement and future acquisitions and operations. Management believes that actions presently being taken to obtain additional equity financing through a secondary offering and acquisitions and increasing sales in the technology sector will provide the opportunity to continue as a going concern. 10 COMTECH CONSOLIDATION GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (14) SUBSEQUENT EVENT During February and March 2000, the Company raised $200,000 through a private placement. The Company agreed to sell 2,000 shares of its Class E preferred stock at $100 per share. Each share of the Class E preferred stock, has an annual cumulative dividend equal to 8%, with a term of 12 months, and is convertible into 650 shares of the Company's common stock. (15) YEAR 2000 ISSUE The Year 2000 issue is the result of computer programs being written using two digits rather than four to define a specific year. Absent corrective actions, a computer program that has date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in system failures or miscalculations causing disruptions to various activities and operations. The Company primarily uses licensed software products in its operations with a significant portion of processes and transactions centralized in several particular accounting software packages. The Company has not experienced any year 2000 problems to date; however, the Company plans to continue to monitor the situation closely. 11 NOTICE OF ANNUAL MEETING OF SHAREHOLDERS DATE: MAY 12, 2000 TIME: 1:00 P.M. PLACE: 1902 MECHANIC STREET GALVESTON, TEXAS 77550 MATTERS TO BE VOTED ON: 1. Election of five directors. 2. Approval of an Increase in authorized shares. 3. Approval of our 2000 Employee Stock Option Plan. 4. Ratification of the appointment of R.E. Bassie & Co., P.C. as our independent auditors for 2000. 5. Any other matters properly brought before the shareholders at the meeting. By orders of the Board of Directors, Dr. Beatrice Beasley April 17, 2000 Secretary 1 PROXY STATEMENT Your vote at the annual meeting is important to us. Please vote your shares of common stock by completing the enclosed proxy card and returning it to us in the enclosed envelope. This proxy statement has information about the annual meeting and was prepared by the Company's management for the board of directors. This proxy statement was first mailed to shareholders on April 17, 2000. In order to avoid the unnecessary expense of further solicitations, we urge you to indicate your voting instructions on the enclosed proxy card. Even though you plan on attending the meeting, we urge you to fill out the proxy card. You may vote in person and cancel your instructions on the proxy card when you arrive at the meeting. --------------------------------------------------------------------------- | TABLE OF CONTENTS | | | | PAGE | | ---- | | | | General Information about voting 2 | | Proposal No. 1: Election of Directors 5 | | Proposal No. 2: Increase in authorized shares 10 | | Proposal No. 3: Approval of Employee Stock Option Plan 12 | | Proposal No. 4: Appointment of Independent Accountants 14 | --------------------------------------------------------------------------- 2 GENERAL INFORMATION ABOUT VOTING WHO CAN VOTE? You can vote your shares of common stock if our records show that you owned the shares on March 9, 2000. A total of 22, 327, 072 shares of common stock can vote at the annual meeting. You get one vote for each share of common stock, unless cumulative voting is in effect. Cumulative voting is described on page 5 hereof. The enclosed proxy card shows the number of shares you can vote. HOW DO I VOTE BY PROXY? Follow the instructions on the enclosed proxy card to vote on each proposal to be considered at the annual meeting. Sign and date the proxy card and mail it back to us in the enclosed envelope. The proxyholders named on the proxy card will vote your shares as you instruct. If you sign and return the proxy card but do not vote on a proposal, the proxyholders will vote for you on that proposal. Unless you instruct otherwise, the proxyholders will vote for each of the other proposals to be considered at the meeting. WHAT IF OTHER MATTERS COME UP AT THE ANNUAL MEETING? The matters described in this proxy statement are the only matters we know will be voted on at the annual meeting. If other matters are properly presented at the meeting, the proxyholders will vote your shares as they see fit. CAN I CHANGE MY VOTE AFTER I RETURN MY PROXY CARD? Yes. At any time before the vote on a proposal, you can change your vote either by giving the Company's secretary a written notice revoking your proxy card or by signing, dating, and returning to us a new proxy card. We will honor the proxy card with the latest date. CAN I VOTE IN PERSON AT THE ANNUAL MEETING RATHER THAN BY COMPLETING THE PROXY CARD? We encourage you to complete and return the proxy card to ensure that your vote is counted and you may also attend the meeting. If you attend the annual meeting, you may vote your shares in person and cancel the proxy instructions. WHAT DO I DO IF MY SHARES ARE HELD IN "STREET NAME"? If your shares are held in the name of your broker, a bank, or other nominee, that party should give you instructions for voting your shares. 3 HOW ARE VOTES COUNTED? We will hold the annual meeting if holders of a majority of the shares of common stock entitled to vote either sign and return their proxy cards or attend the meeting. If you sign and return your proxy card, your shares will be counted to determine whether we have a quorum even if you abstain or fail to vote on any of the proposals listed on the proxy card. If your shares are held in the name of a nominee, and you do not tell the nominee by May 11, 2000 how to vote your shares (so-called "broker nonvotes"), the nominee can vote them as it sees fit only on matters that the National Association of Securities Dealers Automated Quotation System (NASDAQ") determines to be routine, and not on any other proposal. Broker nonvotes will be counted as present to determine if a quorum exists but will not be counted as present and entitled to vote on any nonroutine proposal. WHO PAYS FOR THIS PROXY SOLICITATION? We do. In addition to sending you these materials, some or our employees may contact you by telephone, by mail, or in person. None of theses employees will receive any extra compensation for doing this. We have retained ADP-Process Control, 51 Mercedes Way, Edgewood, NY 11717, to assist us in soliciting your proxy for a fee of approximately $10,000 plus reasonable out-of-pocket expenses. STOCK OWNERSHIP The Annual Report on Form 10-K for the Company (the "Form 10-K") includes a table showing the number of shares of common stock beneficially owned (as of December 31, 1999) by : - - each person who we know beneficially owns more than 5% of the common stock; - - each director; - - each executive officer named in the Summary Compensation Table on page 8; and - - the directors and executive officers as a group. The Form 10-K also includes a table of each beneficial Owner in the Company who owns at least 1% of the Company's voting securities. 4 PROPOSAL NO. 1 ELECTION OF DIRECTORS An entire board of directors, consisting of five (5) members, will be elected at the annual meeting. The directors elected will hold office until their successors are elected, which should occur at the next annual meeting. VOTE REQUIRED. The five (5) nominees receiving the highest number of votes will be elected. Votes withheld for a nominee will not be counted. You get one vote for each of your shares of common stock, unless cumulative voting is in effect. For cumulative voting to be in effect, at least one shareholder must notify the Chair of the annual meeting, before the vote on directors, of his or her intent to cumulate votes. If this notice is given, all shareholders may cumulative votes. If cumulative voting is in effect, you will be entitled to a number of votes in the election of directors equal to five (5) (the total number of directors to be elected) multiplied by the number of shares you are entitled to vote. For example, if you have 100 shares, you have 500 votes. You can give all your votes to one nominee or distribute your votes among as many nominees as you want. Proxyholders can cumulate the shares they are entitled to vote as they see fit. NOMINATIONS. At the annual meeting, we will nominate the persons named in this proxy statement as directors. Although we don't know of any reason why one of these nominees might not be able to serve, the board of directors will propose a substitute nominee if any nominee is not available for election. Shareholders also can nominate persons to be directors. If you want to nominate a person, you must follow the procedures in the Company's bylaws. You must deliver a notice to the Company's secretary at the Company's principal executive offices between April 17, 2000 and May 10, 2000. That notice must contain the information required by the bylaws about you and your nominees. Unless you have complied with these bylaws provision, your nominee won't be accepted and can't be voted on by the shareholders. GENERAL INFORMATION ABOUT THE NOMINEES. All of the nominees are currently directors of the Company. Each has agreed to be named in this proxy statement and to serve as a director if elected. The ages listed for the nominees are as of April 1, 2000. WALTER DAVIS Director since December 1999 Walter Davis, 48, has been chairman of the board and the chief executive officer/president of CCGI since 1/20/00. He served as the chief financial officer from 9/1/99-1/20/00. He also serves as trustee on the Houston Municipal Pension Board. VINCENT EDWARD ALEXANDER Director since December 1999 Vincent Edward Alexander, 38, serves as director and chair of the audit committee. He was elected to the board in 12/99. He is a financial officer of the Infinity Brokerage Corporation. He is also a member of the greater Houston partnership. 5 DR. BEATRICE BEASLEY Director since January 2000 Dr. Beatrice Beasley, 55 has been a member of the board since 1/20/00 and the chair of the compensation committee. She is a tenured professor at Texas Southern University and is president of Beasley & Associates, a business training and consulting firm. Dr. Beasley also serves on the board of the Harris County Children's Protective Services Agency. LAMONT WADDELL Director since January 2000 Lamont Waddell, 57 is a director and has been the Chief Financial Officer since 1/20/00. He formerly served as comptroller of CCGI and prior to that he was the Vice President of Finance/Human Resource/Comptroller of the Faro Pharmaceutical Corp. JESSE FUNCHESS, J.D. Director since January 2000 Attorney Jesse Funchess, 69 was elected to the board in 2/00. He is managing partner of Jesse Funchess & Associates Attorneys at Law in Houston and Beaumont Texas. Attorney Funchess is also the Chairman of the board of the South Central Houston Community Action Council, Inc. COMMITTEES OF THE BOARD. The board of directors has two principal committees. The following chart describes the function and membership of each committee and the number of times it met in 1999: AUDIT COMMITTEE - 1 MEETING FUNCTION MEMBERS - -------- ------- - - Review internal financial information Vincent Edward Alexander (Chair) - - Review audit program Dr. Beatrice Beasley - - Review the results of audits with Attorney Jesse Funchess the independent auditors - - Oversee quarterly reporting COMPENSATION COMMITTEE - 0 MEETINGS FUNCTION MEMBERS - -------- ------- - - Review and approve compensation Dr. Beatrice Beasley (Chair) and benefit programs Vincent Edward Alexander - - Approve compensation of senior executives Attorney Jesse Funchess - - Administer Stock Option Plan The board of directors had four meetings during 1999. Of the current board members, only Walter Davis and Vincent Edward Alexander were on the board in 1999 and they attended one meeting of the board and one meeting of the audit committee. 6 EXECUTIVE COMPENSATION The following report and the performance graph on page 9 do not constitute soliciting materials and are not considered filed or incorporated by reference into any other Company filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, unless we state otherwise. REPORT OF THE COMPENSATION COMMITTEE GENERAL PHILOSOPHY ON EXECUTIVE COMPENSATION The Committee's goal is to: - - provide compensation competitive with other similar companies; - - reward executives consistent with the performance of the Company; - - recognize individual performance; - - retain and attract qualified executives; and - - encourage executives to increase shareholder value. To achieve these goals, the Committee has put in place an executive-compensation program with three basis elements: base salary, annual cash bonus, and stock options. BASE SALARY. The Committee determines the base salary of each executive officer other than the CEO. The Committee considers competitive industry salaries, the nature of the officer's position, the officer's contribution and experience, and the officer's length of service. ANNUAL CASH BONUS. Before the beginning of each year, the Committee sets specific annual performance targets for each executive officer. The performance targets are tailored to the officer's position. They can be based on net income, return on equity, customer satisfaction, and other factors. The Committee sets each annual bonus based on the officer's success in meeting or exceeding the performance targets. STOCK OPTIONS. If proposal No. 3 is adopted, the Committee will grant options to an executive officer when the officer is hired, when the officer is promoted, and during the officer's existing employment. The Committee determines the number of options to be granted to an officer based on the officer's level of responsibility. Options vest over a four-year period. The Committee believes that the use of stock options ties a significant portion of an officer's compensation to increases in the price of the Company's stock realized by all of the Company's shareholders. 7 INTERNAL REVENUE CODE LIMITS Section 162(a) of the Internal Revenue Code disallows a tax deduction to public corporations for compensation over $1,000,000 paid for any fiscal year to the corporation's chief executive officer or to any of the four other most highly compensated executive officers. The statute exempts qualifying performance-based compensation from the deduction limit if certain requirements are met. The Committee currently intends to structure its executive-compensation packages to meet these requirements. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION None of the Compensation Committee members is or has been a Company officer or employee. No Company executive officer currently serves on the Compensation Committee or any similar committee of another public company. 8
SUMMARY COMPENSATION TABLE (1999) Name and Annual Long-Term Principal Position Year Compensation Compensation Awards - ----------------------- ---- ---------------- ------------------- SEE SEC FORM 10-K NUMBER OF STOCK SALARY BONUS OPTIONS GRANTED ------ ----- --------------- RICK BELHMAN 1999 $ Chief Executive Officer WINFRED FIELDS 1999 $ Chief Executive Officer JOEL FLOWERS 1999 $ Chief Financial Officer WALTER DAVIS Chief Financial Officer 1999 $
SUMMARY COMPENSATION TABLE (2000)(1) Name and Annual Long-Term Principal Position Year Compensation Compensation Awards - ------------------ ---- ------------ ------------------- NUMBER OF STOCK SALARY BONUS OPTIONS GRANTED -------- -------- ---------------- WALTER DAVIS 2000 $120,000 $48,000 0 Chief Executive Officer LAMONT WADDELL Chief Financial Officer 2000 $95,000 $20,000 0 - ------------------------- 1. Annualized compensation amounts projected for the year 2000. The current officers of the Company were not officers in 1999.
9 OPTIONS GRANTED IN 1999 (1) PERCENT OF TOTAL NUMBER OF OPTIONS SECURITIES GRANTED TO UNDERLYING ALL EXERCISE GRANT DATE OPTIONS EMPLOYEES PRICE EXPIRATION PRESENT NAME GRANTED 1999 (PER SHARE) DATE VALUE - ---- ---------- ---- ----------- ---------- ---------- Rick Belhman 0 0 __ __ 0 Winfred Fields 0 0 __ __ 0 Joel Flowers 0 0 __ __ 0 Walter Davis 0 0 __ __ 0
OPTION EXERCISES AND YEAR-END VALUE TABLE NUMBER SECURITIES VALUE OF NUMBER OF UNDERLYING UNEXERCISED SHARES UNEXERCISED IN-THE-MONEY ACQUIRED VALUE OPTIONS AT OPTION AS OF NAME ON EXERCISE REALIZED DECEMBER 31, 1999 DECEMBER 31, 1999 - ---- ----------- -------- ------------------- ------------------- EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ----------- ------------- ----------- ------------- Rick Belhman 0 __ __ __ __ __ Winfred Fields 0 __ __ __ __ __ Joel Flowers 0 __ __ __ __ __ Walter Davis 0 __ __ __ __ __ _______________________________ 1. The Company did not have an option plan in 1999.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING REQUIREMENT Our directors and executive officers must file reports with the Securities and Exchange Commission indicating the number of shares of the Company's common stock they beneficially own and any changes in their beneficial ownership. Copies of these reports must be provided to us. Based on our review of these reports and written representations from the persons required to file them, we believe each of our directors and executive officers filed all the required reports during 1999. 10 PROPOSAL NO. 2 INCREASE IN AUTHORIZED SHARES At the annual meeting, you will be asked to vote to approve an increase in authorized shares of the Common Stock, from 30,000,000 to 100,000,000 (the "Share Increase"). We recommend that you vote for it. VOTE REQUIRED. If a majority of the shares of common stock entitled to vote at the meeting are voted for the Share Increase., the Share Increase will be approved. POTENTIAL USES OF SHARE INCREASE. An increase in the amount of authorized shares of common stock of the Company will allow the Company to issue additional shares of common stock to (i) raise capital though private or public offerings for acquisitions, (ii) fund its Employee Stock Option Plan or (iii) offset any debt to its vendors and other creditors with issuances of shares of common stock. EFFECT OF SHARE INCREASE. If the Company issues additional shares, such issuances will dilute the current percentage ownership of all holders of the Company's common stock. In addition, such issuances may dilute the current value per share of each outstanding share of common stock PROPOSAL NO. 3 APPROVAL OF EMPLOYEE STOCK OPTION PLAN At the annual meeting, you will be asked to vote to approve the Company's 2000 Stock Option Plan. We recommend that you vote for it. VOTE REQUIRED. If a majority of the shares of common stock entitled to vote at the meeting are voted for the Company's 2000 Employee Stock Option Plan, the Plan will be approved. SUMMARY OF THE PLAN. Here is a summary of the significant terms of the Plan approved by the Board of Directors on January 20, 2000: Total Number of Shares Covered . . . . . .3,000,000 Administration . . . . . . The board of directors administers the Plan. Eligible Persons . . . . .Officers and other key employees of the Company. Exercise Price . . . . . .Generally the closing price of the Company's Common stock on the date we grant the option, but could be lower. 11 Term of Options . . . . . .Generally 10 years, but could be a shorter period. Vesting of Options . . . . Options will generally vest over a four-year period, with 25% of the options becoming exercisable on each anniversary of the date the option was granted. But we can alter this vesting schedule. Exercise of Options. . . . The holder of an option can choose to pay the exercise price of the option in cash, with the Company's common stock (valued at the closing price of the common stock on the exercise date) or by a cashless exercise. In a cashless exercise, the optionholder irrevocably instructs his or her stockbroker to sell the shares to be acquired upon exercise of the option and pay the exercise price to the Company. Transferability. . . . . . Options are not transferable except by will or By intestate succession. Acceleration of . . . . . .If a Change in Control Event (as defined in the Vesting of Options Plan) occurs, the options will vest immediately and become exercisable in full unless we determine otherwise before the event. Term of Plan . . . . . . The Plan will expire on January 20, 2010, unless we terminate it earlier. FEDERAL INCOME TAX CONSEQUENCES TO OPTION -HOLDERS. All options granted under the Plan will be nonstatutory options. An option-holder will not recognize any taxable income when the option is granted. But when the option is exercised, the option-holder will recognize ordinary income for tax purposes measured by the excess of the then fair market value of the shares over the exercise price. In certain circumstances, where the shares are subject to a substantial risk of forfeiture when acquired, the date of taxation may be deferred unless the option-holder files an election with the Internal Revenue Service under Section 83(b) of the Internal Revenue Code within 30 days after the exercise. The income recognized by an option-holder who is also a Company employee will be subject to tax withholding by the Company by payment of cash or out of the current earnings paid to the option-holder who is also a Company employee will be subject to tax withholding by the Company by payment of cash or out of the current earnings paid to the option-holder. When shares are resold by the option-holder, any difference between the sale price and the exercise price, to the extent not recognized as ordinary income as provided above, will be treated as capital gain or loss. The Company will be entitled to a deduction in the same amount as the ordinary income recognized by the option-holder. 12 This is only a summary of the federal income tax consequences of the grant and exercise of options under the Plan. It is not a complete statement of all tax consequences. In particular, we have not discussed the income tax laws of any municipality, state, or foreign country where an optionee resides. PROPOSAL NO. 4 APPOINTMENT OF INDEPENDENT ACCOUNTANTS We recommend that you vote for ratification of the appointment of R.E. Bassie & Co., P.C. We have appointed the accounting firm of R.E. Bassie & Co., P.C. as our independent accountants to examine the Company's financial statements for the year ending December 31, 2000. A resolution to ratify the appointment will be presented at the annual meeting. A majority of the votes cast must vote in favor to ratify the appointment. If the shareholders do not ratify the appointment, we will reconsider our selection of R.E. Bassie & Co., P.C. R.E. Bassie & Co., P.C. examined the Company's financial statements for 1999. A representative of R.E. Bassie & Co., P.C. will be at the meeting and available to answer questions. SHAREHOLDER PROPOSALS FOR 2000 ANNUAL MEETING If you wanted to include a shareholder proposal in the proxy statement for the 2000 annual meeting, it must have been delivered to the Company's secretary at the Company's executive offices before March 26, 2000. SHAREHOLDER PROPOSALS FOR 2001 ANNUAL MEETING If you want to include a shareholder proposal in the proxy statement for the 2001annual meeting, it must be delivered to the Company's secretary at the Company's executive offices before January 11, 2001. OTHER MATTERS At the date of mailing of this proxy statement, we are not aware of any business to be presented at the annual meeting other than the proposals discussed above. If other proposals are properly brought before the meeting, any proxies returned to us will be voted as the proxyholders see fit. 13 You can obtain a copy of the Company's Annual Report on Form 10-K for the year ended December 31, 1999 at no charge by writing to the Company at P.O. Box 980580 Houston, Texas 77098-0580, attention Shareholder Relations. By order of the Board of Directors, Dr. Beatrice Beasley Secretary April 17, 2000 14 EX-27 2
5 1000 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 21710 0 110007 0 0 131717 921917 129903 948071 864780 545114 0 310 213485 (675618) 948071 9452081 9452081 0 0 9805005 0 11014 0 0 0 2727640 0 0 (3091578) (.02) (.01)
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