SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2003
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (No fee required)
For the transition period from __________ to __________
Commission file number l-9224
CNE Group, Inc.
(Name of Small Business Issuer in Its Charter)
DELAWARE 56-2346563
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
200 West 57th Street, Suite 507, New York, NY 10019
(Address of Principal Executive Offices) (Zip Code)
212-977-2200
(Issuer's Telephone Number, including Area Code)
Securities registered under Section 12(b) of the Exchange Act:
Name of Each Exchange
Title of Each Class on Which Registered
------------------- ---------------------
Common stock - par value $0.00001 American Stock Exchange
Securities registered under Section 12(g) of the Exchange Act:
None
(Title of Class)
Check whether the issuer; (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes |X| No |_|
(Cover page 1 of 2 pages)
Check if there is no 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 the 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.
Issuer's revenues for 2003, its most recent fiscal year, were $2,149,370.
As of April 8, 2004, the aggregate market value of voting stock held by
non-affiliates of the Issuer was approximately $7,980,686.
The number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
Class Outstanding at April 8, 2004
----- ----------------------------
Common stock - par value $0.00001 10,640,915
DOCUMENTS INCORPORATED BY REFERENCE
None.
(Cover page 2 of 2 pages)
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PART I
Forward Looking Statements
Certain statements in this Annual Report Form 10-KSB constitute "forward-looking
statements" relating to the Company within the meaning of the Private Securities
Litigation Reform Act of 1995. All statements regarding future events, our
financial performance and operating results, our business strategy and our
financing plans are forward-looking statements. In some cases you can identify
forward-looking statements by terminology, such as
o "may,"
o "will,"
o "would,"
o "should,"
o "could,"
o "expect,"
o "intend,"
o "plan,"
o "anticipate,"
o "believe,"
o "estimate,"
o "predict,"
o "potential" or
o "continue,"
the negative of such terms or other comparable terminology. These statements are
only predictions. Known and unknown risks, uncertainties and other factors could
cause actual results to differ materially from those contemplated by the
statements. In evaluating these statements, you should specifically consider
various factors, including the risks outlined under the Risk Factors set forth
herein. These factors may cause our actual results to differ materially from any
forward-looking statements.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. We are under no duty to update any of the
forward-looking statements after the date of this report to conform those
statements to actual results or to changes in our expectations.
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Item l. Description of Business.
The Company was incorporated under the laws of the State of Delaware in 2003.
Unless the context requires otherwise, the term "Company," "our," or "we" refers
to CNE Group, Inc. and its wholly-owned subsidiaries SRC Technologies, Inc. and
CareerEngine Network, Inc.
General
We are a holding company whose primary operating subsidiary is SRC
Technologies, Inc. ("SRC"). SRC has three operating subsidiaries;
Connectivity, Inc. ("Connectivity") and Econo-Comm, Inc. ("ECI"),
both located in Lauderhill, Florida, and U.S. Commlink, Ltd. ("US
Commlink"), located in Livermore, California. Econo-Comm, Inc.
conducts business under the name of Mobile Communications and is
sometimes referred to herein as "Mobile Comm." These companies,
which we acquired on April 23, 2003, market, manufacture, repair and
maintain remote radio and cellular-based emergency response products
to a variety of federal, state and local government institutions,
and other vertical markets throughout the United States. SRC has
intellectual property rights to certain key elements of these
products - specifically, certain communication, data entry and
telemetry devices. In addition, we engage in the business of
e-recruiting through our subsidiary, CareerEngine, Inc. The
e-recruiting business does not generate a significant part of our
revenue.
Our corporate executive offices and CareerEngine are located at 200
West 57th Street, New York, NY 10019 (212-977-2200). SRC,
Connectivity and ECI are located at 3733 NW 16th Street, Lauderhill,
FL 33311 (954-587-1414). US Commlink is located at 6244 Preston
Avenue, Livermore, CA 94550 (925-960-0097).
Connectivity, US Commlink and Mobile Comm are part of the wireless
communications industry. Our markets include Intelligent Traffic
Systems, referred to as ITS and security related products. We also
manufacture ancillary devices for wireless data networks. Our
business objective is to design and distribute cost effective
wireless products that are interoperable between people-to-people,
people-to-machine, and machine-to-machine, and to address the remote
communication requirements of our customers with
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solutions that deliver safety, convenience and security benefits. We
compete by offering niche products that utilize either existing
infrastructures or low cost wireless systems that can be rapidly
deployed.
The wireless business we compete in consists of three distinct
categories:
o product development, engineering, and manufacturing;
o sales, distribution and installation of wireless
products; and
o service and maintenance of our own and other
manufacturers' wireless products.
All three operating subsidiaries are engaged in product development.
Both Mobile Comm and US Commlink design, engineer and distribute
wireless products that are either radio or cellular based. All three
companies market their own products and services, but Connectivity
has the primary responsibility for these activities. Mobile Comm and
US Commlink install their products. Mobile Comm is also an
authorized dealer of Motorola products.
We provide a 12-month warranty that our hardware performs within
certain specifications, and we warrant the performance of our
software. To date, we have not received notice of any warranty
claims. We have accrued $40,620 for future warranty claims for the
year ended December 31, 2003.
Mobile Comm has a number of customers with which it has long term
service and maintenance contracts for wireless communications
products. Many of these customers are state, county and municipal
agencies. US Commlink also provides service and maintenance
contracts to its customers.
Connectivity, Inc.
Connectivity has marketed wireless call box products to a variety of
federal, state and local government agencies and departments, and
numerous other vertical markets throughout the United States. Some
of our customers include:
o State Departments of Transportation (DOT's);
o college campuses;
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o private and public golf courses;
o hospitals;
o air/sea ports;
o parking facilities; and
o amusement/county parks.
The retail prices for these products range from $2,500.00 to over
$5,000.00, depending upon the features that are included.
Connectivity's profit margins vary, depending on the type of
distribution channel through which its products are sold.
Prior to June 25, 2003, Connectivity marketed its call boxes
directly to end users and through a network of approximately 25
independent Authorized Agents, referred to as AA's, throughout the
United States pursuant to oral agreements that could be terminated
by either party at will. The AAs purchased the products from
Connectivity at a discount equal to between 10% and 25% of retail
prices. The AA's were not required to purchase any minimum number of
units, but were not permitted to sell competing products. For the
fiscal year ended December 31, 2002, Connectivity sold approximately
75% of its products directly to end users and approximately 25% to
AA for resale. No one distributor accounted for more than 5% of its
sales during this period.
On June 25, 2003, Connectivity entered into a written distribution
agreement with Motorola, Inc. pursuant to which Motorola has begun
marketing certain Connectivity call boxes in North America through
its network of authorized dealers. The dealers purchase these
products from Connectivity at a discount from retail prices. Dealers
are not required to purchase any minimum number of units, and are
permitted to sell competing products. All of the AAs previously used
by us are Motorola dealers and are participating in our distribution
agreement with Motorola. We also continue to market our products
directly. For the fiscal year ended December 31, 2003, Connectivity
sold approximately 84% of its products directly to end users and
approximately 16% to dealers for resale. No one dealer accounted for
more than 5% of its sales during this period.
U.S. Commlink, Ltd.
Although US Commlink commenced operations in June 2003, its
management has been engaged, primarily in the State
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of California, in the wireless communications and emergency call box
systems business for the past 25 years. US Commlink designs,
manufactures, installs and services several wireless and wired ITS
systems for both private and municipal organizations. US Commlink is
also a State of California certified general contractor. Its
services include:
o System Design o Specialized Software o Contract Management
o Device Integration o Technical Support o General Engineering
o Custom Products o Site Installation o Field Construction
US Commlink has two devices that have varying applications in the
ITS market. The Smart Remote Controller, or SRC device, is a
telemetry device that transmits wireless data from up to four
peripheral devices at remote locations to a central receiving
location. The second device is a Text Telephony, or TTY, keyboard
for cellular based emergency call boxes. This keyboard currently
exceeds all of the regulatory requirements under the Americans With
Disabilities Act of 1990 as it pertains to accessibility guidelines.
Both the SRC and TTY devices have been approved by the California
Department of Transportation. The SRC device is the central
component around which many other products may be developed. The
applications for this device include, but are not limited to:
o transmission of remotely gathered environmental data;
o traffic speeds and volume counts;
o gas, electric and seismic meter reading;
o video monitoring; and
o reporting adverse weather conditions through various
types of sensors.
The SRC device is currently being used in several different
California locations as a Datalink Smart Remote Controller. This
controller detects fog and traffic speed levels and transmits this
data wirelessly back to a central station. The central station then
automatically compiles this data on the conditions and reports the
information to highway variable message signs.
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Mobile Comm
Mobile Comm, which was founded in 1984, manufactures all of our
radio based call box products. Its primary revenue-generating
business is maintaining and servicing radio systems for city, county
and state government agencies. Its secondary business includes pager
repair, two-way radio equipment repair and maintenance of highway
callbox systems. Mobile Comm is a Motorola radio dealer, which
allows it to sell and repair Motorola radio products.
Mobile Comm has maintenance contracts with
o the State of Florida DOT for more than 800 call boxes
located on the Ronald Reagan Turnpike, Bee-Line
Expressway and Sun-Coast Parkway;
o the Broward County School Board to service the mobile
and portable radios for its approximately 280 schools;
o the Broward County Transit Authority to service the
radios located on all of the Transit Authority's buses
in Broward County; and
o a number of other public and private institutions for
radio maintenance.
Revenue Distribution
Mobile Comm's, Connectivity's and US Commlink's revenue accounted
for approximately 37%, 29%, and 34%, respectively, of SRC's revenue
for the year ended December 31, 2003. Maintaining radio systems,
maintaining and servicing call boxes, and other maintenance services
accounted for approximately 74% of Mobile Comm's revenue for the
year ended December 31, 2003.
Competition
The wireless call box industry is characterized by rapid
technological changes, frequent new product and service
introductions, and evolving industry standards. We believe that to
compete successfully in this market we must have the ability to:
o Properly identify customer needs;
o Price our products competitively;
o Innovate and develop new or enhanced products;
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o Successfully commercialize new technologies in a timely
manner;
o Manufacture and deliver our products on time and in
sufficient volumes to produce them on a commercially
viable basis; and
o Differentiate our offerings from our competitors'
offerings.
Numerous providers serve the market for emergency call box
systems, including
o Signal Communications Corporation (www.sigcom.com),
o Comarco, Inc. (NYSE symbol CMRO),
o Gaitronics, a division of Hubble Corporation (NYSE
symbol HUBB),
o Talk-A-Phone (www.talkaphone.com),
o Code Blue (codeblue.com)
and certain other manufacturers of wireless and wireline emergency
and information telephones.
The following information was obtained from the web sites of the
respective companies and from other publicly disseminated
promotional information:
o Signal Communications Corporation, which provides call
boxes and other communications devices and has been in
business for more than 28 years, markets products
primarily in the eastern United States.
o Comarco Inc, a public company operating in several
different business sectors, has a subsidiary, Comarco
Wireless Technologies, Inc., that has been manufacturing
solar powered, cellular call boxes since 1986.
o The Hubbell Corporation, a multi-billion dollar company,
which owns Gaitronics (another hard-wired call box
company), has been manufacturing enclosures for over 45
years and offers a variety of shapes and sizes of
enclosures through a variety of distribution channels.
o Blue Light Phone Company, known as Code Blue, a
hard-wired call box competitor, is a private company
founded in 1989.
Most of our competitors are larger and have greater financial
resources than we do, but we believe that the patents that cover our
wireless applications products provide us with a competitive
advantage.
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Research and Development
The proposals that we bid on drive our research and development
activities. Prior to bidding on a contract, we retain a team of two
independent engineers that work under the direction of our product
development staff to design what we require to meet the contract bid
specifications. Accordingly, we depend significantly on the
creativity and efficiency of these independent engineers to compete
for the contracts that we bid on. We cannot assure you that these
engineers will be available for our use in the future. If they are
not and we are unable to obtain qualified replacements, our ability
to bid on new contracts would be adversely affected.
Manufacturing and Suppliers
We assemble our products at our facilities in Lauderhill, Florida
and Livermore, California, and use contract labor for this work. Our
manufacturing process involves the assembly of numerous individual
component parts and materials, which consist primarily of printed
circuit boards, specialized subassemblies, fabricated housings and
chassis, radios, cellular telephones, and small electric circuit
components, such as integrated circuits, semiconductors, resistors,
and capacitors. Third parties make a majority of the components and
sub-assemblies to our specifications, which are delivered to us for
final testing before assembly. Although we use sole sources for
certain of these components, all of these components are readily
available from a number of suppliers. We do not have written
agreements with any of our suppliers except for Motorola.
Patents and Intellectual Property
We hold a patent for a radio-based callbox apparatus and a patent
for our TTY keyboard for cellular call boxes. As of the date hereof,
we are not parties to any infringement claims with respect to our
patented products and have not received any notices of infringement
claims with respect to our products. We also rely on a combination
of trade secrets and confidentiality agreements to protect the
intellectual property embodied in the hardware and software
components of our wireless call boxes and other products.
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Industry Practices Impacting Working Capital
Existing industry practices that affect our working capital and
operating cash flow include
o the level of variability of customer orders relative to
the volume of production,
o vendor lead times,
o materials availability for critical parts,
o inventory levels held to achieve rapid customer
fulfillment, and
o provisions of extended payment terms.
Currently, we sell our products under purchase orders that are
placed with short-term delivery requirements. As a result, we
maintain significant levels of inventory and associated production
and technical staff in order to meet our obligations. Delays in
planned customer orders could result in higher inventory levels and
negatively impact our operating results.
Our standard terms require customers to pay for our products and
services in U.S. dollars within 30 days after receipt of invoice.
Non-U.S. customers are required to pay in U.S. Dollars when the
order is placed. There were no sales to non-U.S. customers for the
fiscal year ended December 31, 2003. On projects that require
special components, we generally receive 25-50% of our payment when
we begin and the balance 30 days after completion.
Employees
As of April 1, 2004, including our six executive officers, we
employed 27 employees; 17 by Mobile Comm (one sales, four engineers,
nine wireless communications technicians, one administrative
personnel, and two executive personnel), four by Connectivity (one
sales, one administrative personnel and two executive personnel),
two by US Commlink (one in construction management and one
executive) and four at our executive offices in New York City (one
administrative personnel, one communications technician and two
executive personnel). The majority of our employees are
professional, technical or administrative personnel who possess
training and experience in engineering, computer science, or
management. We have no union contracts. We believe that our employee
relations are satisfactory.
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Our future success depends in large part on our ability to retain
key technical, marketing, and management personnel, and to attract
and retain qualified employees, particularly those highly skilled in
radio frequency, design, process, and test engineering involved in
the development of new products. Competition for such personnel is
intense, and the loss of key employees, as well as the failure to
recruit and train additional technical personnel in a timely manner,
could have a material and adverse effect on our operating results.
Our success also depends, to a significant, extent upon the
contribution of our executive officers and other key employees. We
have employment agreements with our executive officers, and maintain
an employee stock option plan whereby key employees can participate
in our success. Seven of our employees are currently covered by this
plan.
Our Discontinued Operations
In 2000, the Board of Directors of the Company decided to
discontinue its merchant banking operations, which consisted of its
real estate operations project with Carmike Cinemas, Inc., and its
financial consulting operations. In addition, in 2003 the Company
sold one of its subsidiaries.
Sale of Subsidiary
On August 15, 2003 the Company, for nominal consideration,
sold all the stock of one of the subsidiaries whose remaining
assets and liabilities were transferred to a trust for the
benefit of its creditors and recognized a gain amounting to
approximately $583,634.
Gain of Extinguishment of Debt
In 1997, the Company entered into a triple net, credit type
lease with Carmike Cinemas, Inc. ("Carmike"), pursuant to
which the Company leased to Carmike six parcels of land and
the improvements thereon. Concurrently, the Company issued
$72,750,000 principal amount of its adjustable rate tender
securities due November 1, 2015 (the "Bonds"). The Bonds were
secured by irrevocable letters of credit issued by a group of
banks. In connection therewith the Company entered into a
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Reimbursement Agreement with Wachovia, as agent for the banks,
under which the Company was obligated to remit all rent
received under the lease to Wachovia to reimburse the banks
for the Bond payments made by draws on their letters of
credit.
On August 8, 2000, Carmike filed a petition under Chapter 11
of the United States Bankruptcy Code. As a result of that
filing and Carmike's subsequent failure to pay rent to date
under the lease, the Company failed to make required payments
to Wachovia under the Reimbursement Agreement. Accordingly,
Wachovia declared a default under the Reimbursement Agreement
and accelerated all amounts due by the Company thereunder.
Wachovia also directed the Trustee under the related Indenture
to redeem the Bonds. Such amounts were paid entirely through
draws on the related letters of credit and were not paid with
funds of the Company. However, as the Bonds are no longer
outstanding, all unamortized financing costs (amounting to
$804,667) relating thereto were expensed. In addition, Carmike
has not disaffirmed the lease and continues to occupy the six
theaters.
Interest and fees which have been accrued on the reimbursement
obligations through December 2001 have been recorded with a
corresponding amount of accrued rent receivable from Carmike.
On January 31, 2002 title to the six theaters was transferred
to the banks in payment of the non-recourse debt under the
Reimbursement Agreement and the Company recognized a gain of
$3,512,884, representing the excess of the liabilities over
the carrying value of the assets relating to the real estate
leased to Carmike. In addition, the Company received $294,755
in connection with the sale of its common membership interest
in Movieplex relating to the transfer of title of the movie
theaters to Wachovia.
Subsidiaries
Our active subsidiaries are SRC Technologies, Inc. and CareerEngine
Network, Inc. SRC's subsidiaries are Connectivity, Inc., Econo-Comm,
Inc. (d/b/a/ Mobile Communications) and U.S. Commlink, Ltd.
CareerEngine Network, Inc.'s subsidiaries are CareerEngine, Inc.,
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Shaw Realty Company, Inc., Helmstar Funding, Inc., Burrows, Hayes
Company, Inc., Dover, Sussex Company, Inc., Housing Capital
Corporation, Randel, Palmer & Co., Inc. Parker, Reld & Co.,
Inc., McAdam, Taylor & Co., Inc., and Ryan, Jones & Co., Inc.
CareerEngine, Inc.'s wholly-owned subsidiaries include Advanced
Digital Networks, Inc. and A.E. Lander Corp. (formerly Alexander
Edwards International, Inc.). All of CareerEngine Network, Inc.'s
direct and indirect subsidiaries are operationally inactive except
for CareerEngine, Inc.
Regulation
We do not believe that our business is subject to regulation as it
is currently being conducted.
American Stock Exchange Listing
On December 31, 2003 we received notice from the American Stock
Exchange Staff indicating that we had evidenced compliance with the
requirements necessary for continued listing on the American Stock
Exchange.
As is the case for all listed issuers, our continued listing
eligibility will be assessed on an ongoing basis; however, during
the year ending December 31, 2004 it shall be subject to additional
scrutiny (as set forth in Section 1009(h) of the AMEX Company Guide)
as is the case for any listed Company that has regained compliance.
Risk Factors That May Affect Future Results
The following discussion highlights certain of the risks we
currently face.
Risks Related to our Financial Condition
We have operated on a negative cash flow basis and our
business and financial condition will be materially and
adversely affected if we are unable to generate a
positive cash flow on a continuing basis.
From April 2003, when we acquired SRC and its affiliated
companies, through December 31, 2003, we operated at an
average monthly negative cash flow rate of approximately
$190,000. We estimate that, based on our current rate of
operations, we
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must generate an aggregate of at least approximately
$604,000 per month in average gross revenues in order
for our cash flow to be adequate to cover our operating
expenses and capital expenditures. Although we believe
that we will generate a positive cash flow for the year
ending December 31, 2004, we cannot assure you that we
will be able to do so or to sustain a positive cash flow
thereafter. If we are unable to achieve the level of
revenues needed to attain a positive cash flow, we may
be required to take actions, including reducing our
operations, that could materially and adversely affect
our business.
We have a history of losses and we cannot assure you
that we will be able to operate profitably in the
foreseeable future, if at all.
We have not had income from continuing operations since
our fiscal year ended December 31, 1997. For our fiscal
years ended December 31, 2003, December 31, 2002 and
December 31, 2001 we incurred losses from continuing
operations of approximately $1,703,000, $2,115,000 and
$2,698,000, respectively. Our ability to become
profitable depends on our ability to increase our
revenues to an average of approximately $604,000 per
month while keeping our expenses at current levels. In
January 2004, our management took several actions,
including reducing executive salaries and administrative
expenses and the waiving certain debt service payments,
in an effort to address this problem and our negative
cash flow problem. If we do achieve profitability, we
cannot assure you that we will be able to sustain or
increase such profitability on a monthly, quarterly or
annual basis in the future. Our inability to achieve or
maintain profitability or positive cash flow could
o result in disappointing financial results,
o impede implementation of our growth
strategy,
o cause the market price of our common stock
to decrease,
o impede our ability to procure financing on
acceptable terms or at all, and
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o otherwise adversely affect our business and
financial condition.
We may be unable to continue as a going concern.
Our independent auditors' report on our consolidated
financial statements for the years ended December 31,
2003 and 2002 includes language reflecting that
substantial doubt exists, as to our ability to continue
as a going concern. Our management's notes to these
financial statements included a discussion of our
ability to continue as a going concern. They describe
the reasons why there is substantial doubt about our
ability to continue as a going concern. Our financial
statements show an accumulated deficit at December 31,
2003 of approximately $19,100,000 and an accumulated
deficit at December 31, 2002 of approximately
$18,000,000. Our financial statements do not include any
adjustments that might result from the outcome of this
uncertainty. As noted above, we cannot assure you that
we will not continue to incur net losses and negative
cash flow for the foreseeable future.
Under certain circumstances we could incur an impairment
loss that could adversely affect our stockholders'
equity.
We have accounted for our acquisition of SRC and its
affiliated companies under the purchase method, which
resulted in our recording approximately $7,286,000 in
goodwill. If, among other things, these companies, in
the aggregate, are unable to attain and sustain a
positive cash flow by approximately December 2004, one
year after our last valuation, we may incur an
impairment loss that would significantly decrease the
value of our goodwill adversely affecting our
stockholders' equity, as stated in our financial
statements, to the extent of this loss.
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We may require financing if our revenues do not meet our
projections or our expenses are greater than we
anticipate, or to finance the further development of our
business. Our inability to obtain financing, if
required, would have an adverse effect on our business.
We may need to obtain financing if our actual costs are
higher than projected or our contemplated future
revenues fall below our current expectations, in order
to
o finance more rapid expansion,
o increase marketing and sales,
o develop new or enhanced technology,
o respond to competitive pressures,
o establish strategic relationships, and/or
o provide for working capital.
If we raise such financing by issuing equity or
convertible debt securities, the percentage ownership of
our stockholders will be diluted. Any new debt or equity
securities could have rights, preferences and privileges
senior to rights of our common stock holders. We
currently have no commitments for any financing and,
accordingly, cannot assure you that such financing will
be available when and to the extent required or that, if
available, it will be on terms acceptable to us. If
adequate financing is not available on acceptable terms,
we may be unable to finance the activities referred to
above. In such event, our business may be adversely
affected.
Recently enacted and proposed changes in securities laws
and regulations will increase our costs.
The Sarbanes-Oxley Act of 2002 that became law in July
2002 has required and will continue to require changes
in some of our corporate governance practices. The Act
also required the SEC to promulgate new rules on a
variety of subjects. In addition to final rules and rule
proposals already made by the SEC, the American Stock
Exchange has proposed revisions to its requirements for
companies such as us that have securities listed with
it. We expect these new
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rules and regulations to increase our legal and
financial compliance costs, and to make some activities
more difficult, time consuming and/or more costly. We
also expect that these new rules and regulations may
make it more costly to obtain director and officer
liability insurance coverage, and we may be required to
accept reduced coverage or incur substantially higher
costs to obtain it. We currently do not have this
coverage. These new rules and regulations could also
make it more difficult for us to attract and retain
qualified members of our board of directors,
particularly to serve on our audit committee, and
qualified executive officers. In accordance with the
Sarbanes-Oxley Act, we have instituted a number of
changes relating to corporate governance practices
including the certification of our consolidated
financial statements pursuant to Sections 302 and 906 of
the Sarbanes-Oxley Act and adoption of certain internal
controls. The Sarbanes-Oxley Act has provisions that
have implementation deadlines, including those related
to Section 404 concerning internal control procedures.
Implementation of those procedures will require
resources and a portion of our management's time and
efforts.
Our reported financial results may be adversely affected
by changes in accounting principles generally accepted
in the United States.
We prepare our financial statements in conformity with
accounting principles generally accepted in the United
States. These accounting principles are subject to
interpretation by the Financial Accounting Standards
Board, the American Institute of Certified Public
Accountants, the SEC and various bodies formed to
interpret and create appropriate accounting policies. A
change in these policies or interpretations could have a
significant effect on our reported financial results,
and could affect the reporting of transactions completed
before the announcement of a change. For example, while
current accounting rules allow us to exclude the expense
of stock options from our financial statements,
influential business policy groups, including the
Financial Accounting Standards Board, have suggested
that the rules be changed to require these options to be
expensed. Technology
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companies generally, and our company, specifically, rely
heavily on stock options as a major component of our
employee compensation packages. If we are required to
expense options granted to our officers and employees,
although our cash position would not be affected, our
income from continuing operations and our stockholders'
equity would decrease and our stock price could be
adversely effected. In such event, we may have to
decrease or eliminate option grants to our officers and
employees, which could negatively impact our ability to
attract and retain qualified employees and executive
personnel.
Our ability to use net operating loss carryforwards may
be limited in the future, which could adversely affect
our financial condition.
As of December 31, 2003, we had a federal income tax net
operating loss carryforward of approximately $36.5
million. Section 382 of the Internal Revenue Code of
1986, as amended, (the "Code") provides that our use of
our net operating loss carryover and similar corporate
tax attributes is limited if there is an "ownership
change" as defined in that Section. In general, the
post-ownership change limitation is an amount equal to
our fair market value multiplied by a deemed rate of
return on the investment of that fair market value. The
selected deemed rate of return is the federal "long-term
tax exempt rate," reflecting the rate of return on our
equity value had we sold our assets and invested the
proceeds in long-term tax-exempt bonds. The application
of the limitation would severely restrict our ability to
use our net operating loss carryforward to offset any
taxable income we may earn in future years. This would
adversely affect our net after tax cash, which could
adversely affect our financial condition as well as the
price of our common stock.
In general, for purposes of the Code, an ownership
change occurs when 5% or more owners increase their
ownership percentage by more than 50% over the lowest
percentage owned by those owners at any time during a
testing period, which is generally the three years prior
to the
19
increase in ownership by 5% or more owners. The IRS has
authority to treat warrants, options, contracts to
acquire stock, convertible debt interests and other
similar interests as if they are stock and stock as if
it is not stock. Although we believe that we have not
had an ownership change on the basis of existing rules,
we cannot assure you that the IRS will accept our
position. In any event, it is possible that past and/or
future transactions affecting our equity could create an
ownership change and trigger this limitation on the use
of our net operating loss.
We have amended our by-laws to restrict transfers of our
common stock that could cause an ownership change but we
cannot assure you that this amendment will prevent an
ownership change. In addition, this transfer restriction
could adversely affect the value of our common stock.
Risks Related to our Business
Our business faces intense competition. If we fail to
adequately meet this competition, our business could be
adversely affected.
We encounter aggressive competition in the Intelligent
Traffic System ("ITS") and call box markets. We have
numerous competitors that range from large U.S.
corporations to many relatively small and highly
specialized firms. We compete primarily on the basis of
o technology,
o performance,
o price,
o quality,
o reliability,
o customer service, and
o support.
Most of our competitors have substantially greater
financial, technical and marketing resources, longer
operating histories and greater name recognition to
apply to each of these factors, and in some cases have
built significant reputations with the customer base in
the markets in which we compete. If we are unable to
successfully compete, our business, financial
20
condition, and operating results could be materially and
adversely affected.
Our products must conform to the requirements of the
Americans With Disabilities Act of 1990 as it pertains
to accessibility guidelines. If we fail to meet these
requirements our business could be adversely affected.
Our products are manufactured to comply with the ADA as
it relates to accessibility guidelines. In the event
that the law changes and we fail to adapt our products
to comply with these changes, our business would be
adversely affected.
Because we have fixed costs, any decline in our revenues
could disproportionately and adversely affect our
financial condition and operating results.
Significant portions of our costs are fixed, due in part
to our fixed sales, engineering and product support, and
manufacturing facilities. As a result, relatively small
declines in revenue could disproportionately affect our
operating results. Additionally, we have a limited
backlog and a limited view of when an order will be
received and shipped, which may affect revenue in any
given period.
Changes in product demand, among other things, could
adversely affect our manufacturing capacity, which would
adversely affect our business.
Because we build our inventory to meet specific contract
requirements, customer demand is not a factor that will
result in excess manufacturing capacity. However, if our
manufacturing capacity does not keep pace with our
contract awards, we will be unable to fulfill orders in
a timely manner, which could adversely affect our
operating results. In addition, any significant
disruption in our manufacturing operation, whether due
to fire, natural disaster, or otherwise, also will
materially and adversely affect our financial condition
and operating results.
21
Because we rely on independent and single source
suppliers, failure of a supplier to deliver to us may
adversely affect our business.
We rely on independent suppliers to provide us with the
components that we use to assemble our products. We do
not have written agreements with our suppliers except
for Motorola. We are an authorized dealer for Motorola
radios but the sale of new Motorola radios is not a
material portion of our business. Accordingly, because
we do not control these suppliers, our business could be
adversely affected to the extent that our suppliers fail
to make these components to our specifications or
deliver them in a timely manner.
In addition, we currently procure, and expect to
continue to procure, approximately 10% of the components
that we use to build our products from single source
manufacturers due to unique component designs, as well
as certain quality and performance requirements. We also
purchase certain customized components from single
sources in order to take advantage of volume pricing
discounts. In the future, we could experience shortages
of single-source components. In such event, we may have
to make adjustments to both product designs and
production schedules that could result in delays in the
production and delivery of our products. Such delays
could have materially and adversely affect our financial
condition and operating results.
If we fail to obtain a bidding partner, our business
could be adversely affected.
Approximately 65% of our gross and net revenues for our
fiscal year ended December 31, 2003 were generated by
our participation in public projects. This participation
involves competitive bidding, which generally requires
us to post a bid bond equal to 10% of the total cost of
the project. If we are awarded the bid, we are usually
required to post a 100% performance bond. We have been
able to obtain these bonds for the work we currently are
performing but, because of our weak financial condition,
in the future we may be required to obtain a financially
responsible partner to participate with us in the
22
bidding process. We cannot assure you that such a
partner will be available to us, if required. If and to
the extent that we fail to find such a partner when
needed, our business would be adversely affected.
If we fail to introduce new products on a timely basis,
our business could be adversely affected.
We sell our products in the ITS industry, which is
characterized by;
o rapid technological changes,
o frequent new product introductions, and
o evolving industry standards.
Without the timely introduction of new products and
enhancements, our products will likely become
technologically obsolete over time, in which case our
operating results would suffer. The success of our new
product offerings will depend on several factors,
including our ability to;
o properly identify customer needs,
o price our products competitively,
o innovate and develop new technologies and
applications,
o successfully commercialize new technologies
in a timely manner,
o manufacture and deliver our products in
sufficient volumes on time, and
o differentiate our offerings from those of
our competitors.
Development of new products may require a substantial
investment before we can determine the commercial
viability of these innovations. We would suffer
competitive harm if we dedicate a significant amount of
our resources to the development of products that do not
achieve broad market acceptance.
Our business could be adversely affected if our products
have defects.
Our products may have defects despite any internal
testing that we may undertake. These defects could
result in product returns or
23
recalls and loss or delay in market acceptance, which
could materially and adversely affect our business,
operating results, and/or financial condition. We
warrant our products against certain defects and,
although we have not received notice of any warranty
claims in the past, we cannot assure you that no such
claims will be made in the future.
Because most of our products are based on constantly
changing technology, our business could be adversely
affected if we fail to adequately adapt our products to
these changes.
Most of our products are based on wireless and solar
powered technology. This technology is constantly being
updated. Accordingly, our operating results could suffer
if we fail to adapt our products to meet this changing
technology. Among the factors that make a smooth
transition from current products to new products
difficult are:
o delays in product development or
manufacturing,
o variations in product costs, and
o delays in customer purchases of existing
products in anticipation of new product
introductions.
Our operating results could also suffer due to the
timing of product introductions by our competitors. This
is especially true when a competitor introduces a new
product just before we do.
Our business could be adversely affected if we fail to
maintain rights to our intellectual property.
We generally rely upon patent and trade secret laws, and
agreements with our employees, customers, and partners
to establish and maintain our proprietary rights in our
technology and products. However, any of our
intellectual proprietary rights could be challenged,
invalidated, or circumvented. Our intellectual property
may not necessarily provide significant competitive
advantages. In addition, because of
24
the rapid pace of technological change in the ITS and
call box markets, certain of our products rely on key
technologies developed by third parties, and we may not
be able to continue to obtain licenses from these third
parties. Third parties also may claim that we are
infringing their intellectual property. Even if we do
not believe that our products are infringing third
parties' intellectual property rights, these claims can
be time-consuming and costly to defend and divert our
management's attention and resources away from our
business. Claims of intellectual property infringement
might also require us to enter into costly royalty or
license agreements. If we cannot or do not license the
infringed technology or substitute similar technology
from another source, our business could suffer.
If we fail to integrate with third parties when required
to do so, our business could be adversely affected.
In the normal course of business, we frequently engage
in discussions with third parties relating to integrated
bid participations and strategic alliances, possible
acquisitions, and joint ventures. Although completion of
any one transaction may not have a material effect on
our financial position, results of operations, or cash
flows taken as a whole, our financial results may differ
from the investment community's expectations in a given
quarter. Acquisitions and strategic alliances may
require us to integrate with different company cultures,
management teams, and business infrastructures. We may
also have to develop, manufacture, and market products
in a way that enhances the performance of the combined
business or product line. Depending on the size and
complexity of an acquisition, our successful integration
of an entity depends on a variety of factors, including
o hiring and retaining key employees,
o managing facilities and employees in
separate geographic areas, and
o integrating or coordinating different
research and development and product
manufacturing facilities.
25
All of these efforts require varying levels of
management resources, which may divert our attention
from other business operations.
Our business may suffer if we lose the services of our
executive officers, or if we cannot recruit and retain
additional skilled personnel.
We depend on the continued services and performance of
George W. Benoit, our Chairman and Chief Executive
Officer, Michael J. Gutowski, our President and Chief
Operating Officer, and Anthony S. Conigliaro, our Chief
Financial Officer, for our future success. If either Mr.
Benoit, Mr. Gutowski or Mr. Conigliaro becomes unable or
unwilling to continue in his current position, our
business and financial conditions could be damaged. We
are not the beneficiaries of any key person life
insurance covering them or any other executive.
We also depend upon our ability to attract, hire, train
and retain highly skilled technical, sales and
marketing, and support personnel, particularly with
expertise in wireless call box products and services.
Competition for qualified personnel throughout our
industry is intense. If we fail to attract, hire or
retain such personnel, our business, results of
operations and financial condition could be materially
and adversely affected. We may experience difficulty
providing the proper level of service to our customers
or incur increased costs due to rising salary and
benefit levels.
We may be unable to effectively manage growth that we
may experience, which could constantly strain our
resources and adversely affect our business.
We plan to expand our operations, which, if we do, will
impose significant demands on our management, financial,
technical and other resources. We must adapt to changing
business conditions and improve existing systems or
implement new systems for our financial and management
controls, reporting systems and procedures and expand,
train and manage a growing employee base in order to
manage any future
26
growth we may have. Furthermore, we may need to acquire
more advanced technologies or products or enter into
strategic alliances, in order to achieve growth. For us
to succeed, we must make our existing technology,
business and systems work effectively with those of any
strategic partners without undue expense, management
distraction or other disruptions to our business. We may
be unable to implement our business plan if we fail to
manage any of the above growth challenges successfully,
in which event our business, results of operations and
financial condition could be materially and adversely
affected.
Risks Related to the ownership of our Common Stock
Because our assets are insufficient to pay our
outstanding debt and preferred stock liquidation
preferences, if we liquidated now, owners of our common
stock would not receive any proceeds from the
liquidation.
As of December 31, 2003, we had outstanding indebtedness
of approximately $3,904,000 and outstanding preferred
stock with an aggregate liquidation preference of
$3,137,961. Accordingly, if we liquidated, based on our
current financial condition, no assets would be
available for distribution to our common stockholders
after distributions to creditors and holders of our
preferred stock.
Your ability to sell any common stock may be restricted,
because there is a limited trading market for these
securities.
Although our common stock is currently traded on the
American Stock Exchange, a liquid market in our stock
has been sporadic. Accordingly, if you purchase any
shares of our common stock, you may not be able to sell
them when you want or at the price you want, if at all.
Our common stock could be delisted from trading on the
American Stock Exchange, in which event your ability to
sell any shares you may own could be significantly and
adversely affected.
27
Although our common stock is listed for trading on the
American Stock Exchange (the "AMEX"), it could be
delisted because we may be unable to satisfy certain
AMEX listing guidelines, including earnings per share,
market price and stockholders' equity criteria. Among
other things, we must (i) continuously maintain our
stockholders' equity in excess of $6,000,000, and (ii)
hold, annually, a meeting of our stockholders, to meet
the AMEX's continuing listing requirements. On August
26, 2003, we received notice from the AMEX that as of
June 30, 2003, we were below certain of its continuing
listing standards. At that date, our stockholders'
equity was $2,069,635; however, at September 30, 2003,
our stockholders' equity was $6,900,790. On January 2,
2004 we received a notice dated December 31, 2003 from
the AMEX Staff indicating that we evidenced compliance
with the requirements necessary for continued listing on
the AMEX. As is the case for all listed issuers, our
continued listing eligibility will be assessed on an
ongoing basis; however, during the year ending December
31, 2004 we shall be subject to additional scrutiny (as
set forth in Section 1009(h) of the AMEX Company Guide)
as is the case for any listed company that has regained
compliance. If we fail to comply with the continuing
listing standards, our securities would most likely be
delisted from the AMEX. We cannot assure you that we
will continue to be in such compliance.
If we do not retain the AMEX listing and our common
stock is thereafter quoted only on the OTC Electronic
Bulletin Board, a significantly less liquid market than
the AMEX, a stockholder will find it even more difficult
to dispose of, or to obtain accurate price quotations of
our common stock. In addition, depending on several
factors including, among others, the future market price
of our common stock, these securities could become
subject to the so-called "penny stock" rules that impose
additional sales practice and market making requirements
on broker-dealers who sell and/or make a market in such
securities. These factors could affect the ability or
willingness of broker-dealers to sell and/or make a
market in our common stock and the ability of purchasers
of our common stock to sell their
28
shares in the secondary market. A delisting could also
negatively affect our ability to raise capital in the
future.
The market price of our common stock may be volatile,
which could adversely affect the value of any common
stock that you may own.
The market price of our common stock may fluctuate
significantly in response to the following factors:
o variations in our quarterly operating
results;
o our announcements of significant contracts,
milestones or acquisitions;
o our relationships with other companies;
o our ability to obtain capital commitments;
o additions or departures of our key
personnel;
o sales of our common stock by others or
termination of stock transfer restrictions;
o changes in estimates of our financial
condition by securities analysts; and
o fluctuations in stock market price and
volume.
The last three factors are beyond our control.
In the past, following periods of volatility in the
market price of a company's securities, securities class
action litigation often has been instituted against that
company. Such litigation is expensive and diverts
management's attention and resources. Any one of the
factors noted above could have an adverse affect on the
value of our common stock.
Anti-takeover provisions of the Delaware General
Corporation Law and in our Certificate of Incorporation
could discourage a merger or other type of corporate
reorganization or a change in control, even if it could
be favorable to the interests of our stockholders.
The Delaware General Corporation Law and our Certificate
of Incorporation contain provisions that may enable our
management to retain control and resist a takeover of
our Company. These
29
provisions generally prevent us from engaging in a broad
range of business combinations with an owner of 15%, 20%
in the case of our Certificate of Incorporation, or more
of our outstanding voting stock for a period of three
years from the date that this person acquires his stock.
Our Certificate of Incorporation and our By Laws also
require the affirmative vote of at least 60% or our
voting stockholders to effect certain actions,
including, under certain circumstances, the removal of
directors, and provide for the election of different
classes of directors with the term of each class ending
at different times. In addition, our By-Laws require the
affirmative vote of at least 60% or our directors to
change the composition of our Executive Committee.
Accordingly, these provisions could discourage or make
more difficult a change in control or a merger or other
type of corporate reorganization even if it could be
favorable to the interests of our stockholders.
Our officers and directors exercise significant control
over our affairs, which could result in their taking
actions that other stockholders do not approve of.
Our executive officers and directors, and persons or
entities affiliated with them, currently control about
18.9% of our outstanding common stock. These
stockholders, if they act together, may be able to
exercise substantial influence over all matters
requiring approval by our stockholders, including the
election of directors and approval of significant
corporate transactions. This concentration of ownership
may also delay or prevent a change in control of our
Company and might affect the market price of our common
stock.
We do not intend to pay cash dividends on our common
stock in the foreseeable future.
We have never paid any cash dividends on our common
stock and currently intend to retain all future
earnings, if any, to invest in our business.
Accordingly, we do not anticipate paying cash dividends
on our common stock in the foreseeable future.
30
If our Board issues common stock, which it can do
without stockholder approval, a purchaser of our common
stock could experience substantial dilution.
Our Board of Directors has the authority to issue up to
40 million shares of common stock and to issue options
and warrants to purchase shares of our common stock
without stockholder approval. In the future, we could
issue additional shares of our common stock at values
substantially below the current market price for our
common stock, which could substantially dilute the
equity ownership of holders of our common stock. In
addition, our Board could issue large blocks of our
common stock to prevent unwanted tender offers or
hostile takeovers without any stockholder approval.
Our ability to issue preferred stock may adversely
affect the rights of common stockholders and be used as
an anti-takeover device.
Our Certificate of Incorporation authorizes our Board of
Directors to issue up to 25 million shares of preferred
stock without approval from our stockholders.
Accordingly, all of our common stock will be junior to
any preferred stock issued by us, and our Board has the
right, without the approval of common stockholders, to
fix the relative rights and preferences of such
preferred stock. This could affect the rights of common
stockholders regarding, among other things, voting,
dividends and liquidation. We could also use an issuance
of preferred stock to deter or delay a change in control
that may be opposed by our management, even if the
transaction might be favorable to the common
stockholders.
Any exercise of outstanding options and warrants will
dilute then-existing stockholders' percentage of
ownership of our common stock.
We have a significant number of outstanding options and
warrants. Shares issuable upon the exercise of these
options and warrants, at prices ranging currently from
$0.15 to $6.00 per share, represent approximately 69.8%
of our total
31
outstanding stock on a fully-diluted basis. The exercise
of all of the outstanding options and warrants would
dilute the then-existing stockholders' percentage
ownership of our common stock. Any sales resulting from
the exercise of options and warrants in the public
market, such as sales by the selling stockholders
pursuant to this prospectus, could adversely affect
prevailing market prices for our common stock. Moreover,
our ability to obtain additional equity capital could be
adversely affected since the holders of outstanding
options and warrants may exercise them at a time when we
would also wish to enter the market to obtain capital on
terms more favorable than those provided by such options
and warrants. We lack control over the timing of any
exercise or the number of shares issued or sold if
exercises occur.
Item 2. Description of Property.
Our principal executive offices and e-recruiting business are
located at 200 West 57th Street, Suite 507, New York, New York 10019
where we rent approximately 500 square feet under a lease that will
expire on April 30, 2005 pursuant to which we pay a base monthly
rental of $3,250. SRC, Connectivity and Mobile Comm are located at
3733 NW 16th Street, Lauderhill, FL 33311, where they rent
approximately 5,000 square feet under a lease that expires on March
31, 2006 pursuant to which we pay a base monthly rental of $5,830.
This lease is with affiliates of Thomas Sullivan, who is one of our
executive officers and Gary Eichsteadt, who is one of our employees.
US Commlink is located at 6244 Preston Avenue, Livermore, CA 94550,
where it leases approximately 2,000 square feet under a lease that
expires May 31, 2005 pursuant to which we pay a base monthly rental
of $1,981.
32
Item 3. Legal Proceedings.
We are a party to various vendor related litigations. Based on the
opinion of legal counsel, we have accrued a liability of
approximately $100,000 and, accordingly, this liability has been
reflected in accounts payable and accrued expenses within the
consolidated financial statements at December 31, 2003.
Item 4. Submission of Matters to a Vote of Security-Holders.
On December 18, 2003, we held an annual meeting of our stockholders
at which our stockholders elected seven directors, ratified the
selection of our auditors for 2003 and approved and adopted our 2003
Stock Incentive Plan, as amended.
Our stockholders elected Charles W. Currie and Michael J. Gutowski
for three year terms, Joseph G. Anastasi and Larry M. Reid for two
year terms and George W. Benoit, David W. Dube and Carol L. Gutowski
to one year terms. The following table sets forth the number of
votes for, against, withheld, abstained and broker no votes:
Broker
No
Name of Director For Against Withheld Abstained Votes
---------------- --- ------- -------- --------- ------
Charles W. Currie 5,068,503 -- 43,493 -- --
Michael J. Gutowski 5,065,503 -- 46,493 -- --
Joseph G. Anastasi 5,065,703 -- 46,293 -- --
Larry M. Reid 5,066,703 -- 45,293 -- --
George W. Benoit 5,065,003 -- 46,993 -- --
David W. Dube 5,068,303 -- 43,693 -- --
Carol L. Gutowski 5,065,303 -- 46,693 -- --
Our stockholders ratified the selection of Rosen Seymour Shapss
Martin & Company LLP as our auditors for 2003. The vote was
5,079,053 for, 21,933 against, none withheld, 11,010 abstained and
no broker no votes. Our stockholders also approved and adopted our
2003 Stock Incentive Plan, as amended. The vote was 3,135,509 for,
89,087 against, none withheld, 12,650 abstained and 1,874,750 broker
no votes.
33
PART II
Item 5. Market For Common Equity and Related Stockholder Matters.
Exchange Listing:
Our common stock is listed on the American Stock Exchange (trading
symbol CNE).
The number of record holders of our common stock as of April 1, 2004
was approximately 320.
Equity Sale Prices:
Common Stock
------------
High Sales Price Low Sales Price
---------------- ---------------
2003
1st Quarter 0.96 0.25
2nd Quarter 1.20 0.55
3rd Quarter 0.92 0.45
4th Quarter 0.65 0.52
2002
1st Quarter 1.40 0.60
2nd Quarter 0.57 0.16
3rd Quarter 0.34 0.16
4th Quarter 0.56 0.10
Dividends:
We have not previously paid cash dividends on our common stock. Our
Board of Directors does not currently intend to pay cash dividends
on the outstanding shares of our common stock in the foreseeable
future. The payments of future dividends and the amount thereof will
depend upon our earnings, financial condition, capital requirements
and such other factors as our Board of Directors may consider
relevant.
Private Issuance of Company Securities:
During the year ended December 31, 2003, we issued common stock,
notes and warrants in private transactions pursuant to the exemption
from registration provided by Section 4(2) of the Securities Act of
1933. For information on these issuances, see "Part II - Item 6:
Management's Discussion and Analysis of Financial
34
Condition and Results of Operations - Liquidity and Capital
Resources." We issued preferred stock, common stock, warrants and
notes in connection with our acquisition of SRC and ECI pursuant to
the exemption from registration provided by Regulation D promulgated
under the Securities Act. For information on these issuances, see
"Part II - Item 7: Financial Statements - Notes to Financial
Statements."
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations Summary Financial Information
The summary financial data set forth below are derived from and
should be read in conjunction with the financial statements,
including the notes thereto, filed as part of this Annual Report in
Form 10-KSB.
Year Ended December 31,
-----------------------
2003 2002
---- ----
(in thousands, except share data)
Statement of Operations Data
Revenues $ 2,149 $ 238
Net income (loss) $ (1,119) $ 1,597
Net income (loss) per
common share:
Basic $ (.16) $ .29
Diluted $ (.18) $ .29
Weighted average number of common shares
outstanding:
Basic 7,161,756 5,585,944
Diluted 10,541,956 5,585,944
December 31,
------------
2003 2002
---- ----
(in thousands)
Balance Sheet Data
Working capital $ (544) $ (3,640)
Total assets $ 10,141 $ 316
Total liabilities $ 3,873 $ 4,214
Stockholders' equity $ 6,268 $ (3,898)
General
We are a holding company whose primary operating subsidiary is SRC.
SRC, also a holding company, is the parent of Connectivity, ECI, and
US Commlink. These companies, which we acquired on April 23, 2003,
market, manufacture, repair and maintain remote radio and
cellular-based emergency response products to a variety of federal,
state and local government agencies as well as other vertical
markets located throughout the United
35
States. In addition, we engage in the business of e-recruiting
through our subsidiary, CareerEngine, Inc. The e-recruiting business
does not generate a significant part of our revenue, and is not
significant to the operations of the Company.
Acquisition of all of the outstanding stock of SRC and ECI
On April 23, 2003 we issued (i) 899,971 shares of our common stock,
(ii) 1,697,966 shares of our non-voting Series A Preferred Stock and
an equal number of ten year Class A Warrants, (iii) 4,400 shares of
our Series B Preferred Stock, and (iv) 9,735,875 shares of our
non-voting Series C Preferred Stock and a like number of ten year
Class C Warrants, for 100% ownership of SRC and ECI. In addition,
ECI's sellers retained certain of ECI's trade receivables
aggregating approximately $100,000. We also acquired a patent
related to the operation of ECI's business in exchange for notes
aggregating $2,000,000 bearing 8% interest. The consolidated
financial statements include the operating results of SRC and ECI
from the date of acquisition. The details of such transactions are
set forth below.
SRC
On April 23, 2003, we issued to Mr. and Mrs. Gutowski, the former
principal common stockholders of SRC, an aggregate of 4,867,937
shares of its non-voting Series C Preferred Stock and a like number
of ten year Class C Warrants, each to purchase one share of its
Common Stock at $1.00 per share. The Class C Warrants are not
exercisable or detachable from the Series C Preferred Stock prior to
66 months after their issuance.
We issued to the other former common stockholders of SRC, including
Mr. Reid, an aggregate of 899,976 shares of its Common Stock,
1,697,966 shares of its non-voting Series A Preferred Stock and a
like number of ten year non-detachable Class A Warrants, each to
purchase one share of its Common Stock at $1.00 per share. The Class
A Warrants are not exercisable or detachable from the Series A
Preferred Stock prior to 66 months after their issuance.
We issued an aggregate of 4,400 shares of our Series B Preferred
Stock to the former holders of the SRC Series B Preferred Stock.
36
ECI
On April 23, 2003, the Company issued to Gary Eichsteadt and Thomas
Sullivan, the former stockholders of ECI, an aggregate of 4,867,938
shares of its Series C Preferred Stock and a like number of Class C
Warrants. In addition, Messrs. Eichsteadt and Sullivan retained
certain of ECI's trade receivables aggregating approximately
$100,000. We also acquired a patent ("ECI Patent) related to the
operation of ECI's business from Mr. Eichsteadt for notes in the
aggregate principal amount of $2,000,000, bearing interest at the
annual rate of 8%, payable quarterly, and due on October 31, 2008.
The notes are currently secured by a certain Pledge Agreement - see
Note H. Mr. Sullivan remained an executive officer ECI. On July 31,
2003, we transferred all the stock of ECI to SRC and ECI became a
wholly-owned subsidiary of SRC. In addition, we transferred our
title to the ECI Patent to SRC.
On May 19, 2003, Mr. Eichsteadt assigned $1,500,000 of the
aforementioned 8% notes equally to Mr. Sullivan, Mr. Gutowski and
Mrs. Gutowski. On August 31, 2003, Mr. and Mrs. Gutowski converted
their notes aggregating $1,000,000 into 1,000,000 shares of the
Company's Series AA Preferred Stock.
The Series AA Preferred Stock has an 8% cumulative dividend, payable
in common stock or cash, and a liquidating preference over all other
CNE equity of $1,000,000. The Series A Preferred Stock has a
liquidating preference over all other CNE equity except the Series
AA of $1,697,961. The Series B Preferred Stock has a liquidating
preference over all other CNE equity except the Series AA and A
Preferred Stock of $440,000. The Series C Preferred Stock has no
liquidating preference.
The total consideration, including acquisition costs, was allocated
based on the estimated fair values of the net assets acquired on the
acquisition date.
ECI SRC Total
----------- ----------- -----------
Tangible assets $ 588,492 $ 292,979 $ 857,593
Patents 1,379,789 170,820 1,550,609
Goodwill 2,766,233 4,519,661 7,285,894
Liabilities (2,144,771) (857,033) (3,001,804)
----------- ----------- -----------
Net asset valve $ 2,589,743 $ 4,126,427 $ 6,716,170
=========== =========== ===========
37
There were no relationships between us or any of our affiliates and
any of the sellers of the assets we acquired prior to the
acquisition transactions.
Catastrophe of September 11, 2001
Our headquarters were located at Suite 2112 of Two World Trade
Center in New York City. The catastrophe of September 11, 2001
involved no injury to any of our employees. However, with the
complete destruction of the building, all of our leasehold
improvements, furniture and fixtures, and office and computer
equipment located at this site were also destroyed. Since the attack
through the date of the acquisitions and financing set forth above,
our management had been preoccupied with the relocation and
reestablishment of our businesses, assessing and processing of
insurance claims with the assistance of a risk manager with our
insurers, and seeking sources of financing. In 2002, the Company
received insurance proceeds in amounts that have exceeded the net
carrying value of the destroyed assets and, accordingly, recorded a
$152,934 gain on assets destroyed due to this catastrophe. We also
had insurance coverage for other than assets destroyed. In 2003, we
received all outstanding insurance claims relating to the
catastrophe.
In addition, we applied for governmental assistance grants related
to the catastrophe. In April and September 2002, and August 2003, we
received grants aggregating $300,000. The grants have a restriction
that could require their repayment, specifically if we were to
relocate a substantial portion our operations outside of New York
City before May 1, 2005. Until such time as this restriction no
longer applies, we will classify the grants will as a liability of
the Company. We will remove the liability and record grant income on
our financial statements when these restrictions lapse or are
satisfied or, alternatively, repay such grants if the above
condition is not satisfied.
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with U.S.
generally accepted accounting principles requires us to make
estimates and assumptions that affect the reported amounts of assets
and liabilities at the date of the financial statements and the
reported amounts of net revenue and expenses during the reporting
period. On an ongoing basis, we evaluate our estimates,
38
including those related to our allowance for doubtful accounts,
inventory reserves, goodwill and purchased intangible asset
valuations, and asset impairments. We base our estimates on
historical experience and on various other assumptions that we
believe to be reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying values
of assets and liabilities. Actual results may differ from these
estimates under different assumptions or conditions.
We believe the following critical accounting policies, among others,
affect the significant judgments and estimates we use in the
preparation of our consolidated financial statements:
Allowance for Doubtful Accounts, Revenue Recognition
We evaluate the collectibility of our accounts receivable based on a
combination of factors. In circumstances where we are aware of a
specific customer's inability to meet its financial obligations to
us, we record a specific allowance to reduce the net receivable to
the amount we reasonably believe will be collected. For all other
customers, we record allowances for doubtful accounts based on the
length of time the receivables are past due, the prevailing business
environment and our historical experience. If the financial
condition of our customers were to deteriorate or if economic
conditions were to worsen, additional allowances may be required in
the future.
We recognize product revenue when persuasive evidence of an
arrangement exists, the sales price is fixed, the service is
performed or products are shipped to customers, which is when title
and risk of loss transfers to the customers, and collectibility is
reasonably assured.
At December 31, 2003, our allowance for doubtful accounts was
$51,500 or 19.8% of gross receivables, compared to $51,500 or 59.4%
of grow receivables as of December 31, 2002. The decrease in the
reserve as a percentage of gross receivable from prior year is the
result of a significant increase in accounts receivable and a
significant decrease in the need for an allowance for doubtful
accounts.
39
Inventory Valuation
At each balance sheet date, we evaluate our ending inventories for
excess quantities and obsolescence. This evaluation includes
analyses of sales levels by product and projections of future
demand. If inventories on hand are in excess of forecasted demand,
we provide appropriate reserves for such excess inventory. If we
have previously recorded the value of such inventory determined to
be in excess of projected demand, or if we determine that inventory
is obsolete, we write off these inventories in the period the
determination is made. Remaining inventory balances are adjusted to
approximate the lower of our cost or market value. If future demand
or market conditions are less favorable than our projects,
additional inventory write-downs may be required, and would be
reflected in cost of revenues in the period the revision is made.
Valuation of Goodwill. Purchased Intangible Assets and
Long-Lived Assets
We perform goodwill impairment tests on an annual basis and on an
interim basis if an event or circumstance indicates that it is more
likely than not that impairment has occurred. We assess the
impairment of other amortizable intangible assets and long-lived
assets whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. Factors we consider important
that could trigger an impairment review include significant
underperformance to historical or projected operating results,
substantial changes in our business strategy and significant
negative industry or economic trends. If such indicators are
present, we evaluate the fair value of the goodwill. For other
intangible assets and long-lived assets we determine whether the sum
of the estimated undiscounted cash flows attributable to the assets
in question is less than their caring value. If less, we recognize
an impairment loss based on the excess of the carrying amount of the
assets over their respective fair values. Fair value of goodwill is
determined by using a valuation model based on market
capitalization. Fair value of other intangible assets and long-lived
assets is determined by future cash flows, appraisals or other
methods. If the long-lived asset determined to be impaired is to be
held and used, we recognize an impairment charge to the extent the
anticipated net cash flows attributable to the asset are less than
the asset's carrying value. The fair value of the long-lived asset
then becomes
40
the asset's new carrying value, which we depreciate over the
remaining estimated useful life of the asset. See Note D
"Intellectual Property Right and Goodwill."
Recent Accounting Pronouncements
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN
45"), "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees and Indebtedness of
Others." FIN 45 elaborates on the disclosures to be made by the
guarantor in its interim and annual financial statements about its
obligations under certain guarantees that it has issued. It also
requires that a guarantor recognize, at the inception of a
guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. The initial recognition and
measurement provisions of this interpretation are applicable on a
prospective basis to guarantees issued or modified after December
31, 2002; while the provisions of the disclosure requirements are
effective for financial statements of interim or annual reports
ending after December 15, 2002. The adoption of this statement had
no material impact on our financial position or results of
operations.
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure" ("SFAS 148"). SFAS 148 amends Statement
No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), to
provide alternative methods for voluntary transition to SFAS 123's
fair value method of accounting for stock-based employee
compensation ("the fair value method"). SFAS 148 also requires
disclosure of the effects of an entity's accounting policy with
respect to stock-based employee compensation on reported net income
(loss) and earnings (loss) per share in annual and interim financial
statements. We have determined not to adopt the fair value method
for stock based compensation.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN
46"), "Consolidation of Variable Interest Entities." In general, a
variable interest entity is a corporation, partnership, trust, or
any other legal structure used for business purposes that either (a)
does not have equity investors with voting rights or (b) has equity
investors that do not provide sufficient financial resources for the
entity to support its activities. FIN 46 requires certain variable
interest entities to be consolidated by the primary beneficiary
41
of the entity if the investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at
risk for the entity to finance its activities without additional
subordinated financial support from other parties. The consolidation
requirements of FIN 46 apply immediately to variable interest
entities created after January 31, 2003. The consolidation
requirements apply to older entities in the first fiscal year or
interim period beginning after December 15, 2003. Certain of the
disclosure requirements apply in all financial statements issued
after January 31, 2003, regardless of when the variable interest
entity was established. We do not expect this statement to have a
material impact on our financial position or results of operations.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities" ("SFAS No.
149"). SFAS No. 149 amends and clarifies financial accounting and
reporting for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities under FASB Statement No.
133, Accounting for Derivative Instruments and Hedging Activities.
This Statement requires that contracts with comparable
characteristics be accounted for consistently as either derivatives
or hybrid instruments. This Statement is effective for contracts
entered into or modified after June 30, 2003, and for hedging
relationships designated after June 30, 2003. The adoption of this
statement has had no effect on our financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and
Equity." SFAS No. 150 changes the accounting for certain financial
instruments that under previous guidance issuers could account for
as equity. It requires that those instruments be classified as
liabilities in balance sheets. The guidance in SFAS No. 150 is
generally effective for all financial instruments entered into or
modified after May 31, 2003, and otherwise is effective on July 1,
2003. The adoption of this statement has had no effect on our
financial statements.
A. Results of Operations: 2003 Compared to 2002
42
Revenues
Total revenues from continuing operations increased to $2,149,370
for the year ended December 31, 2003 from $237,800 for the year
ended December 31, 2002.
Product sales income increased to $1,445,324 for the year ended
December 31, 2003 from nil for the year ended December 31, 2002 due
to the acquired operations, in April 2003, of SRC and its
subsidiaries.
Service fee income increased to $548,762 for the year ended December
31, 2003 from nil for the year ended December 31, 2002 due to the
acquired operations, in April 2003, of SRC and its subsidiaries.
Internet related income decreased to $155,284 for the year ended
December 31, 2003 from $237,800 for the year ended December 31, 2002
as the operations of our subsidiary, CareerEngine, Inc. have
continued to decline due to our relatively small size in the
e-recruiting industry.
Cost of Goods Sold
Costs of goods sold, which relates to product sales and related
service fee income increased to $1,176,900 for the year ended
December 31, 2003 from nil for the year ended December 31, 2002 due
to the acquired operations, in April 2003, of SRC and its
subsidiaries.
Other Expenses
Total other expenses from continuing operations increased to
$2,666,457 for the year ended December 31, 2003 from $1,194,914 for
the year ended December 31, 2002.
Selling expenses increased to $47,806 for the year ended December
31, 2003 from $10,000 for the year ended December 31, 2002 due to
the acquired operations, in April 2003, of SRC and its subsidiaries.
Compensation and related costs increased to $1,212,150 for the year
ended December 31, 2003 from $580,145 for the year ended December
31, 2002 due to the acquired operations and related increase in
personnel, in April 2003, of SRC and its subsidiaries.
General and administrative expenses increased to $1,247,096 for the
year ended December 31, 2003 from $390,880 for the year ended
December 31, 2002 due to the
43
costs associated with the acquisition and related operations of SRC
and its subsidiaries, and the professional fees associated with the
merger and private financing, primarily completed in April 2003.
Depreciation and amortization expenses decreased to $159,405 for the
year ended December 31, 2003 from $213,889 for the year ended
December 31, 2002, due to the net effect of the depreciation and
amortization expense relating to the relatively long-life fixed
assets and intellectual property rights associated with the
acquisition of SRC and its subsidiaries in 2003, and the
depreciation of certain short-life assets of the Company becoming
fully depreciated in 2002.
Other Items
Amortization of debt discount decreased to $467,000 for the year
ended December 31, 2003 from $691,748 for the year ended December
31, 2002 due to the net effect of the cessation of amortization and
complete write-off of the debt discount related to certain
debentures payable that became immediately callable by the debenture
holders and the commencement of amortization of the debt discount
($699,000) related to the newly issued 10% subordinated notes over a
period of one year.
Interest expense increased to $423,625 for the year ended December
31, 2003 from $348,918 for the year ended December 31, 2002 due
primarily to the net effect of the issuance of the Company's 10% and
8% subordinated notes in April 2003 and the cessation of interest
expense on a subsidiary's 12% Debentures Payable and Tax Assessment
Payable in July and August 2003.
Tax Settlement adjustment of $895,622 relates to the accepted and
paid Offer in Compromise with the Internal Revenue Service ($50,000)
pertaining to a previous year estimated $945,000 tax liability of a
subsidiary of the Company.
Amortization of deferred financing costs decreased to nil for the
year ended December 31, 2003 from $322,598 for the year ended
December 31, 2002 due to the complete write-off of the remaining
deferred financing costs relating to a subsidiary's 12% Debentures
Payable.
Gain on fixed assets destroyed in catastrophe decreased to nil for
the year ended December 31, 2003 from $152,934 for the year ended
December 31, 2002 due to the
44
destruction of the World Trade Center where we were headquartered in
2001.
Reversal of Directors fees decreased to nil for the year ended
December 31, 2003 from $55,000 for the year ended December 31, 2002.
This amount relates to the forgiveness of fees earned by the outside
Directors and their agreement to forego these fees until further
notice. We began compensating our outside Directors, commencing
October 1, 2003, at a monthly rate of $1,000 per Director and
another $1,000 per Director if a Director is also a member of the
Executive Committee of our Board of Directors.
Operating Loss
On a pre-tax basis, we had a loss from continuing operations of
$1,688,990 for the year ended December 31, 2003 compared with a loss
from continuing operations of $2,110,196 for the year ended December
31, 2002.
Our loss from continuing operations for the year ended December 31,
2003 was $1,702,955 compared with a loss from continuing operations
of $2,115,446 for the year ended December 31, 2002. For the year
ended December 31, 2003, loss per common share from continuing
operations, basic and diluted, was $.24 per share. For the year
ended December 31, 2002, loss per common share from continuing
operations, basic and diluted, was $.37 per share.
Our income from discontinued operations for the year ended December
31, 2003 was $583,634 compared with income from discontinued
operations of $3,712,884 for the year ended December 31, 2002 due to
a gain on the sale of one of our subsidiaries in 2003 and,
primarily, a gain on the extinguishment of debt in 2002. For the
year ended December 31, 2003, basic income per common share from
discontinued operations was $.08 per share. For the year ended
December 31, 2002, basic income per common share from discontinued
operations was $.66 per share. For the year ended December 31, 2003,
diluted income per common share from discontinued operations was
$.06 per share. For the year ended December 31, 2002, diluted income
per common share from discontinued operations was $.66 per share.
Our net loss for the year ended December 31, 2003 was $1,119,321
compared with net income of $1,597,438 for the year ended December
31, 2002. For the year ended
45
December 31, 2003, basic net loss per common share was $.16 per
share. For the year ended December 31, 2002, basic net income per
common share from was $.29 per share. For the year ended December
31, 2003, diluted net loss per common share was $.18 per share. For
the year ended December 31, 2002, diluted net income per common
share was $.29 per share.
B. Liquidity and Capital Resources
As reflected in the 2003 and 2002 financial statements, the Company
has incurred substantial losses from continuing operations,
sustained substantial cash outflows from operating activities, has a
working capital deficit and at December 31, 2002 had a capital
deficiency. The above factors raise substantial doubt about the
Company's ability to continue as a going concern. The Company's
continued existence depends on its ability to obtain additional
equity and/or debt financing to fund its operations and ultimately
to achieve profitable operations. The Company is attempting to raise
additional financing and has initiated a cost reduction strategy. At
December 31, 2003 management believes that the working capital
deficit, losses and negative cash flow will ultimately be improved
by (i) the acquisitions of SRC and ECI (ii) cost reduction
strategies initiated in January 2004 and (iii) additional equity and
debt financing activities in addition to those set forth in the
financial statements. In addition, the Company had been notified
that, subject to the procedural requirements of the American Stock
Exchange (the "Exchange"), its stock could be delisted. However, on
January 2, 2004 the Company received a notice dated December 31,
2003 from the Exchange indicating that the Company had demonstrated
compliance with the requirement for continued listing on the
Exchange. There is no assurance that the Company can obtain
additional financing or achieve profitable operations or generate
possible cash flow. The 2003 and 2002 financial statements do not
include any adjustments relating to the recoverability or
classification of recorded asset amounts or the amount and
classification of liabilities that might be necessary as a result of
this going concern uncertainty.
Off-Balance Sheet Arrangements
At December 31, 2003, we had no off-balance sheet arrangements.
Operating Activities
We utilized $1,361,966 of cash in operating activities during the
year ended December 31, 2003. We had a net loss from continuing
operations of $1,702,955 during this period which included an
aggregate of ($70,467) of non-cash items, including depreciation and
amortization, amortization of debt discount, allowance for doubtful
accounts and common stock issued in lieu of cash for professional
fees offset by tax settlement adjustment on a previous year's
estimated tax liability. In addition to the net impact of non-cash
items, our operating activities for the year ended December 31, 2003
also reflected an increase in accounts and insurance receivable,
inventory, accrued expenses and other liabilities, and deferred
grant revenue. These were offset in part by decreases other current
and non-current assets.
We utilized $217,582 of cash in operating activities during the year
ended December 31, 2002. We had a net loss from continuing
operations of $2,115,446 during this period which included an
aggregate of $1,059,553 of non-cash items, including depreciation
and amortization, amortization of debt discount, allowance for
doubtful accounts and common stock issued in lieu of cash for
professional fees partially offset by a reversal of fees due
Directors and a gain on fixed assets destroyed in the 9/11
catastrophe. In addition to the net impact of non-cash items, our
operating activities for the year ended December 31, 2002 also
reflected an increase in accrued expenses and other liabilities and
deferred grant revenue. These were offset in part by decreases in
accounts and insurance receivable, and other current and non-current
assets.
46
On January 21, 2004, we took several initiatives to address our
operating cash deficiency, which included, but were not limited to,
the reduction and/or elimination of certain executive salaries,
waiving of certain interest payments due officers and/or directors,
waiving of certain accounts receivable due an officer and employee,
and the reduction of certain administrative costs. In addition, we
raised gross proceeds of $700,000 in February 2004 from the sale of
our common stock (see "Financing Activities" below), and
restructured certain short-term credit arrangements into a $300,000
Note payable due in February 2005 (see Note R to our Consolidated
Financial Statements).
Financing Activities
On April 23, 2003 we issued $1,000,000 in principal amount of our
10% Subordinated Notes due April 30, 2004 to investors for a 15%
non-dilutive interest in the Company in the form of 4,165,800
cashless Class B Warrants, each to purchase one share of Common
Stock at $0.50 per share. We had the option to extend the maturity
date of the notes to April 30, 2005 in consideration for issuing the
noteholders an additional 4% non-dilutive interest in the Company.
The notes also require prepayment in an amount equal to 100% of any
net financing proceeds obtained by us after the issuance of the
notes. The noteholders waived this provision to the extent of
$2,000,000 through April 15, 2004, of which $1,200,000 has been
raised. The investors included two of our officers. Interest is
payable, in arrears, calendar quarterly. We valued the Warrants,
utilizing the Black-Scholes Pricing Model, at $699,000, which is
being accounted for as debt discount and is being amortized ratably
over the initial one-year term of the Notes.
On March 12, 2004, we notified the Class B Warrant holders that, to
satisfy the 15% non-dilutive provisions of their Warrants, these
Warrants were now exercisable for an aggregate of 5,245,200 shares
of our common stock at approximately $0.40 per share. On this date,
we also exercised our option to extend the maturity date of the
notes to April 30, 2005 and satisfied the requirement for the
additional 4% non-dilutive interest in the Company by issuing to the
noteholders Class B Warrants to purchase an additional 1,708,900
shares of our common stock at $0.50 per share. The non-dilutive
provisions
47
of the Warrants terminate when all of the notes have been paid in
full.
In addition, on September 17, 2003, we sold 1,250,000 shares of our
common stock at $0.40 per share to an existing noteholder and
stockholder of the Company.
On February 10, 2004, the Company sold 1,750,000 shares of our
common stock at $0.40 per share in consideration of $700,000 cash.
We are using the funds obtained from these financings to pay certain
ECI notes payable and for working capital. The financings were
effected pursuant to the exemption from the registration provisions
of the Securities Act of 1993 provided by Section 4(2) thereof.
We did not have any material commitments for capital expenditures as
of December 31, 2003.
C. Inflation
We believe that inflation does not significantly impact our current
operations.
Item 7. Financial Statements.
Our financial statements to be filed hereunder follow, beginning
with page F-1.
48
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
of CNE Group, Inc.
We have audited the consolidated balance sheet of CNE Group, Inc. as of December
31, 2003 and the related consolidated statements of operations, changes in
(capital deficit) stockholders' equity and cash flows for the year then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit. The financial statements of CareerEngine Network, Inc. as of
December 31, 2002 were audited by other auditors whose report dated April 9,
2003 on those statements included an explanatory paragraph that described the
substantial losses, sustained operating cash outflows and capital deficit from
continuing operations discussed in Note A of the financial statements.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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 audit provides a
reasonable basis for our opinion.
In our opinion, the December 31, 2003 financial statements referred to above
present fairly, in all material respects, the financial position of CNE Group,
Inc. as of December 31, 2003 and the results of its operations and its cash
flows for the year then ended in conformity with accounting principles generally
accepted I the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note A to the
financial statements, the Company has experienced substantial losses and
sustained net operating cash outflows from continuing operations and anticipates
that such conditions will continue into fiscal year 2004. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans regarding those matters are also described in Note A. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
ROSEN SEYMOUR SHAPSS MARTIN & COMPANY LLP
CERTIFIED PUBLIC ACCOUNTANTS
New York, New York
March 5, 2004
F-1
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholder
CareerEngine Network, Inc.
(a wholly owned subsidiary of CNE Group, Inc.)
We have audited the accompanying consolidated statements of operations, changes
in capital deficit and cash flows of CareerEngine Network, Inc. and subsidiaries
(the "Company") for the year ended December 31, 2002. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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 audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements enumerated above present fairly, in all
material respects, the consolidated results of operations and consolidated cash
flows of CareerEngine Network, Inc. and subsidiaries for the year ended December
31, 2002, in conformity with accounting principles generally accepted in the
United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note A to the
financial statements, the Company has experienced substantial losses, sustained
operating cash outflows, and anticipates that such conditions will continue.
These factors raise substantial doubt about the Company's ability to continue as
a going concern. Management's plans in regard to these matters are also
described in Note A. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
Eisner LLP
New York, New York
April 9, 2003
F-2
CNE GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
December 31, 2003
ASSETS
Current:
Cash and cash equivalents $ 460,832
Accounts receivable, net of allowance for doubtful accounts of $51,500 208,358
Inventory 246,719
Other 27,840
------------
Total current assets 943,749
Fixed assets, net 447,579
Intellectual property rights, net 1,475,145
Goodwill 7,285,894
Prepaid expenses and other assets 18,961
------------
Total assets $ 10,171,328
============
LIABILITIES
Current:
Accounts payable and accrued expenses $ 940,253
Interest payable 89,950
Short-term credit arrangements 45,779
Lines of credit 164,314
Notes payable 146,988
Debenture payable 100,000
------------
Total current liabilities 1,487,284
Notes payable, net of current portion 326,045
Subordinated notes payable 1,767,000
Deferred revenue 23,620
Deferred grant revenue 300,000
------------
Total liabilities 3,903,949
------------
Commitments and contingencies (Note N)
STOCKHOLDERS' EQUITY
Preferred stock (Notes A and I) 124
Common stock (Notes A and J) 101
Paid-in surplus 28,258,215
Accumulated deficit (19,117,961)
------------
9,140,479
Less treasury stock, at cost - 1,238,656 shares (2,873,100)
------------
Total stockholders' equity 6,267,379
------------
Total liabilities and stockholders' equity $ 10,171,328
============
See Notes to Consolidated Financial Statements
F-3
CNE GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Year Ended December 31,
----------------------------
2003 2002*
----------- -----------
(Note A)
Revenues:
Product sales $ 1,445,324 $ --
Service fee income 548,762 --
Internet related income 155,284 237,800
----------- -----------
2,149,370 237,800
Costs of goods sold 1,176,900 --
----------- -----------
Gross profit 972,470 237,800
Other expenses:
Advertising 47,806 10,000
Compensation and related costs 1,212,150 580,145
General and administrative 1,247,096 390,880
Depreciation and amortization 159,405 213,889
----------- -----------
2,666,457 1,194,914
----------- -----------
Loss from continuing operations
before other income and (expenses) (1,693,987) (957,114)
Amortization of debt discount (467,000) (691,748)
Interest expense (423,625) (348,918)
Tax settlement adjustment (Note M) 895,622
Interest income -- 2,248
Amortization deferred financing costs -- (322,598)
Gain on fixed assets (Note A) -- 152,934
Reversal of Director fees accrual -- 55,000
----------- -----------
Loss from continuing operations before income taxes (1,688,990) (2,110,196)
Income tax provision 13,965 5,250
----------- -----------
Loss from continuing operations (1,702,955) (2,115,446)
Discontinued operations:
Income from discontinued operations 583,634 3,712,884
----------- -----------
Net income (loss) $(1,119,321) $ 1,597,438
=========== ===========
*CareerEngine Network, Inc.
See Notes to Consolidated Financial Statements
F-4
CNE GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations, continued
Year Ended December 31,
---------------------------
2003 2002*
----------- ----------
(Note A)
Income (loss) per common share:
Basic:
Loss from continuing operations $ (.24) $ (.37)
Income from discontinued operations .08 .66
----------- ----------
Net income (loss) $ (.16) $ .29
=========== ==========
Diluted:
Loss from continuing operations $ (.24) $ (.37)
Income from discontinued operations .06 .66
----------- ----------
Net income (loss) $ (.18) $ .29
=========== ==========
Weighted average number of common
shares outstanding:
Basic 7,161,756 5,585,944
=========== ==========
Diluted 10,541,956 5,585,944
=========== ==========
*CareerEngine Network, Inc.
See Notes to Consolidated Financial Statements
F-5
CNE GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in (Capital Deficit) Stockholders' Equity
Years ended December 31, 2003 and 2002
Common Stock Preferred Stock
---------------------------- ------------------------------ Paid-in
Shares Amount Shares Amount Surplus
------------- ----------- ------------- ------------- -----------
Balance - January 1, 2002 6,789,600 $ 678,960 $ $15,996,941
Common stock issued for
services, at market value 40,000 4,000 27,500
Capital contributions by
officers, directors and
stockholders in the form of
compensation forgiveness 266,250
Net income
------------- ----------- ------------- ------------- -----------
Balance - December 31, 2002* 6,829,600 $ 682,960 $ $16,290,691
Portion of $1,000,000 10%
Subordinated Notes deemed
Equity subject to amortization 699,000
Effect of change in par value
from $0.10 to $0.00001 (682,892) 682,892
Stock issued related to
acquisition of SRC,
Connectivity, Econo-Comm
and related intellectual
property rights 899,971 9 11,438,241 114 6,095,836
Stock options issued for
services, at market value 135,250
Conversion of $2,300,000
12% Debentures Payable and
related interest to Equity 1,150,000 12 2,644,988
Conversion of $1,000,000 8%
Promissory Notes to Equity 1,000,000 10 999,990
Sale of common stock for cash 1,250,000 12 499,988
Capital contributions by
officers, directors and
stockholders in the form of
compensation and interest
forgiveness 209,580
Net loss
------------- ----------- ------------- ------------- -----------
Balance - December 31, 2003 10,129,571 $ 101 12,438,241 $ 124 $28,258,215
============= =========== ============= ============= ===========
Treasury Stock
Accumulated ------------------------------
Deficit Shares Amount Total
------------- ------------- ------------- -----------
Balance - January 1, 2002 $ (19,596,078) 1,238,656 $ (2,873,100) $(5,793,277)
Common stock issued for
services, at market value 31,500
Capital contributions by
officers, directors and
stockholders in the form of
compensation forgiveness 266,250
Net income 1,597,438 1,597,438
------------- ------------- ------------- -----------
Balance - December 31, 2002* $ (17,998,640) 1,238,656 $ (2,873,100) $(3,898,089)
Portion of $1,000,000 10%
Subordinated Notes deemed
Equity subject to amortization 699,000
Effect of change in par value
from $0.10 to $0.00001 --
Stock issued related to
acquisition of SRC,
Connectivity, Econo-Comm
and related intellectual
property rights 6,095,959
Stock options issued for
services, at market value 135,250
Conversion of $2,300,000
12% Debentures Payable and
related interest to Equity 2,645,000
Conversion of $1,000,000 8%
Promissory Notes to Equity 1,000,000
Sale of common stock for cash 500,000
Capital contributions by
officers, directors and
stockholders in the form of
compensation and interest
forgiveness 209,580
Net loss (1,119,321) (1,119,321)
------------- ------------- ------------- -----------
Balance - December 31, 2003 $ (19,117,961) 1,238,656 $ (2,873,100) $ 6,267,379
============= ============= ============= ===========
*CareerEngine Network, Inc.
See Notes to Consolidated Financial Statements
F-6
CNE GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Year Ended December 31,
----------------------------
2003 2002*
----------- -----------
(Note A)
Cash flows from operating activities:
Loss from continuing operations $(1,702,955) $(2,115,446)
Adjustments to reconcile loss from continuing operations to net cash
provided by (used in) operating activities:
Depreciation and amortization 159,405 534,239
Issuance of common stock for services 135,250 31,500
Provision for doubtful accounts 16,500 10,000
Amortization of debt discount 467,000 691,748
Tax settlement adjustment (895,622) --
Reversal of fees due to Directors (55,000)
Gain on fixed assets destroyed in catastrophe (152,934)
Changes in:
Accounts and insurance claims receivable (123,754) 461,451
Inventory (15,833) --
Prepaid expenses and other assets 15,066 63,815
Accrued expenses and other liabilities 551,184 21,218
Deferred revenue 23,620 --
Deferred grant revenue 8,173 291,827
----------- -----------
Cash used in continuing operations (1,361,966) (217,582)
Cash provided by discontinued operations -- 200,000
----------- -----------
Net cash used in operating activities (1,361,966) (17,582)
----------- -----------
Cash flows from investing activities:
Purchase of furniture and equipment (35,478) --
----------- -----------
Net cash used in investing activities (35,478) --
----------- -----------
Cash flows from financing activities:
Proceeds from issuance 1,250,000 shares of Common Stock 500,000 --
Proceeds from issuance of 10% notes payable 1,000,000 --
Proceeds from other notes payable 300,000 --
Principal repayments on notes payable (24,924) --
Payment of accounts receivable due Sellers of Econo-Comm, Inc. (100,000) --
----------- -----------
Net cash provided by financing activities 1,675,076 --
----------- -----------
Increase (decrease) in cash and cash equivalents 277,632 (17,582)
Cash and cash equivalents at beginning of period 183,200 200,782
----------- -----------
Cash and cash equivalents at end of period $ 460,832 $ 183,200
=========== ===========
*CareerEngine Network, Inc.
See Notes to Consolidated Financial Statements
F-7
CNE GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, continued
Year Ended December 31,
----------------------------
2003 2002*
----------- -----------
(Note A)
Supplemental disclosures of cash flow information related to
continuing operations:
Cash paid during the period for:
Interest $ 135,931 $ 72,000
Income taxes $ 50,000 $ 5,250
Non-cash investing and financing activities relating to the acquisition
of subsidiaries and certain intellectual property rights:
Accounts receivable $ 102,048 --
Inventory 230,886 --
Intellectual property rights 1,550,609 --
Goodwill 7,285,894 --
Fixed assets 462,792 --
Other assets 61,867 --
Accrued expenses and other liabilities (1,645,893) --
8% notes payable (2,000,000) --
Issuance of preferred stock, at par (114) --
Issuance of common stock, at par (9) --
Paid in surplus (6,048,080) --
Non-cash investing and financing activities relating to the conversion of
certain notes and debentures, sale of common stock, and capital
contributions of significant stockholders, and directors and officers:
Accounts payable and accrued expenses 196,246 --
Interest payable 13,334 --
8% notes payable 1,000,000 --
Debentures payable and related interest payable 2,645,000 --
Issuance of preferred stock (10) --
Issuance of common stock (12) --
Paid in surplus (3,854,5588) --
Other non-cash investing and financing activities - See Note Q
*CareerEngine Network, Inc.
See Notes to Consolidated Financial Statements
F-8
CNE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
NOTE A - THE COMPANY
Business
CNE Group, Inc. (the "Company" or "CNE") is a holding company whose primary
operating subsidiary is SRC Technologies, Inc. ("SRC"). SRC, also a holding
company, is the parent of Connectivity, Inc. ("Connectivity"), Econo-Comm, Inc.
(d/b/a Mobile Communications ("ECI"), and U.S. Commlink, Ltd. ("USCL").
Connectivity, ECI and USCL market, manufacture, repair and maintain remote radio
and cellular-based emergency response products to a variety of federal, state
and local government institutions, and other vertical markets throughout the
United States. SRC has intellectual property rights to certain key elements of
these products - specifically, certain communication, data entry and telemetry
devices.
The Company also generates revenue from its subsidiary, CareerEngine, Inc.,
which is engaged in the business of e-recruiting. This segment is not
significant to the operations of the Company.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As reflected in the 2003 and 2002
financial statements, the Company has incurred substantial losses from
continuing operations, sustained substantial cash outflows from operating
activities, has a working capital deficit and at December 31, 2002 had a capital
deficiency. The above factors raise substantial doubt about the Company's
ability to continue as a going concern. The Company's continued existence
depends on its ability to obtain additional equity and/or debt financing to fund
its operations and ultimately to achieve profitable operations. The Company is
attempting to raise additional financing and has initiated a cost reduction
strategy. At December 31, 2003 management believes that the working capital
deficit, losses and negative cash flow will ultimately be improved by (i) the
acquisitions of SRC and ECI (ii) cost reduction strategies initiated in January
2004 and (iii) additional equity and debt financing activities in addition to
those set forth in Note R. The Company had been notified that, subject to the
procedural requirements of the American Stock Exchange, its stock could be
delisted (see Note R). There is no assurance that the Company can obtain
additional financing or achieve profitable operations or generate possible cash
flow. The 2003 and 2002 financial statements do not include any adjustments
relating to the recoverability or classification of recorded asset amounts or
the amount and classification of liabilities that might be necessary as a result
of this going concern uncertainty.
Corporate Matters
On April 17, 2003, pursuant to the terms of Section 251(g) of the Delaware
General Corporation Law, CareerEngine Network, Inc. ("CareerEngine") became a
wholly-owned subsidiary of the Company. Pursuant to this transaction, the
Company acquired all of the assets of CareerEngine and all former stockholders
of CareerEngine became the stockholders of the Company, which is the entity that
is now publicly traded on the American Stock Exchange under the symbol "CNE." As
a successor entity to CareerEngine, the Company's shares are deemed to be
registered under Section 12(g) of the Securities Exchange Act of 1934 and Rule
12g-3 promulgated thereunder. The shares were issued without registration in
reliance upon exemptions provided in Section 3(a)(9) of the Securities Act of
1933 and Rule 145 promulgated thereunder.
In addition, the officers and directors of CareerEngine became the officers and
directors of the Company. On April 23, 2003, three directors of the Company
resigned (Kevin J. Benoit, Edward A. Martino and James J. Murtha) and their
replacements were appointed (Michael J. Gutowski, Larry M. Reid and Carol L.
Gutowski). Ms. Gutowski is the wife of Michael J. Gutowski. Messrs. Gutowski and
Reid were also appointed the President and Chief Operating Officer and the
Executive Vice President of the Company, respectively. See "Acquisition of all
of the outstanding stock of SRC and ECI" below.
In addition, on April 23, 2003, the Board of Directors and a majority of the
stockholders approved the reorganization of the Company and pursuant to
Accounting Standards ARB 43 which increased the authorized number of shares of
common stock to 40,000,000 shares with a par value of $0.00001 per share and
increased the authorized number of shares of preferred stock to 25,000,000
shares with a par value of $0.00001 per share. The preferred stock may be issued
in one or more series at the discretion of the Board of Directors.
F-9
CNE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
NOTE A - THE COMPANY (CONTINUED)
Acquisition of all of the outstanding stock of SRC and ECI
On April 23, 2003 the Company issued (i) 899,971 shares of its common stock,
(ii) 1,697,966 shares of its non-voting Series A Preferred Stock and an equal
number of ten year Class A Warrants, (iii) 4,400 shares of its Series B
Preferred Stock, and (iv) 9,735,875 shares of its non-voting Series C Preferred
Stock and a like number of ten year Class C Warrants, each to purchase one share
of the Company's Common Stock at a $1.00 per share, for 100% ownership of SRC
and ECI. In addition, ECI's sellers retained certain of ECI's trade receivables
aggregating approximately $100,000. The Company also acquired a patent related
to the operation of ECI's business in exchange for notes aggregating $2,000,000
bearing 8% interest. The consolidated financial statements include the operating
results of SRC and ECI from the date of acquisition. The details of such
transactions are set forth below.
SRC
On April 23, 2003, the Company issued to Mr. and Mrs. Gutowski, the former
principal common stockholders of SRC, an aggregate of 4,867,937 shares of
its non-voting Series C Preferred Stock and an equal number of ten year
Class C Warrants, each to purchase one share of its Common Stock at $1.00
per share. The Class C Warrants are not exercisable and are not detachable
from the Series C Preferred Stock prior to 66 months after their issuance.
See Note I.
The Company issued to the other former common stockholders of SRC,
including Mr. Reid, an aggregate of 899,971 shares of its Common Stock,
1,697,966 shares of its non-voting Series A Preferred Stock and a like
number of ten year non-detachable Class A Warrants, each to purchase one
share of its Common Stock at $1.00 per share. The Class A Warrants are not
exercisable and are not detachable from the Series A Preferred Stock prior
to 66 months after their issuance. See Note I.
The Company issued an aggregate of 4,400 shares of its Series B Preferred
Stock to the former holders of the SRC Series B Preferred Stock. See Note
I.
ECI
Also, on April 23, 2003, the Company issued to Gary L. Eichsteadt and
Thomas L. Sullivan, the former stockholders of ECI, an aggregate of
4,867,938 shares of its Series C Preferred Stock and an equal number of
Class C Warrants, each to purchase one share of its Common Stock at $1.00
per share. The Class C Warrants are not exercisable and are not detachable
from the Series C Preferred Stock prior to 66 months after their issuance
(see Note I). In addition, Messrs. Eichsteadt and Sullivan retained
certain of ECI's trade receivables aggregating approximately $100,000. The
Company also acquired a patent ("ECI Patent) related to the operation of
ECI's business from Mr. Eichsteadt for notes in the aggregate principal
amount of $2,000,000, bearing interest at the annual rate of 8%, payable
quarterly, and due on October 31, 2008. The notes are currently secured by
a certain Pledge Agreement - see Note H. Mr. Sullivan remained an
executive officer ECI. On July 31, 2003, the Company transferred all the
stock of ECI to SRC and ECI became a wholly-owned subsidiary of SRC. In
addition, the Company transferred its rights to the ECI Patent to SRC.
F-10
CNE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
NOTE A - THE COMPANY (CONTINUED)
On May 19, 2003, Mr. Eichsteadt assigned $1,500,000 of the aforementioned
8% notes equally to Mr. Sullivan, Mr. Gutowski and Mrs. Gutowski. Further
on August 31, 2003, Mr. and Mrs. Gutowski converted their notes
aggregating $1,000,000 into 1,000,000 shares of the Company's Series AA
Preferred Stock.
The Series A Preferred Stock has an aggregate liquidating preference over
all other CNE equity of $1,697,966 and the Series B Preferred Stock has an
aggregate liquidating preference over all other CNE equity except the
Series B Preferred Stock liquidating value of $440,000. The Series C
Preferred Stock has no liquidating preference.
The total consideration, including acquisition costs, was allocated based
on the estimated fair values of the net assets and liabilities acquired on
the acquisition date.
ECI SRC Total
----------- ----------- -----------
Tangible assets $ 588,492 $ 292,979 $ 881,471
Patents 1,379,789 170,820 1,550,609
Goodwill 2,766,233 4,519,661 7,285,894
Liabilities (2,144,771) (857,033) (3,001,804)
----------- ----------- -----------
Net asset value $ 2,589,743 $ 4,126,427 $ 6,716,170
=========== =========== ===========
There were no relationships between the Company or any of its affiliates
and any of the sellers of the assets (SRC and ECI) acquired by the Company
prior to the acquisition transactions.
Private Financings
1. On April 23, 2003, the Company also completed a private financing
pursuant to which it issued notes (the "Notes") in the aggregate
principal amount of $1,000,000, of which $650,000 was to the
officers of the Company, and 4,165,800 ten year cashless Class B
Warrants, each to purchase one share of its Common Stock at $0.50
per share. The Notes bear interest at the annual rate of 10% payable
quarterly and are due on April 30, 2004. The aggregate number of
shares for which the Warrants may be exercised equal 15% of the
Company's outstanding Common Stock on a fully-diluted basis. The
Warrants are anti-dilutive until the Notes have been repaid. The due
date of the Notes may be extended at the Company's option for an
additional year in consideration for the issuance of 10-year
warrants to purchase 4% of the Company's then outstanding common
stock at $0.50 per share. These Warrants would also be anti-dilutive
until the Notes have been repaid. In addition, the Company valued
the warrants, utilizing the Black-Scholes Pricing Model, at
$699,000, which is being accounted for as debt discount and is being
amortized ratably over the one-year term of the Notes.
On March 12, 2004, the Company notified the Class B Warrant holders
that, to satisfy the 15% non-dilutive provisions of their Warrants,
these Warrants were now exercisable for an aggregate of 5,245,200
shares of the Company's common stock at approximately $0.40 per
share.
F-11
CNE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
NOTE A - THE COMPANY (CONTINUED)
The non-dilutive provisions of the Warrants terminate when all of
the notes have been paid in full.
2. On September 17, 2003, the Company sold 1,250,000 shares of its
Common Stock at $0.40 per share to an existing noteholder and
stockholder of the Company.
3. On February 10, 2004, the Company sold 1,750,000 shares of its
Common Stock at $0.40 per share for $700,000 cash.
The Company is using the funds obtained from these financings primarily
for working capital purposes as well as to pay certain ECI notes payable.
The aforementioned financings were effected pursuant to the exemption from
the registration provisions of the Securities Act of 1993 provided by
Section 4(2) thereof.
Catastrophe on September 11, 2001
On September 11, 2001 the Company's headquarters were located at Suite 2112 of
Two World Trade Center in New York City. The catastrophe of September 11, 2001
involved no injury to any of the Company's employees. However, with the complete
destruction of the building, all of the Company's leasehold improvements,
furniture and fixtures, and office and computer equipment located at this site
were also destroyed. Since the attack through the date of the acquisitions and
financing set forth above, the Company's management had been preoccupied with
the relocation and reestablishment of its businesses, assessing and processing
of insurance claims with the assistance of a risk manager with its insurers, and
seeking sources of financing. In 2002, the Company received insurance proceeds,
based on replacement costs, in amounts that have exceeded the net carrying value
of the destroyed assets and, accordingly, recorded a $152,934 gain on fixed
assets due to this catastrophe. The Company also had insurance coverage for
other than assets destroyed. In 2003, all outstanding insurance claims relating
to the catastrophe were settled.
In addition, the Company applied for government assistance grants related to the
catastrophe. In April and September 2002, and in August 2003, the Company
received grants aggregating $300,000. The grants have a restriction that could
require their repayment, specifically if the Company were to relocate a
substantial portion its operations outside of New York City before May 1, 2005.
Until such time as this restriction shall no longer apply, the grants will be
classified as a liability of the Company. Upon the satisfaction or lapse of the
restrictions, the Company will remove the liability and record grant income on
its financial statements or, alternatively, repay such grants if the above
condition is not satisfied.
NOTE B - SIGNIFICANT ACCOUNTING POLICIES
[1] Principles of consolidation:
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries, SRC and CareerEngine
Network, Inc. ("CareerEngine Network"). All significant intercompany
balances and transactions have been eliminated.
F-12
CNE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
NOTE B - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[2] Revenue recognition:
The Company's operations relating to manufacturing, marketing and
servicing its remote and cellular-based emergency response products
recognizes revenue from the sale of a product upon installation or
delivery to the customer, depending on the terms of the underlying sales
agreement.
E-recruiting fees are earned on job placement advertisements and
sponsorship advertisements on the Company's website and are recognized
over the period during which the advertisements are exhibited. Website
construction fees are recognized ratably over the construction period.
Monthly hosting and maintenance fees for such sites are recognized ratably
over the period of the underlying contract.
[3] Depreciation and amortization:
Furniture, fixtures and equipment are being depreciated using the
straight-line method over estimated lives of three to seven years.
Computer equipment is being depreciated on a straight-line basis over an
estimated life of three to five years.
Leasehold improvements were amortized on a straight-line basis over the
shorter of the term of the lease or their estimated useful lives.
[4] Cash and cash equivalents:
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents. At
December 31, 2003 there were no cash equivalents. At December 31, 2002
cash equivalents consisted principally of an investment of approximately
$151,000 in a money market account.
[5] Accounts and Trade Receivables:
The Company extends credit to its customers on an unsecured basis in the
ordinary course of business but mitigates the associated credit risk by
performing credit checks and actively pursuing past due accounts. An
allowance for doubtful accounts has been established since management is
of the opinion that all accounts receivable may not be fully collectible.
The allowance for doubtful accounts is based on an estimated percentage of
overall accounts receivable.
[6] Concentration of Credit Risk:
Financial instruments that subject the Company to risk of loss consist
principally of accounts receivable, deposits with financial institutions.
The Company grants credit terms to customers in the normal course of doing
business. Credit risk with respect to trade receivables is considered
F-13
CNE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
NOTE B - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
minimal due to the Company's diverse customer base throughout the United
States and strict enforcement of its credit policies. The Company
generally does not require security deposits or other collateral to
support credit sales. The consolidated financial statements have been
adjusted for anticipated losses thereon. Deposits held with banks may
exceed the amount of insurance provided on such deposits.
The Company's sales are made primarily to customers throughout the United
States. Non-U.S. customers are required to pay in U.S. Dollars when the
order is placed. There were no sales to non-U.S. customers for the fiscal
year ended December 31, 2003. During the fiscal year ended December 31,
2003, no single customer accounted for ten percent (10%) or more of the
Company's sales, and credit losses were not significant.
[7] Inventory:
Inventory is stated at the lower of cost (determined by first-in,
first-out method) or market. At December 31, 2003 the Company's inventory
consisted of the following:
Raw materials $158,347
Work in progress 3,089
Finished goods 85,283
--------
Total $246,719
========
[8] Income (loss) per share:
Basic and diluted net income (loss) per common share have been computed in
accordance with SFAS No. 128, "Earnings Per Share." Basic earnings per
share ("BEPS") is computed by dividing net income (loss) by the
weighted-average number of common shares outstanding during the year.
Diluted earnings per share ("DEPS") is computed by dividing net income
(loss) used in determining BEPS by the weighted average number of common
shares outstanding during the period, plus the incremental shares, if any,
that would have been outstanding upon the assumed exercise of certain
dilutive stock options and warrants.
The reconciliation of shares used to calculate BEPS and DEPS (loss) per
share consists of the following:
Year Ended December 31,
------------------------
2003 2002
---------- ----------
Shares used in BEPS computations -
weighted average shares outstanding 7,161,756 5,585,944
Net effect of dilutive common share equivalents 3,380,200 --
---------- ----------
Shares used in DEPS computations 10,541,956 5,585,944
========== ==========
Common stock equivalents to purchase common stock of the Company that were
outstanding at December 31, 2002 were not included in the computation of
diluted net loss per share as their
F-14
CNE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
NOTE B - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
effect would have been anti-dilutive. The anti-dilutive common stock
equivalents for December 31, 2002, and the common stock equivalents for
December 31, 2003 consists primarily of incentive stock options,
convertible debentures that are convertible into Common Stock of the
Company at an approximate conversion price of $2.00 and warrants to
purchase common stock of the Company at prices that range from $0.50 -
$6.00.
[9] Income taxes:
Deferred income taxes are measured by applying enacted statutory rates in
effect at the balance sheet date to net operating loss carryforwards and
to the differences between the tax bases of assets and liabilities and
their reported amounts in the financial statements. The resulting deferred
tax asset as of December 31, 2003 and 2002 was fully reserved since the
likelihood of realization of future tax benefits cannot be established.
[10] Financial instruments:
The Financial Accounting Standards Board's Statement of Financial
Accounting Standards No. 107, Disclosures about Fair Value of Financial
Instruments ("SFAS 107"), defines fair value of a financial instrument as
the amount at which the instrument could be exchanged in a current
transaction between willing parties. The Company's carrying value of cash,
accounts receivable, inventory, accounts payable, short-term credit
arrangements, lines of credit, notes payable, and subordinated debt
approximates fair value because the instruments have a short-term maturity
or because the applicable interest rates are comparable to current
investing or borrowing rates of those instruments.
[11] Stock-based compensation:
As permitted under SFAS No. 123, Accounting for Stock-based Compensation
(SFAS No. 123), the Company has elected to continue to follow the guidance
of APB Opinion No. 25, Accounting for Stock Issued to Employees (APB No.
25), and Financial Accounting Standards Board Interpretation No. 44,
Accounting for Certain Transactions Involving Stock Compensation--an
Interpretation of APB Opinion No. 25 (FIN No. 44), in accounting for its
stock-based employee compensation arrangements. Accordingly, no
compensation cost is recognized for any of the Company's fixed stock
options granted to employees when the exercise price of each option equals
or exceeds the fair value of the underlying common stock as of the grant
date for each stock option. Changes in the terms of stock option grants,
such as extensions of the vesting period or changes in the exercise price,
result in variable accounting in accordance with APB Opinion No. 25.
Accordingly, compensation expense is measured in accordance with APB No.
25 and recognized over the vesting period. If the modified grant is fully
vested, any additional compensation costs is recognized immediately. The
Company accounts for equity instruments issued to non-employees in
accordance with the provisions of SFAS No. 123.
F-15
CNE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
NOTE B - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
At December 31, 2003, the Company had a stock-based employee compensation
plan - the 2003 Plan. Two of Company's subsidiaries each had separate
stock-based employee compensation plans. These subsidiaries' plans were
contractually terminated by the Company upon the acquisition of SRC and
ECI on April 23, 2003. Furthermore, on March 14, 2003, all recipients of
options granted pursuant to these plans rescinded all of their interests.
As permitted under SFAS No. 148, Accounting for Stock-Based
Compensation--Transition and Disclosure, which amended SFAS No. 123, the
Company has elected to continue to follow the intrinsic value method in
accounting for its stock-based employee compensation arrangements as
defined by APB No. 25 and related interpretations including FIN No. 44.
The following table illustrates the effect on net loss and loss per share
if the Company had applied the fair value recognition provisions of SFAS
No. 123 to stock-based employee compensation for options granted under its
plan.
Year Ended December 31,
-------------------------------
2003 2002
------------- -------------
Net (loss) income, as reported $ (1,119,321) $ 1,597,438
Less, Total stock-based employee compensation
expense determined under fair value-based method for
all awards, net of related tax effects -- (213,657)
------------- -------------
Pro forma net (loss) income $ (1,119,321) $ 1,383,781
============= =============
Net (loss) income per share:
As reported:
Basic $ (0.16) $ 0.25
============= =============
Diluted $ (0.18) $ 0.25
============= =============
Pro forma:
Basic $ (0.16) $ 0.25
============= =============
Diluted $ (0.18) $ 0.25
============= =============
On April 30, 2003, incentive stock options to purchase 1,987,500 shares of
the Company's common stock were granted by the Incentive Compensation
Committee of the Board of Directors to five officers (1,800,000) and one
employee (187,500) of the Company at a weighted average exercise price of
$1.32 per share. On November 4, 2003, incentive stock options to purchase
950,000 shares of the Company's common stock were granted by the Incentive
Compensation Committee of the Board of Directors to three officers of the
Company at a weighted average exercise price of $1.09 per share. On April
30, 2003 (435,000), November 4, 2003 (220,000) and November 21, 2003
(100,000), non-qualified stock options to purchase an aggregate 755,000
shares of the Company's common stock were granted by the Board of
Directors of the Company
F-16
CNE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
NOTE B - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
to certain independent contractors of the Company. The Company recorded a
charge of $135,250 in general and administrative expense, relating to the
755,000 non-qualified stock options that were vested at December 31, 2003,
in its Statement of Operations for year then ended. No options granted
have been exercised.
[12] Use of estimates:
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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 revenue and expenses during the reporting period. Actual
results could differ from those estimates.
[13] Advertising costs:
Advertising costs, which amounted to $47,806 and $10,000 for the years
ended December 31, 2003 and 2002, respectively, are expensed as incurred.
[14] Warranty Expense:
The Company generally warrants its products against defects for a period
of one to three years. A provision for estimated future costs relating to
warranties is recorded when products are shipped and revenue recognized.
At December 31, 2003 and 2002, estimated future costs relating to
warranties were $40,260 and $0, respectively.
[15] Impairment of long-lived assets:
Impairment losses are recognized for long-lived assets used in operations
when indicators of impairment are present and the undiscounted cash flows
estimated to be generated by those assets are not sufficient to recover
the assets' carrying amount. The impairment loss is measured by comparing
the fair value of the asset to its carrying amount. No write-down of
assets for impairment losses were required during the years ended December
31, 2003 and 2002.
[16] Intellectual Property Rights and Goodwill:
In July 2001, the FASB issued SFAS No. 141, Business Combinations ("SFAS
141"), and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS 141
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001, and that certain intangible
assets acquired in a business combination be recognized as assets apart
from goodwill. SFAS 142 requires goodwill to be tested for impairment on
an annual basis and between annual tests in certain circumstances, and
written down when impaired, rather than being amortized as previous
standards required. Furthermore, SFAS 142 requires intangible assets,
other than
F-17
CNE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
NOTE B - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
goodwill, to be amortized over their useful lives unless these lives are
determined to be indefinite. Other intangible assets are carried at cost
less accumulated amortization. Intellectual Property Rights acquired by
the Company in the ECI business combination in April 2003 (see Note A) are
being amortized on a straight-line basis over the shorter of the remaining
lives of the patents when acquired or their estimated useful remaining
lives, generally eleven to fourteen years. No goodwill impairment charge
was recorded in 2003 in accordance with SFAS No. 142.
[17] Startup Activities
Costs associated with the organization and start-up activities of the
Company are expensed as incurred.
[18] Recent accounting pronouncements:
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees and Indebtedness of Others." FIN 45
elaborates on the disclosures to be made by the guarantor in its interim
and annual financial statements about its obligations under certain
guarantees that it has issued. It also requires that a guarantor
recognize, at the inception of a guarantee, a liability for the fair value
of the obligation undertaken in issuing the guarantee. The initial
recognition and measurement provisions of this interpretation are
applicable on a prospective basis to guarantees issued or modified after
December 31, 2002; while the provisions of the disclosure requirements are
effective for financial statements of interim or annual reports ending
after December 15, 2002. The adoption of this statement had no effect on
the Company's financial position or results of operations.
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, "Accounting for Stock-Based Compensation - Transition
and Disclosure" ("SFAS 148"). SFAS 148 amends Statement No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), to provide
alternative methods for voluntary transition to SFAS 123's fair value
method of accounting for stock-based employee compensation ("the fair
value method"). SFAS 148 also requires disclosure of the effects of an
entity's accounting policy with respect to stock-based employee
compensation on reported net income (loss) and earnings (loss) per share
in annual and interim financial statements. The Company has determined not
to adopt the fair value method for stock based compensation.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities." In general, a variable
interest entity is a corporation, partnership, trust, or any other legal
structure used for business purposes that either (a) does not have equity
investors with voting rights or (b) has equity investors that do not
provide sufficient financial resources for the entity to support its
activities. FIN 46 requires certain variable interest entities to be
consolidated by the primary beneficiary of the entity if the investors do
not have the characteristics of a controlling financial interest or do not
have sufficient equity at risk for the
F-18
CNE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
NOTE B - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
entity to finance its activities without additional subordinated financial
support from other parties. The consolidation requirements of FIN 46 apply
immediately to variable interest entities created after January 31, 2003.
The consolidation requirements apply to older entities in the first fiscal
year or interim period beginning after December 15, 2003. Certain of the
disclosure requirements apply in all financial statements issued after
January 31, 2003, regardless of when the variable interest entity was
established. Management does not expect this statement to have a material
impact on the Company's financial position or results of operations.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities" ("SFAS No. 149"). SFAS
No. 149 amends and clarifies financial accounting and reporting for
derivative instruments, including certain derivative instruments embedded
in other contracts (collectively referred to as derivatives) and for
hedging activities under FASB Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities". This Statement requires
that contracts with comparable characteristics be accounted for
consistently as either derivatives or hybrid instruments. This Statement
is effective for contracts entered into or modified after June 30, 2003,
and for hedging relationships designated after June 30, 2003. The adoption
of this statement has had no effect on the Company's financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and
Equity." SFAS No. 150 changes the accounting for certain financial
instruments that under previous guidance issuers could account for as
equity. It requires that those instruments be classified as liabilities in
balance sheets. The guidance in SFAS No. 150 is generally effective for
all financial instruments entered into or modified after May 31, 2003, and
otherwise is effective on July 1, 2003. The adoption of this statement has
had no effect on the Company's financial statements.
NOTE C - FIXED ASSETS, NET
Fixed assets, net consists of the following at December 31, 2003:
Machinery and equipment $ 400,101
Office and computer equipment 62,577
Transportation equipment 36,827
Furniture and fixtures 40,505
---------
540,010
Less, accumulated depreciation (92,431)
---------
Fixed assets, net $ 447,579
=========
Depreciation expense for the years ended December 31, 2003 and 2002 totaled
$83,941 and $213,889, respectively.
F-19
CNE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
NOTE D - INTELLECTUAL PROPERTY RIGHTS AND GOODWILL
Detail of intellectual property rights and goodwill is as follows at December
31, 2003:
Intellectual property rights:
Intellectual property rights, stated at lower of
cost or fair market value $ 1,550,609
Less, accumulated amortization (75,464)
-----------
Intellectual property rights, net $ 1,475,145
===========
The estimated future amortization expense of intellectual property rights is as
follows:
2004 $ 113,196
2005 113,196
2006 113,196
2007 113,196
2008 113,196
Thereafter 909,165
----------
Total $1,475,145
==========
Additional amortization will be recognized in future periods if impairment of
the rights occurs. Amortization expense for the year ended December 31, 2003
totaled $75,464.
Goodwill:
Gross carrying amount $7,285,894
Less, impairment charge 0
----------
Total goodwill $7,285,894
==========
The Company is required to perform goodwill impairment tests on an annual basis
and between annual tests in certain circumstances. In 2003, the Company did not
incurr any goodwill impairment. Future goodwill impairment tests may result in
charges to earnings if the Company determines that goodwill has become impaired.
The Company recognizes an impairment loss based on the excess of the carrying
amount of the assets over their respective fair values. Fair value of goodwill
is determined by using a valuation model based on an market capitalization
approach. Fair value of the intangible assets is determined by discounted future
cash flows, appraisals or other methods. If the intangible asset determined to
be impaired is to be held and used, the Company recognizes an impairment charge
to the extent the present value of anticipated net cash flows attributable to
the asset are less than the asset's carrying value.
NOTE E - SHORT-TERM FINANCING ARRANGEMENTS
The Company accounts for credit card obligations as short-term financing
arrangements. The obligations require minimum monthly payments that are based on
approximately 3% of the outstanding balance and interest accrues on the
outstanding balances at rates ranging from 10.5% to 25%. Outstanding balances of
these obligations aggregated $45,779 at December 31, 2003.
F-20
CNE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
NOTE E - SHORT-TERM FINANCING ARRANGEMENTS (CONTINUED)
From time to time during 2003, the Company factored its accounts receivables
with a financial institution and an individual. Funds are advanced to the
Company based on 75% of submitted accounts receivables. Interest is charged at
the effective rate of 3.33% per month. The submitted accounts receivable secure
the advances to the Company. At December 31, 2003 such factoring arrangements
amounted to $300,000, however, on January 21, 2004 such factoring arrangements
with an individual were restructured into a $300,000 unsecured Note Payable due
February 10, 2005 (see Notes G and R.).
NOTE F - LINES OF CREDIT
The Company has the following two lines of credit at December 31, 2003:
$165,000 line of credit with a bank, due on demand, or if no demand is made, due
in one payment on March 15, 2004. Interest payments are due monthly, which are
calculated at 1% above the Prime Rate. At December 31, 2003 the interest rate
was 5.00%. The line is collateralized by accounts receivable, inventory,
equipment, and all other assets of a subsidiary of the Company. The outstanding
balance of the line is at December 31, 2003 is $145,230.
$20,000 unsecured line of credit with a bank. Interest payments are due monthly,
which are calculated at At December 31, 2003 the interest rate was 5%; 1% above
the Prime Rate. The outstanding balance of the line at December 31, 2003 is
$19,084.
NOTE G - NOTES AND DEBENTURE PAYABLE
The Company has the following notes and debenture payable at December 31, 2003:
Note payable to Ford Motor Credit due February 16, 2007. The note accrues
interest at 5.0% and is payable in monthly installments of principal and
interest of $1,032. The note is collateralized by a vehicle owned by the
Company. At December 31, 2003 the outstanding balance on the note is $36,866 of
which $10,821 has been classified as current portion of notes payable.
Note payable to financial institution due July 15, 2004. The note accrues
interest at 13.95% and is payable in monthly installments of principal and
interest of $156. The note is collateralized by a utility trailer owned by the
Company. At December 31, 2003 the outstanding balance on the note is $1,091 of
which all has been classified as current portion of notes payable.
Promissory note payable to an individual due in one payment on February 10,
2005. The note accrues interest at 18.00% which is payable quarterly commencing
May 1, 2004. The note is unsecured. At December 31, 2003 the outstanding balance
on the note is $300,000.
Installment notes payable to four individuals, who are employees and an officer
of a subsidiary of the Company, dated April 23, 2003 and due February 1, 2004.
The notes accrue interest at 8.00% of which all accrued interest is due and
payable on February 1, 2004. Principal payments of $53,333 are due August 1,
2003, November 1, 2003 and February 1, 2004. The notes are unsecured. At
December 31, 2003 the outstanding principal balance of the notes is $135,076.
F-21
CNE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
NOTE G - NOTES AND DEBENTURE PAYABLE (CONTINUED)
In August and September 2003, holders of 95.83333% of $2,400,000 principal
amount of the debentures payable issued by a subsidiary of the Company elected
to (i) convert the outstanding principal balance of their debentures amounting
to $2,300,000 into 1,150,000 shares of the Company's Common Stock, (ii) cancel
575,000 of the related 600,000 outstanding B Warrants of the subsidiary of the
Company (the related Class A Warrants of the subsidiary of the Company expired
on March 31, 2003), and (iii) waive all accrued and unpaid interest relating
thereto ($345,000), in consideration for the issuance of the Company's five-year
common stock Class F Warrants to purchase 1,150,000 shares of the Company's
Common Stock at $3.00 per share. One-half of these warrants (575,000) were
exercisable upon issuance with the balance exercisable commencing January 1,
2004. In addition, unamortized debt discount of $29,768 on the debentures was
recognized as interest expense in the year ended December 31, 2002. The Company
also recognized as expense the unamortized deferred financing costs associated
with the debentures of $320,350 for the year ended December 31, 2002. The
subsidiary of the Company also granted the placement agent a warrant exercisable
through June 2005 to purchase 5 units at $60,000 per unit. If the warrant for
all 5 units is exercised, the purchaser shall effectively receive 125,000 shares
of the Company's common stock and the right to purchase an additional 62,500
common shares at $5.00 per share - see Note K. At December 31, 2003 the
outstanding principal balance of a debenture payable of a subsidiary of the
Company is $100,000.
NOTE H - SUBORDINATED NOTES PAYABLE
The Company has the following subordinated notes payable at December 31, 2003:
10% Subordinated Notes due April 30, 2004
On April 23, 2003 the Company issued $1,000,000 in principal amount of its 10%
Subordinated Notes due April 30, 2004 to investors for a 15% non-dilutive
interest in the Company in the form of 4,165,800 cashless warrants, each to
purchase one share of Common Stock at $0.50 per share. The Company has the
option to extend the maturity date of the notes to April 30, 2005 in
consideration for issuing the noteholders an additional 4% non-dilutive interest
in the Company. The notes also require the Company to prepay them in an amount
equal to 100% of any net financing proceeds obtained by the Company after the
issuance of the notes. The noteholders waived this provision to the extent of
$2,000,000 through April 15, 2004, of which $1,200,000 has been raised. The
investors included two officers of the Company. Interest is payable, in arrears,
calendar quarterly. The Company valued the warrants, utilizing the Black-Scholes
Pricing Model, at $699,000, which is being accounted for as debt discount and is
being amortized ratably over the initial one-year term of the Notes.
On March 12, 2004, the Company notified the Class B Warrant holders that, to
satisfy the 15% non-dilutive provisions of their Warrants, these Warrants were
now exercisable for an aggregate of 5,245,200 shares of the Company's common
stock at approximately $0.40 per share. On this date, the Company also exercised
its option to extend the maturity date of the notes to April 30, 2005 and
satisfied the requirement for the additional 4% non-dilutive interest in the
Company by issuing to the noteholders Class B Warrants to purchase an additional
1,708,900 shares of the Company's common stock at $0.50 per share. The
non-dilutive provisions of the Warrants terminate when all of the notes have
been paid in full. At December 31, 2003 the 10% subordinated notes had an
outstanding principal balance of $767,000.
F-22
CNE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
NOTE H - SUBORDINATED NOTES PAYABLE (CONTINUED)
8% Subordinated Notes due April 30, 2008
On April 23, 2003, the Company issued $2,000,000 of its 8% subordinated notes
due April 30, 2008 to three officers and an employee of the Company. Interest is
payable quarterly on a calendar year basis. The notes are secured by the all of
the issued and outstanding common stock of SRC and ECI, which represents
substantially all of the assets of the Company, pursuant to a certain Pledge
Agreement, which shall terminate upon repayment or other satisfaction of a
certain subsidiary's indebtedness (see Note I) that initially amounted to
$2,400,000. At December 31, 2003, $2,300,000 of this indebtedness had been
converted into Common Stock of the Company as discussed in Note G.
On August 31, 2003, two holders who are officers of the Company, converted
$1,000,000 of the Company's 8% Subordinated Notes into 1,000,000 shares of the
Company's Series AA Preferred Stock, par value $.00001 per share. The Series AA
Preferred Stock has a liquidating preference to all other equity securities of
the Company. It also has an 8% cumulative dividend, payable in common stock or
cash. At December 31, 2003 the 8% subordinated notes had an outstanding
principal balance of $1,000,000.
Maturities of long-term debt subsequent to December 31, 2003 are as follows:
2004 $ 11,912
2005 1,311,374
2006 12,620
2007 2,051
2008 1,000,000
----------
Total $2,337,957
==========
NOTE I - PREFERRED STOCK
Preferred Stock consists of the following at December 31, 2003:
Par value per share $ 0.00001
Authorized number of shares 25,000,000
Issued and outstanding number of shares:
Series AA 1,000,000
Series A 1,697,966
Series B 4,400
Series C 9,735,875
Series E --
----------
Total 12,438,241
==========
The Series AA Preferred Stock has an 8% cumulative dividend, payable in common
stock or cash, and a liquidating preference over all other CNE equity of
$1,000,000. The Series A Preferred Stock has a liquidating preference over all
other CNE equity except the Series AA of $1,697,961. The Series B Preferred
Stock has a liquidating preference over all other CNE equity except the Series
AA and A Preferred Stock of $440,000. The Series C Preferred Stock has no
liquidating preference.
F-23
CNE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
NOTE J - COMMON STOCK
Common Stock consists of the following at December 31, 2003:
Par value per share $ 0.00001
Authorized number of shares 40,000,000
Issued number of shares 10,129,571
Less, Treasury shares (1,238,656)
-----------
Issued and outstanding number of shares 8,890,915
===========
NOTE K - WARRANTS
At December 31, 2003 outstanding warrants to acquire common stock consisted of:
Shares of
Exercise Common
Type of Warrant Exercise Date Expiration Date Price Stock
--------------- ------------------ ------------------ -------- ----------
Class A October 22, 2008 April 22, 2013 $1.00 1,697,966
Class B April 23, 2003 April 30, 2013 $0.50 4,904,800
Class BB May 10, 2003 May 10, 2006 $0.50 20,000
Class BB June 10, 2003 June 10, 2006 $0.50 20,000
Class BB July 10, 2003 July 10, 2006 $0.50 20,000
Class BB August 10, 2003 August 10, 2006 $0.50 20,000
Class BB September 10, 2003 September 10, 2006 $0.50 20,000
Class BB October 10, 2003 October 10, 2006 $0.50 20,000
Class BB June 10, 2003 June 10, 2006 $2.50 10,000
Class BB July 10, 2003 July 10, 2006 $3.00 10,000
Class BB August 10, 2003 August 10, 2006 $4.00 10,000
Class BB September 10, 2003 September 10, 2006 $4.50 10,000
Class BB October 10, 2003 October 10, 2006 $5.00 10,000
Class C October 22, 2008 April 22, 2013 $1.00 9,735,875
Class F January 1, 2004 December 31, 2009 $3.00 1,150,000
Class B(1) Immediate March 31, 2005 $6.00 25,000
Units(1) Immediate June 28, 2005 $5.00 62,500
----------
17,746,141
==========
(1) Class B warrants and Units of a subsidiary of the Company are
exercisable for the Company's common shares (see Note G:
Debenture Payable).
F-24
CNE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
NOTE L - CAPITAL CONTRIBUTIONS AND DIRECTOR FEES
Capital Contributions
On January 21, 2004 (retroactive to December 31, 2003) certain officers,
directors and stockholder of the Company waived certain amounts due to them as
follows:
Compensation and certain reimbursable expenses $ 66,246
Interest on promissory notes 13,334
Accounts receivable due stockholders 130,000
--------
Total $209,580
========
These aforementioned amounts have been reflected in the financial statements as
contributions to the capital of the Company during the year ended December 31,
2003.
Through March 31, 2002, significant stockholders of the Company, who are also
directors and officers, agreed to permanently forego $266,250 of compensation
earned by them during 2001 and 2000. The amount of the forgiven salaries through
December 31, 2001 has been reflected in the financial statements as
contributions to the capital of the Company during the year ended December 31,
2002.
Director Fees
On March 31, 2002 the Company's outside directors agreed to forego any
previously accrued and unpaid directors' fees earned through December 31, 2002
and agreed to forgo compensation through September 30, 2003. The reversal of
previously accrued fees has been reflected in the Company's Consolidated
Statement of Operations for the year ended December 31, 2002.
NOTE M - INCOME TAXES
The provision for income taxes applicable to continuing operations, all of which
is current, consists of the following at December 31, 2003 and 2002:
2003 2002
------- -------
Federal $ -- $ --
State and local franchise taxes 13,965 5,250
------- -------
$13,965 $ 5,250
======= =======
At December 31, 2003, the Company had a net operating loss carryforward for
federal income tax purposes of approximately $36,500,000, which expires in the
years 2005 through 2023.
F-25
CNE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
NOTE M - INCOME TAXES (CONTINUED)
The Company's deferred tax assets and liabilities consists of the following:
2003 2002
------------ ------------
Deferred tax assets:
Net operating loss carryforward $ 16,777,000 $ 14,534,000
Liability for interest and state taxes related to federal
tax settlement 0 232,000
Other 23,690 16,000
------------ ------------
Total deferred tax assets, before valuation allowance 16,800,690 14,782,000
Valuation allowance (16,800,690) (14,782,000)
------------ ------------
Total deferred tax assets $ 0 $ 0
============ ============
The valuation allowance increased (decreased) by approximately $2,018,690 during
2003 and ($108,000) during 2002. The increase in the valuation allowance of
$2,018,690 for the twelve months ended December 31, 2003 resulted from the
increase in the valuation allowance attributable to the deferred tax benefit of
approximately $2,287,161 on the loss from continuing operations and a benefit of
$268,471 recognized from discontinued operations. The decrease in the valuation
allowance of $108,000 for the twelve months ended December 31, 2002 resulted
from the increase in the valuation allowance attributable to the deferred tax
benefit of approximately $840,000 on the loss from continuing operations and a
benefit recognized of $948,000 from discontinued operations.
The effective tax rate applicable to continuing operations varied from the
statutory federal income tax rate as follows:
Year Ended December 31,
-----------------------
2003 2002
---- ----
Statutory rate (34)% (34)%
State and local taxes, net of federal income tax effect (12) (12)
Nondeductible expenses 2 2
Valuation allowance 44 44
--- ---
Effective rate 0% 0%
=== ===
The Internal Revenue Service ("IRS") has examined the Company's consolidated
federal income tax returns through 1989. The returns for the years 1999 through
2003 remain open.
Settlement of Tax Assessment Payable of a Subsidiary of the Company
On July 16, 2003, the IRS accepted an "Offer in Compromise" submitted in April,
2003 by a subsidiary of the Company to settle its Tax Assessment Payable
amounting to approximately $946,000, including interest, at June 30, 2003. The
accepted Offer in Compromise provided for payment of $50,000 cash on or before
October 14, 2003. The $50,000 cash was paid in July and September 2003. The
Company recognized a gain on settlement in the amount of $895,622 relating to
this transaction during the year ended December 31, 2003.
F-26
CNE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
NOTE N - COMMITMENTS, LITIGATION AND OTHER MATTERS
[1] The Company's principal executive offices and e-recruiting business are
located at 200 West 57th Street, Suite 507, New York, New York 10019 where
the Company rents approximately 500 square feet under a lease that will
expire on April 30, 2005 pursuant to which the Company pays a monthly base
rent of $3,250. SRC Technologies and its subsidiaries, Connectivity and
Mobile Comm are located at 3733 NW 16th Street, Lauderhill, FL 33311,
where they rent approximately 5,000 square feet under a lease that expires
on March 31, 2006 pursuant to which the Company pays a monthly base rent
of $5,830. This lease is with an affiliate of Thomas Sullivan, who is one
of the Company's executive officers and Gary Eichsteadt, who is an
employee of the Company. U.S. Commlink is located at 6244 Preston Avenue,
Livermore, CA 94550, where it leases approximately 2,000 square feet under
a lease that expires May 31, 2005 pursuant to which the Company pays a
monthly base rent of $1,981.
Rental expense amounted to $115,791 and $60,500 for the years ended
December 31, 2003 and 2002, respectively. Minimum future annual rental
payments at December 31, 2003 are as follows:
2004 $132,732
2005 92,865
2006 17,490
--------
$243,087
========
[2] A subsidiary of the Company is the sponsor a Retirement Savings Plan for
its employees pursuant to Section 401(k) of the Internal Revenue Code.
Employee contributions to the plan and the subsidiary's matching
contributions vested immediately. The subsidiary's contribution to the
plan amounted to approximately $8,245 for the year ended December 31,
2002. There were no contributions for the year ended December 31, 2003.
[3] The Company has employment agreements with its executive officers, of
which all but one expires on April 30, 2006. The remaining contract
expires on April 30, 2007. These agreements provide for minimum salary
levels. The aggregate commitment for future salaries at December 31, 2003
was approximately $1,853,000.
[4] The Company is a party to various vendor related litigations. Based on the
opinion of legal counsel, the Company has accrued a liability of
approximately $100,000 and, accordingly, this liability has been reflected
in accounts payable and accrued expenses.
NOTE O - ACQUISITIONS AND RELATED UNAUDITED PRO FORMA FINANCIAL INFORMATION
The purchase price of the acquisition of SRC and ECI was allocated to the assets
and liabilities acquired, both tangible and intangible (as determined by an
independent appraiser), with the excess of the purchase price over the fair
value of the net assets acquired of $7,285,894 being recorded as Goodwill. The
value of the intellectual property rights, amounting to $1,550,609, acquired in
the related financing was also determined by an independent appraiser. Due to
these acquisitions and related financing, SRC has acquired intellectual property
rights to certain key elements of these products - specifically, certain
communication, data entry and telemetry devices.
F-27
CNE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
NOTE O - ACQUISITIONS AND RELATED UNAUDITED PRO FORMA FINANCIAL INFORMATION
(CONTINUED)
The Company's consolidated financial statements include the results of
operations of SRC from its respective acquisition dates. The following unaudited
pro forma information presents a summary of the Company's consolidated results
of operations as if the SRC and ECI acquisitions and the related financing had
taken place on January 1, 2002 for the year ended December 31, 2002 and on
January 1, 2003 for the year ended December 31, 2003. The SRC and ECI
acquisitions have been recorded in accordance with SFAS No. 141; therefore, no
amortization of goodwill or intangible assets without determinable lives related
to SRC and ECI is reflected in the prior year amounts. These pro forma results
have been prepared for comparative purposes only and do not purport to be
indicative of the results of operations which actually would have resulted had
the acquisitions occurred on January 1, 2002 or January 1, 2003, as the case may
be, or which may result in the future.
Year Ended December 31,
---------------------------
2003 2002
----------- -----------
Unaudited Unaudited
Revenues $ 2,703,406 $ 3,169,735
Expenses 4,706,100 4,940,740
----------- -----------
Loss from continuing operations $(2,002,694) $(1,771,005)
=========== ===========
Loss from continuing operations per share:
Basic $ (0.11) $ (0.10)
=========== ===========
Diluted $ (0.11) $ (0.10)
=========== ===========
NOTE P - STOCK OPTION PLANS
At December 31, 2003, the Company had a stock-based employee compensation plan -
the 2003 Stock Incentive Plan. Two of Company's subsidiaries each had separate
stock-based employee compensation plans. These subsidiaries' plans were
contractually terminated by the Company upon the acquisition of SRC and ECI on
April 23, 2003. Furthermore, on March 14, 2003, all recipients of options
granted pursuant to these terminated plans rescinded all of their interests.
Contractually Terminated Subsidiaries' Plans
CareerEngine Network 1990 Plan and CareerEngine Network 1999 Plan
In 1990, the Company's subsidiary, CareerEngine Network, adopted a stock option
plan (the "CareerEngine Network 1990 Plan") for granting options to purchase up
to 750,000 shares of its common stock, pursuant to which officers and other key
employees were eligible to receive incentive and/or nonqualified stock options,
stock appreciation rights, and restricted stock awards. Incentive stock options
granted under the CareerEngine Network 1990 Plan were exercisable for a period
of up to 10 years (five years in the case of a 10% or greater stockholder) from
date of grant at an exercise price which was not less than the quoted market
price on date of grant, except that the exercise price of options granted to a
F-28
CNE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
NOTE -P STOCK OPTION PLANS (CONTINUED)
stockholder owning more than 10% of the outstanding capital stock may not have
been less than 110% of the quoted market price of the common stock at date of
grant. The CareerEngine Network 1990 Plan was terminated on June 3, 1999.
In 1999, CareerEngine Network adopted a new stock option plan (the
"CareerEngine Network 1999 Plan") for granting options to purchase up to 350,000
shares of its common stock, pursuant to which officers and other key employees,
directors, independent contractors and agents were eligible to receive incentive
and/or nonqualified stock options. Options granted under the CareerEngine
Network 1999 Plan were exercisable for a period of up to 10 years from date of
grant at an exercise price which was not less than the quoted market price on
date of grant, except that the exercise price of options granted to a
stockholder owing more than 10% of the outstanding capital stock may not have
been less than 110% of the quoted market price of the common stock at date of
grant.
Stock option activity under the terminated CareerEngine Network 1990 Plan and
the CareerEngine Network 1999 Plan is summarized as follows:
Year Ended December 31,
----------------------------------------------
2003 2002
--------------------- --------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
-------- -------- -------- --------
Options outstanding at beginning of year 290,000 $2.55 290,000 $2.55
Options cancelled 0 0
Rescission by recipients of all their
interest in options (290,000) 2.55 0 2.55
-------- ----- -------- -----
Options outstanding at end of year 0 2.55 290,000 2.55
-------- ----- -------- -----
Options available at end of year 0 $2.55 290,000 $2.55
======== ===== ======== =====
CareerEngine 1999 Plan
In 1999, CareerEngine, Inc., a subsidiary of CareerEngine Network, adopted a
stock option plan (the "CareerEngine 1999 Plan") for granting options to
purchase up to 2,000,000 shares of its common stock , pursuant to which officers
and other key employees were eligible to receive incentive and/or nonqualified
stock options. Options granted under the CareerEngine 1999 Plan were exercisable
for a period of up to 10 years from date of grant at an exercise price which was
not less than the fair value on date of grant, except that the exercise price of
options granted to a stockholder owing more than 10% of the outstanding capital
stock may not have been less than 110% of the fair value of the common stock at
date of grant.
F-29
CNE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
NOTE -P STOCK OPTION PLANS (CONTINUED)
Stock option activity under the terminated CareerEngine 1999 Plan is summarized
as follows:
Year Ended December 31,
------------------------------------------------
2003 2002
-------------------- ----------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------- -------- ------- --------
Options outstanding at
beginning of year 52,000 $ 2.50 73,500 $ 2.50
Options cancelled 0 $ 2.50 (21,500) $ 2.50
Rescission by recipients of all their
interest in options (52,000) $ 2.50 0 $ 2.50
------- -------
Options outstanding at end of year 0 $ 2.50 52,000 $ 2.50
======= =======
Options available at end of year 0- $ 2.50 51,167 $ 2.50
======= =======
Current Plan of the Company
2003 Stock Incentive Plan
On April 30, 2003, the Board of Directors of the Company approved the 2003 Stock
Incentive Plan, which provided, among other matters, for incentive and
non-qualified stock options to purchase 3,500,000 shares of the Company's common
stock. On November 4, 2003, the 2003 Stock Incentive Plan was amended by the
Board of Directors of the Company to increase the number of incentive and
non-qualified stock options that may be granted from 3,500,00 to 5,000,000
shares of Common Stock. The purpose of the 2003 Stock Incentive Plan, as
amended, ("2003 Stock Incentive Plan") is to provide incentives to officers, key
employees, directors, independent contractors and agents whose performance will
contribute to the long-term success and growth of the Company, to strengthen the
ability of the Company to attract and retain officers, key employees, directors,
independent contractors and agents of high competence, to increase the identity
of interests of such people with those of the Company's stockholders and to help
build loyalty to the Company through recognition and the opportunity for stock
ownership. The 2003 Stock Incentive Plan was ratified by a majority of the
stockholders of the Company on December 18, 2003 and is administered by the
Incentive Compensation Committee of the Board.
On April 30, 2003, incentive stock options to purchase 1,987,500 shares of the
Company's Common Stock were granted by the Incentive Compensation Committee to
five officers (1,800,000) and one employee (187,500) of the Company at a
weighted average exercise price of $1.32 per share. On November 4, 2003,
incentive stock options to purchase 950,000 shares of the Company's Common Stock
were granted by the Incentive Compensation Committee to three officers of the
Company at a weighted average exercise price of $1.09 per share. On April 30,
2003 (435,000), November 4, 2003 (220,000) and November 21, 2003 (100,000),
non-qualified stock options to purchase an aggregate 755,000 shares of the
Company's Common Stock were granted by the Board of Directors to certain
independent contractors of
F-30
CNE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
NOTE P - STOCK OPTION PLANS (CONTINUED)
the Company. The Company recorded a charge of $135,250 in general and
administrative expense, relating to the 755,000 non-qualified stock options that
were vested at December 31, 2003, on its Statement of Operations for year then
ended. No options granted have been exercised.
Stock option activity under the 2003 Stock Incentive Plan is summarized as
follows:
Year Ended December 31, 2003
------------------------------------------------
Weighted
Incentive Non-Qualified Average
Shares Shares Exercise Price
--------- ------------- --------------
Options outstanding at
beginning of year 0 0 --
Options granted 2,937,500 755,000 $0.92
Options cancelled 0 0
--------- -------
Options outstanding at end of year 2,937,500 755,000 $0.92
========= =======
Options available at end of year 1,307,500 $1.17
=========
The following table presents information relating to stock options outstanding
at December 31, 2003 relating to the 2003 Incentive Stock Plan:
Options Outstanding Options Available
---------------------------------------- ------------------------------------
Weighted
Range Weighted Average Weighted
of Average Remaining Average
Exercise Exercise Life in Exercise
Price Shares Price Years Shares Price
------------- --------- -------- --------- --------- --------
$0.15 - $3.00 3,692,500 $ 0.92 8.79 1,307,500 $ 1.17
NOTE Q - DISCONTINUED OPERATIONS
In 2000, the Board of Directors of the Company approved the discontinuing of its
merchant banking operations, which consisted of its real estate operations
project with Carmike Cinemas, Inc., and its financial consulting operations. In
addition, in 2003 the Company sold one of its subsidiaries. Results of
discontinued operations related thereto are shown separately in the accompanying
consolidated financial statements.
Sale of Subsidiary
On August 15, 2003, the Company, for nominal consideration, sold all the stock
of one of its subsidiaries whose remaining assets and liabilities were
transferred to a trust for the benefit of its creditors and recognized a gain
amounting to approximately $583,634.
F-31
CNE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
NOTE Q - DISCONTINUED OPERATIONS (CONTINUED)
Gain of Extinguishment of Debt
In 1997, the Company entered into a triple net, credit type lease with Carmike
Cinemas, Inc. ("Carmike"), pursuant to which the Company leased to Carmike six
parcels of land and the improvements thereon. Concurrently, the Company issued
$72,750,000 principal amount of its adjustable rate tender securities due
November 1, 2015 (the "Bonds"). The Bonds were secured by irrevocable letters of
credit issued by a group of banks. In connection therewith the Company entered
into a Reimbursement Agreement with Wachovia, as agent for the banks, under
which the Company was obligated to remit all rent received under the lease to
Wachovia to reimburse the banks for the Bond payments made by draws on their
letters of credit.
On August 8, 2000, Carmike filed a petition under Chapter 11 of the United
States Bankruptcy Code. As a result of that filing and Carmike's subsequent
failure to pay rent to date under the lease, the Company failed to make required
payments to Wachovia under the Reimbursement Agreement. Accordingly, Wachovia
declared a default under the Reimbursement Agreement and accelerated all amounts
due by the Company thereunder. Wachovia also directed the Trustee under the
related Indenture to redeem the Bonds. Such amounts were paid entirely through
draws on the related letters of credit and were not paid with funds of the
Company. However, as the Bonds were no longer outstanding, all unamortized
financing costs (amounting to $804,667) relating thereto were expensed. In
addition, Carmike has not disaffirmed the lease and continues to occupy the six
theaters.
Interest and fees, which have been accrued on the reimbursement obligations
through January 2002, have been recorded with a corresponding amount of accrued
rent receivable from Carmike.
On January 31, 2002, title to the six theaters was transferred to the banks in
payment of the non-recourse debt under the Reimbursement Agreement and the
Company recognized a gain of $3,512,884, representing the excess of the
liabilities over the carrying value of the assets relating to the real estate
leased to Carmike. In addition, the Company received $294,755 in connection with
the sale of its common membership interest in Movieplex relating to the transfer
of title of the movie theaters to Wachovia.
Income from discontinued operations for the years ended December 31, 2003 and
2002 are as follows:
Year Ended December 31,
-----------------------
2003 2002
--------- ----------
Revenues:
Rental income $1,249,710
Gain on sale of subsidiary $ 583,634
Gain on extinguishment of debt 3,512,884
Common membership interest transfer fee 294,755
--------- ----------
583,634 5,057,349
--------- ----------
Expenses:
Interest 1,249,710
Other 94,755
--------- ----------
1,344,465
--------- ----------
$ 583,634 $3,712,884
========= ==========
F-32
CNE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
NOTE R - SUBSEQUENT EVENTS
Private Financing
On February 10, 2004, the Company sold 1,750,000 shares of its Common Stock at
$0.40 per share. The net proceeds of the transaction amounted to $567,000. The
Company is using the funds obtained from this financing primarily for working
capital purposes. The financing was effected pursuant to the exemption from the
registration provisions of the Securities Act of 1933 provided by Section 4(2)
thereof and Rule 506 promulgated thereunder.
2003 Stock Incentive Plan
On January 21 2004, incentive stock options to purchase 601,000 shares of the
Company's common stock were granted by the Incentive Compensation Committee of
the Board of Directors to one officer and 18 employees of the Company at a
weighted average exercise price of $0.50 per share. In addition, on January 21,
2004 non-qualified stock options to purchase an aggregate 295,500 shares of the
Company's common stock were granted by the Board of Directors of the Company to
certain independent contractors and the outside directors (75,000 in the
aggregate) of the Company. No options granted have been exercised.
Certain Activities of significant stockholders and Directors and Officers of the
Company
On January 21, 2004, certain officers, directors and stockholders of the Company
waived certain amounts due to them as follows:
Compensation and certain reimbursable expenses $ 66,246
Interest on promissory notes 13,334
Accounts receivable due stockholders 130,000
--------
Total $209,580
========
These amounts have been reflected in the financial statements as contributions
to the capital of the Company during the year ended December 31, 2003.
10% Subordinated Notes Payable
On March 12, 2004, the Company notified the Class B Warrant holders that, to
satisfy the 15% non-dilutive provisions of their Warrants, these Warrants were
now exercisable for an aggregate of 5,245,200 shares of the Company's common
stock at approximately $0.40 per share. On this date, the Company also exercised
its option to extend the maturity date of the notes to April 30, 2005 and
satisfied the requirement for the additional 4% non-dilutive interest in the
Company by issuing to the noteholders Class B Warrants to purchase an additional
1,708,900 shares of the Company's common stock at $0.50 per share. The
non-dilutive provisions of the Warrants terminate when all of the notes have
been paid in full.
F-33
CNE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
NOTE R - SUBSEQUENT EVENTS (CONTINUED)
Short-Term Credit Arrangements and Notes Payable
On January 21, 2004, a secured factoring arrangement with an individual, which
amounted to $300,000 at December 31, 2003, was restructured into a $300,000
unsecured Note Payable due February 10, 2005. The individual was also issued
Class BB Warrants to purchase 150,000 shares of the Company's common stock at
$0.50 per share.
American Stock Exchange Listing
On January 2, 2004 the Company received a notice dated December 31, 2003 from
the American Stock Exchange Staff indicating that the Company had demonstrated
compliance with the requirements necessary for continued listing on the American
Stock Exchange.
As is the case for all listed issuers, the Company's continued listing
eligibility will be assessed on an ongoing basis; however, during the year
ending December 31, 2004 it shall be subject to additional scrutiny (as set
forth in Section 1009(h) of the AMEX Company Guide) as is the case for any
listed Company that has regained compliance.
F-34
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
Item 8A. Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer have
conducted an evaluation of the effectiveness of disclosure controls
and procedures pursuant to Exchange Act Rule 13a-14. Based on that
evaluation, they have concluded that our disclosure controls and
procedures are effective in ensuring that all material information
required to be filed in this Annual Report on Form 10-KSB has been
made known to them in a timely fashion. There have been no
significant changes in internal controls, or in other factors that
could significantly affect internal controls, subsequent to the date
they completed their evaluation.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act.
(a) Directors and Executive Officers
Under our By-Laws, the Board of Directors is divided into three
classes. Each of the three classes has a term that is staggered by
one year from one another. Members of each class are elected to
serve for a term of three years and until their successors are
elected or until their resignation, removal or ineligibility.
Set forth below are our directors and executive officers, their
respective names and ages, positions with us, principal occupations
and business experiences during at least the past five years and the
dates of the commencement of each individual's term as a director
and/or officer.
Name Age Position
---- --- --------
George W. Benoit 67 Chairman of the Board and Chief Executive Officer
Michael J. Gutowski 45 Chief Operating Officer and Director
Larry M. Reid 58 Executive Vice President and Director
David W. Dube 47 Director
Carol L. Gutowski 45 Director
Joseph G. Anastasi 66 Director
Charles W. Currie 60 Director
Anthony S. Conigliaro 53 Vice President and Chief Financial Officer
Thomas L. Sullivan 48 President and Director of ECI
GEORGE W. BENOIT has been our Chief Executive Officer and one of our
directors since 1971 and our Chairman of the Board since 1972. He is
also Chairman of the Board of Directors of SRC and ECI. His term
expires in 2004.
MICHAEL J. GUTOWSKI has been one of our directors since April 2003,
as well as our President and Chief Operating Officer. He is also
Chief Executive Officer and a director of SRC, Connectivity, ECI and
US Commlink, Ltd. and Chairman of the Board of Directors of
Connectivity and US Commlink. Mr. Gutowski was employed by American
Mobile Systems, commencing in 1993, as an indirect
49
distribution manager. In 1994, American Mobile Systems was purchased
by Nextel Communications. For Nextel, Mr. Gutowski contracted and
managed over 120 indirect sales locations in North Carolina, South
Carolina and Florida. Mr. Gutowski remained at Nextel until 1999
when he left to start Connectivity. His term expires in 2006.
LARRY M. REID has been one of our directors since April 2003, as
well as our Executive Vice President. Mr. Reid is the co-founder of
SRC and continues to serve as a director and its Vice President and
Chief Operating Officer. He is also a director and the Treasurer of
both Connectivity and US Commlink, and a director and Chief
Operating Officer of ECI. Prior thereto, from September 1999 to
January 2002 he was President and Chief Executive Officer of CNE
Communications, Inc., a diversified communications company he
founded that provided consulting and management services, private
equity management, and digital content and data aggregation services
located in Stuart, Florida. CNE Communications ceased operations in
January 2002 when Mr. Reid joined Connectivity. From December 1997
to September 1999, Mr. Reid was an independent financial consultant.
His term expires in 2005.
DAVID W. DUBE has been one of our directors since June 1996. Mr.
Dube is President of Peak Capital Corporation, a corporate finance
and management advisory firm, and Peak Securities Corporation, a
registered broker-dealer. Mr. Dube was Senior Vice President and
Chief Financial Officer of FAB Capital Corp., a merchant banking and
securities investment firm, and served in various other capacities
with this company from 1997 through October 1999. From 1996 to 1997
he was President and Chief Executive Officer of Optimax Industries,
Inc., a company that engaged in the horticultural, decorative
giftware and truck parts accessories industries. Mr. Dube serves on
the Board of Directors of publicly-traded GlycoGenesys, Inc. and New
World Wine Group, Ltd. His term expires in 2004.
CAROL L. GUTOWSKI has been one of our directors since April 2003.
Mrs. Gutowski was a human resource manager for Allied Bendix
Aerospace from 1980 until 1994. In 1994 she left the business world
to be at home with her children until 1999 when she and Michael
Gutowski, her husband, formed Connectivity. Mrs. Gutowski is
currently President and a director of both Connectivity and SRC. Her
term expires in 2004.
50
JOSEPH G. ANASTASI has been one of our directors of the Company
since September 1986. Since 1960, Mr. Anastasi has been the owner
and president of Montgomery Realty Company, Inc., a firm
specializing in commercial real estate sales, development consulting
and property management. His term expires in 2005.
CHARLES W. CURRIE has been one of our directors since 1986. Mr.
Currie is, and has been since October 2002, a partner in First
American Fund Services, Inc., a company that provides marketing
services to investment managers. Mr. Currie was a partner in Asset
Management Services LLC from August 1996 through September 2002. His
term expires in 2006.
ANTHONY S. CONIGLIARO has been our Vice President and Chief
Financial Officer since March 1999. He is also Chief Financial
Officer of SRC, Connectivity, ECI and US Commlink. Mr. Conigliaro is
a certified public accountant.
THOMAS L. SULLIVAN has been the President and a director of ECI
since we acquired it in April 2003. He co-founded ECI in 1984 and
served as its Vice President from its inception until its
acquisition by the Company. Mr. Sullivan has more than 25 years
experience in the communications industry.
Except for Michael J. Gutowski and Carol L. Gutowski, who are
husband and wife, there are no family relationships among our
directors or executive officers.
(b) Meetings of the Board and its Committees
During 2003, the Board had 9 meetings.
Our By-Laws provide for an Executive Committee consisting of the
Chairman of the Board and not less than two other Directors to
exercise the powers of the Board during the intervals between
meetings of the Board. During the period January 1 through April 23,
2003, the Executive Committee, consisting of George W. Benoit, Kevin
J. Benoit, the son of George W. Benoit, and David W. Dube, had five
meetings. Since April 23, 2003, members of the Executive Committee
are Messrs. G. Benoit, Gutowski, Reid and Dube and they have had 4
meetings.
The Board also has an Audit Committee that, during the period
January 1 through April 23, 2003, consisted of four outside
Directors. This committee discusses audit
51
and financial reporting matters with both our management and our
independent public accountants. To ensure independence, our
independent public accountants may meet with the Audit Committee
with or without the presence of management representatives. During
the period January 1 through April 23, 2003, the Audit Committee,
consisting of Joseph J. Anastasi, Charles W. Currie, David W. Dube
and James J. Murtha, had four meetings. Since April 23, 2003, the
members of the Audit Committee have been Messrs. Dube, Anastasi and
Currie and they had 4 meetings. Each of these committee members is
an Independent Director as that term is defined by the American
Stock Exchange. In addition, Mr. Dube is a financial expert as
defined in Securities and Exchange Commission rules. Webelieve that
each of the Committee members is independent of management and free
of any relationship that would interfere with his exercise of
independent judgment as a member of this committee.
The principal function of the Audit Committee is to serve as an
independent and objective party to assist the Board of Directors in
monitoring the integrity of our financial statements, our compliance
with legal and regulatory requirements, and the independence and
performance of our auditors.
The Board also has a Compensation Committee for the purpose of
reviewing the compensation of our officers and employees and making
recommendations to the Board with respect thereto. During the period
January 1 through April 23, 2003 the Compensation Committee,
consisting of Messrs. G. Benoit, K. Benoit, Currie and Dube, had two
meetings. Since April 23, 2003, the members of the Compensation
Committee have been Messrs. G. Benoit, Gutowski, Reid and Dube and
they had 1 meeting.
The Board also has a Nominating Committee to propose nominees for
election to the Board. During the period January 1 through April 23,
2003 the Nominating Committee, consisting of Messrs. K. Benoit,
Anastasi, Murtha and Currie, had one meeting. The Nominating
Committee will consider suggestions for potential nominees submitted
by stockholders if mailed to the Chairman of the Board. Since April
23, 2003, the members of the Nominating Committee have been Messrs.
G. Benoit, Gutowski, Reid and Dube and they had 1 meeting.
52
The Board also has an Incentive Compensation Committee for the
purpose of administering and making incentive compensation awards
under our Incentive Compensation Plans. During the period January 1
through April 23, 2003, the Incentive Compensation Committee,
consisting of Messrs. Anastasi, Murtha, Currie, and Dube, had two
meetings. Since April 23, 2003, the members of the Incentive
Compensation Committee have been Messrs. Dube, Anastasi and Currie
and they had 3 meetings.
During 2003 each Director attended at least 75% of the aggregate of
the total number of Board meetings and meetings of all committees of
the Board on which he served, except for Mr. Murtha.
(c) Compliance with Section 16(a) of the Exchange Act
Officers, Directors and persons who own more than ten percent of a
registered class of the Company's equity securities are required by
Section 16(a) of the Exchange Act to file reports of ownership and
changes in ownership with the Commission. They are also required by
the Commission's rules to furnish the Company with copies of all
Section 16(a) forms they file.
Based solely on a review of the copies of such forms received by us,
we believe that, during the fiscal year ended December 31, 2003, its
officers, directors and ten percent stockholders complied with all
applicable Section 16(a) filing requirements on a timely basis
except that a Form 5 filed on April 13, 2004 for George W. Benoit
reflecting his sale of warrants to purchase 624, 870 shares of our
common stock at his cost and his gift of 5,000 shares of common
stock during the year ended December 31, 2003; a Form 5 filed on
April 13, 2004 for David W. Dube reflecting the granting to him
during the year ended December 31, 2003 of options to purchase
75,000 shares of our common stock; a Form 5 filed on April 13, 2004
for Michael J. Gutowski reflecting the granting to him during the
year ended December 31, 2003 of options to purchase 175,000 shares
of our common stock; a Form 5 filed on April 13, 2004 for Carol L.
Gutowski reflecting the granting to her during the year ended
December 31, 2003 of options to purchase 175,000 shares of our
common stock; a Form 5 for Grace Lindblom reflecting her purchase of
1,250,000 shares of common stock and warrants to purchase 1,041,450
shares of common stock.
Item 10. Executive Compensation.
(a) Executive Officer Compensation
The following table sets forth all compensation awarded to, earned
by or paid to, our Chief Executive Officer and our most highly
compensated executive officers. In 2003, annual salaries of such
individuals did not exceed $100,000. The following table represents
annual compensation for all services rendered in all capacities to
us by individuals earning $100,000 or more during 2003, 2002 and
2001.
53
Summary Compensation Table
--------------------------
Name and
Principal All Other
Position Year Salary Bonus Compensation (1)
-------- ---- ------ ----- ----------------
George W. Benoit, 2003
President, Chief 2002
Executive Officer 2001 $160,000 $ 3,212
and Chairman
Anthony S. 2003
Conigliaro, Vice 2002
President and 2001 $110,000
Chief Financial
Officer
----------
(1) Represents our share of insurance premium on Split Dollar Life
Insurance Agreement which was cancelled in 2001.
Executive compensation can vary widely from year to year. We may pay
discretionary bonuses to its salaried employees. Bonuses are
determined by the Compensation Committee of the Board of Directors.
There were no bonuses in 2003.
We have three-year employment agreements, commencing April 2003,
with each of our executive officers, except for Michael J. Gutowski
whose contract is for four years. These agreements provide for
annual salaries as follows:
54
Executive Officers Annual Salary
------------------ -------------
George W. Benoit $150,000
Michael J. Gutowski $150,000
Larry M. Reid $120,000
Anthony S. Conigliaro $110,000
Carol L. Gutowski $100,000
Thomas L. Sullivan $100,000
(b) Compensation Pursuant to Plans
401(k) Cash or Deferred Compensation Plan. CareerEngine Network,
Inc. ("CareerEngine"), one of our subsidiaries, maintains a
tax-qualified 401(k) cash or deferred compensation plan that covers
all employees who have completed three months of service and
attained age 21. Participants are permitted, within the limitations
imposed by the Internal Revenue Code, to make pre-tax contributions
to the plan pursuant to salary reduction agreements. CareerEngine
may, in its discretion on an annual basis, make additional
contributions. The contributions of the participants and those of
CareerEngine are held in separate accounts. Participants are always
fully vested in both accounts.
1990 Incentive Compensation Plan. This Plan was terminated on June
3, 1999. On March 14, 2003 the recipients of all outstanding awards
under the Plan waived their rights to such awards.
1999 Stock Option Plan. This Plan was terminated on April 23, 2003.
On March 14, 2003 the recipients of all outstanding awards under the
Plan waived their rights to such awards.
2003 Stock Incentive Plan. Our Stockholders approved the 2003 Stock
Incentive Plan (the "2003 Plan"), which provides, among other
matters, for incentive and non-qualified stock options to purchase
5,000,000 shares of our common stock. The purpose of the 2003 Plan
is to provide incentives to officers, key employees, directors,
independent contractors and agents whose performance will contribute
to our long-term success and growth, to strengthen our ability to
attract and retain officers, key employees, directors, independent
contractors and agents of high competence, to increase the identity
of interests of such people with those of our stockholders and to
help build loyalty to the Company through recognition and the
opportunity for
55
stock ownership. The 2003 Plan is administered by the Incentive
Compensation Committee of the Board.
The 2003 Plan permits the granting of both incentive stock options
and non-qualified stock options. Generally, the option price of both
incentive stock options and non-qualified stock options must be at
least equal to 100% of the fair market value of the shares on the
date of grant. The maximum term of each option is ten years. For any
participant who owns shares possessing more than 10% of the voting
rights of the outstanding shares of our common stock, the exercise
price of any incentive stock option must be at least equal to 110%
of the fair market value of the shares subject to such option on the
date of grant and the term of the option may not be longer than five
years. Options become exercisable at such time or times as the Board
may determine at the time it grants options.
Under the 2003 Plan, incentive stock options may be granted only to
officers and employees and non-qualified stock options may be
granted to officers, employees as well as directors, independent
contractors and agents.
The 2003 Plan may be amended, terminated or modified by the Board at
any time, except that the Board may not, without approval by a vote
of our stockholders (i) increase the maximum number of shares for
which options may be granted under the 2003 Plan, (ii) change the
persons eligible to participate in the 2003 Plan, or (iii)
materially increase the benefits accruing to participants under the
2003 Plan. No such termination, modification or amendment may affect
the rights of an optionee under an outstanding option or the grantee
of an award.
On April 30, 2003, incentive stock options to purchase 1,987,500
shares of our common stock were granted by the Incentive
Compensation Committee to five officers (1,800,000) and one
employees (187,500) of the Company at a weighted average exercise
price of $1.32 per share. On November 4, 2003, incentive stock
options to purchase 950,000 shares of our common stock were granted
by the Incentive Compensation Committee to three officers of the
Company at a weighted average exercise price of $1.09 per share. On
April 30, 2003 (435,000), November 4, 2003 (220,000) and November
21, 2003 (100,000), non-qualified stock options to purchase an
aggregate 755,000 shares of our common stock were granted by the
Board of
56
Directors to certain independent contractors of the Company. No
options granted have been exercised.
(c) Director Compensation
Until October 1, 2003, we did not pay directors who were also our
employees any fees for serving as directors, but reimbursed them for
their out-of-pocket expenses in connection with such duties.
Effective October 1, 2003, we agreed to pay directors who are not
also our employees a monthly retainer of $1,000, plus expenses
incurred for attending meetings of the Board, Annual Stockholders
Meetings, and for each meeting of a committee of the Board not held
in conjunction with a Board meeting. In addition, effective October
1, 2003, any Director who is also a member of the Executive
Committee will be paid an additional monthly retainer of $1,000.
57
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, at April 1, 2004, the shares of our
common stock owned beneficially; by each of our current directors;
by all of our current directors and executive officers as a group;
and by persons known to us to own, beneficially, more than five
percent of the outstanding shares of our common stock:
Percent of
Aggregate Voting
Common Stock Power and
Name of Beneficially Outstanding
Beneficial Owner(1) Owned(2) Equity Owned(3)
------------------- -------- ---------------
Grace C. Lindblom (13) 3,063,858 24.75
George W. Benoit (4)(7)(9)(10)(14)(15) 2,229,120 19.74
Maureen Benoit (9)(14) 1,738,535 14.04
Frank Ciolli (21) 1,043,115 8.93
Barry W. Blank (8) 557,300 5.16
Michael J. Gutowski (16)(11) 775,000 6.79
Kevin J. Benoit (5)(7)(10)(12) 775,705 7.00
Anthony S. Conigliaro (12)(17) 649,705 5.76
Carol L. Gutowski (11)(19) 475,000 4.27
Larry M. Reid (17) 446,414 4.08
Charles W. Currie (6) 296,780 2.78
David W. Dube (18) 104,000 *
Joseph G. Anastasi (22) 27,200 *
Thomas L. Sullivan (20) 210,000 1.94
All Directors and Executive
Officers as a group (9 persons) 6,951,754 60.63
* Owns less than one (1%) percent.
(1) The address of all the beneficial owners except Mr. Blank,
Ms. Lindblom and Mr. Ciolli, is CNE Group, Inc., Inc., Suite
507, 200 West 57th Street, New York, New York 10019. Mr.
Blank's address is P.O. Box 32056, Phoenix, Arizona 85064, Ms.
Lindblom's address is 1412 W. Colonial Drive, Orlando, FL
32804, and Mr. Ciolli's address is 7 Jessup Lane, Westhampton
Beach, NY 11978.
58
(2) A person is deemed to be a beneficial owner of securities that
can be acquired by such person within 60 days from the filing
of this Form 10-KSB upon the exercise of options and warrants
or conversion of convertible securities. Each beneficial
owner's percentage ownership is determined by assuming that
options, warrants and convertible securities that are held by
such person (but not held by any other person) and that are
exercisable or convertible within 60 days from the filing of
this Form 10-KSB have been exercise or converted. Except as
otherwise indicated, and subject to applicable community
property and similar laws, to our knowledge each of the
persons named has sole voting and investment power with
respect to the shares shown as beneficially owned.
(3) All percentages of beneficial ownership are calculated based
the number of shares outstanding as of April 1, 2004. On such
date we had 10,640,915 shares of common stock issued (or
awaiting issuance) and outstanding.
(4) Ownership and percentage numbers include 90,700 shares of
common stock held in Mr. Benoit's 401K Plan.
(5) Ownership and percentage numbers include (a) 31,000 shares of
common stock held in the Kevin J. Benoit 1998 Family Trust, of
which Mr. Benoit is the Trustee; and (b) 35,300 shares of
common stock held in Mr. Benoit's Individual Retirement
Account.
(6) Ownership and percentage numbers include (a) 200 shares of
common stock owned by Mr. Currie's wife, (b) 9,900 shares of
common stock held in Mr. Currie's Individual Retirement
Account; and (c) 25,000 shares of common stock that Mr. Currie
can acquire by exercising non-qualified stock options issued
pursuant to our 2003 Stock Incentive Plan..
(7) Ownership and percentage numbers include 50,000 shares of
common stock that each of these individuals can acquire by
exercising warrants of the Company.
(8) Ownership and percentage numbers include 150,000 shares of
common stock that Mr. Blank can acquire by exercising warrants
of the Company.
(9) George W. Benoit and Maureen Benoit are husband and wife.
(10) George W. Benoit is the father of Kevin J. Benoit.
(11) Michael J. Gutowski and Carol L. Gutowski are husband and
wife.
(12) Ownership and percentage numbers include 347,705 shares of
common stock that Mr. Conigliaro and Mr. K. Benoit can each
acquire by exercising warrants issued to them in conjunction
with their purchase of our 10% Promissory Notes.
(13) Ownership and percentage numbers include 1,738,525 shares of
common stock that Ms. Lindblom can acquire by exercising
warrants issued to her in conjunction with her purchase of our
10% Promissory Notes.
(14) Ownership and percentage numbers consist of 1,738,525 shares
of common stock that Mrs. Benoit can acquire by exercising of
warrants issued in conjunction with her purchase of our 10%
Promissory Notes. George Benoit disclaims beneficial ownership
of these securities.
59
(15) Ownership and percentage numbers include 600,000 shares of
common stock that Mr. Benoit can acquire by exercising
incentive stock options issued pursuant to our 2003 Stock
Incentive Plan.
(16) Ownership and percentage numbers consist of 775,000 shares of
common stock that Mr. Gutowski can acquire by exercising
incentive stock options issued to him pursuant to our 2003
Stock Incentive Plan.
(17) Ownership and percentage numbers include 300,000 shares of
common stock that each of these individuals can acquire by
exercising incentive stock options issued to each of them
pursuant to our 2003 Stock Incentive Plan.
(18) Ownership and percentage numbers include 100,000 shares of
common stock that Mr. Dube can acquire by exercising
non-qualified stock options issued pursuant to our 2003 Stock
Incentive Plan.
(19) Ownership and percentage numbers consist of 475,000 shares of
common stock that Mrs. Gutowski can acquire by exercising
incentive stock options issued to her pursuant to our 2003
Stock Incentive Plan.
(20) Ownership and percentage numbers consist 210,000 shares of
common stock that Mr. Sullivan can acquire by exercising
incentive stock options issued pursuant to our 2003 Stock
Incentive Plan.
(21) Ownership and percentage numbers consist of 1,043,115 shares
of common stock that Mr. Ciolli can acquire by exercising of
warrants issued in conjunction with his purchase of our 10%
Promissory Notes.
(22) Ownership and percentage numbers include 25,000 shares of
common stock that Mr. Anastasi can acquire by exercising
non-qualified stock options issued pursuant to our 2003 Stock
Incentive Plan.
Item 12. Certain Relationships and Related Transactions
On April 23, 2003 we acquired SRC and ECI. These acquisitions, which
involved certain of our current officers, directors and employees,
are discussed under the heading "Item 6: Management's Discussion and
Analysis of Financial Condition and Results of Operations -
Acquisition of all of the outstanding stock of SRC and ECI" above.
On January 21, 2004, George Benoit waived certain compensation and
reimbursable expenses due him from the Company amounting to $66,246
at December 31, 2003.
Maureen Benoit, George Benoit's wife, purchased $600,000 of the
Company's 10% Subordinated Notes due April 30, 2004 (extended to
April 30, 2005 on March 12, 2004) (the "10% Notes") and related
2,499,480 common stock warrants on April 23, 2003. On October 14,
2003, Mrs. Benoit sold $150,000 in principal amount of the 10% Notes
and 624,870 related warrants to Frank Ciolli for her cost.
60
On March 2, 2004, Mrs. Benoit sold $200,000 in principal amount of
the 10% Notes and 833,160 related warrants to Barry W. Blank for her
cost. Mrs. Benoit currently owns $250,000 in principal amount of the
10% Notes and 1,738,525 related warrants, including 697,075 warrants
issued to her due to certain non-dilutive and loan extension
provisions of her 10% Notes.
Kevin J. Benoit currently owns $50,000 of the 10% Notes and related
common stock warrants (208,290, which was increased to 347,705 due
to certain non-dilutive and loan extension provisions of the 10%
Notes) which he purchased on April 23, 2003.
Mr. Conigliaro currently owns $50,000 of the 10% Notes and related
common stock warrants (208,290, which was increased to 347,705 due
to certain non-dilutive and loan extension provisions of the notes)
which he purchased on April 23, 2003.
Mr. and Mrs. Gutowski currently own, in the aggregate, (i) 100% of
our Series AA Preferred Stock amounting to 1,000,000 shares, and
(ii) 50% of our Series C Preferred Stock amounting to 4,867,937
shares and related common stock warrants (4,867,937) which they
acquired in 2003. On August 31, 2003, they converted the Company's
8% Subordinated Notes due April 30, 2008 (the "8% Notes") then owned
by them in the principal amount of $1,000,000 into 1,000,000 shares
of our Series AA Preferred Stock. On January 21, 2004, Mr. and Mrs.
Gutowski waived interest due them of $13,334 relating to the period
of time they held the 8% Notes.
Thomas J. Sullivan and Gary L. Eichsteadt, an officer and an
employee of ECI, respectively, in the aggregate currently own (i)
100% of the 8% Notes amounting to $1,000,000, (ii) 50% of our Series
C Preferred Stock amounting to 4,867,938 shares and related common
stock warrants (4,867,938), and (iii) certain 8% installment notes
amounting to $65,076, all of which they acquired during 2003. On
January 21, 2004, Messrs. Sullivan and Eichsteadt waived $130,000 of
certain accounts receivable due them from the Company.
We have employment agreements with our executive officers and have
granted stock options and warrants to purchase common stock to our
officers and directors. These employment agreements and grants are
discussed under the headings "Item 10: Executive Compensation" and
61
"Item 11: Security Ownership of Certain Beneficial Owners and
Management" above.
On May 1, 2003, our subsidiary, SRC, entered into a two-year lease
with T&G 16th Street Property, relating to its office and
manufacturing premises located in Lauderhill, FL, at a monthly
rental of $5,830. The lease contains one, one-year renewal option at
the current annual rental rate. SRC's primary obligations pursuant
to the lease agreement are the payment of rent and its incurred
utility costs. Messrs. Sullivan and Eichsteadt are the principals of
T&G 16th Street Property.
There are no material proceedings to which any of our officers,
directors or affiliates, or any associates thereof is a party
adverse to our interests or do any of these individuals have a
material interest adverse to the Company.
Item 13. Exhibits, List and Reports on Form 8-K.
(a) Exhibits
Certain of the following exhibits, as indicated parenthetically,
were previously filed as exhibits to other reports or registration
statements filed by the Registrant under the Securities Act of 1933
or under the Securities Exchange Act of 1934 and are hereby
incorporated by reference.
2.1 Agreement and Plan of Merger among CNE Group, Inc., CNE
General Acquisition, Inc. (a wholly-owned subsidiary of CNE
Group, Inc.) and CareerEngine Network, Inc., dated as of April
7, 2003 (Incorporated by reference to the Registrant's Current
Report on Form 8-K filed on May 6, 2003).
2.2 Agreement and Plan of Reorganization of CNE Group, Inc., CNE
Acquisition Corp. I (a wholly-owned subsidiary of CNE Group,
Inc.), SRC Technologies, Inc. and others, dated April 23, 2003
(Incorporated by reference to the Registrant's Current Report
on Form 8-K filed on May 6, 2003).
2.3 Agreement and Plan of Reorganization among CNE Group, Inc.,
CNE Acquisition Corp. II (a wholly-owned subsidiary of CNE
Group, Inc.), Econo-Comm, Inc. D/B/A Mobile Communications and
the
62
Stockholders of Econo-Comm, Inc. dated as of April 23, 2003
(Incorporated by reference to the Registrant's Current Report
on Form 8-K filed on May 6, 2003).
3.1 Certificate of Incorporation of CNE Group, Inc. (Incorporated
by reference to the Registrant's Current Report on Form 8-K
filed on May 6, 2003).
3.2 Certificate of Amendment of the Certificate of Incorporation
of CNE Group, Inc. (Incorporated by reference to the
Registrant's Current Report on Form 8-K filed on May 6, 2003).
3.3 Amended and Restated By-Laws of CNE Group, Inc. (Incorporated
by reference to the Registrant's Current Report on Form 8-K
filed on May 6, 2003).
3.4 Amendment to Amended and Restated By-Laws of CNE Group, Inc.
adopted on March 18, 2004
4.1 Certificate of Designations of CNE Group, Inc., Series A
Preferred Stock adopted pursuant to Section 151(g) of the
Delaware General Corporation Law (Incorporated by reference to
the Registrant's Current Report on Form 8-K filed on May 6,
2003).
4.2 Certificate of Designations of CNE Group, Inc., Series B
Preferred Stock adopted pursuant to Section 151(g) of the
Delaware General Corporation Law (Incorporated by reference to
the Registrant's Current Report on Form 8-K filed on May 6,
2003).
4.3 Certificate of Designations of CNE Group, Inc., Series C
Preferred Stock adopted pursuant to Section 151(g) of the
Delaware General Corporation Law (Incorporated by reference to
the Registrant's Current Report on Form 8-K filed on May 6,
2003).
4.4 Certificate of Designations of CNE Group, Inc., Series E
Preferred Stock adopted pursuant to Section 151(g) of the
Delaware General Corporation Law (Incorporated by reference to
the Registrant's Current Report on Form 8-K filed on May 6,
2003).
63
4.5 Form of Class A Warrants to Purchase Common Stock of CNE
Group, Inc. (Incorporated by reference to the Registrant's
Current Report on Form 8-K filed on May 6, 2003).
4.6 Form of Class B Warrants to Purchase Common Stock of CNE
Group, Inc. (Incorporated by reference to the Registrant's
Current Report on Form 8-K filed on May 6, 2003).
4.7 Form of Class C Warrants to Purchase Common Stock of CNE
Group, Inc. (Incorporated by reference to the Registrant's
Current Report on Form 8-K filed on May 6, 2003).
4.8 Form of CNE Group, Inc. 10% Subordinated Note (Incorporated by
reference to the Registrant's Current Report on Form 8-K filed
on May 6, 2003).
4.9 Form of 8% Subordinated Note issued by CNE Group, Inc. to Gary
Eichsteadt, to purchase all right, title and interest in
Patent No. 6,060,979, dated April 23, 2003 (Incorporated by
reference to the Registrant's Current Report on Form 8-K filed
on May 6, 2003).
4.10 Certificate of Designations of CNE Group, Inc., Series AA
Preferred Stock adopted pursuant to Section 151(g) of the
Delaware General Corporation Law.
10.1 Asset Purchase Agreement between CNE Group, Inc. and Gary
Eichsteadt, dated April 23, 2003 (Incorporated by reference to
the Registrant's Current Report on Form 8-K filed on May 6,
2003).
10.2 Assignment of patent by Gary Eichsteadt to CNE Group, Inc.,
dated April 23, 2003 (Incorporated by reference to the
Registrant's Current Report on Form 8-K filed on May 6, 2003).
10.3 Pledge Agreement made by CNE Group, Inc. and Gary Eichsteadt,
dated April 23, 2003 (Incorporated by reference to the
Registrant's Current Report on Form 8-K filed on May 6, 2003).
10.4 Employment Agreement between CNE Group, Inc. and George W.
Benoit (Incorporated by reference to the Registrant's Current
Report on Form 8-K filed on May 6, 2003).
64
10.5 Employment Agreement between CNE Group, Inc. and Anthony S.
Conigliaro (Incorporated by reference to the Registrant's
Current Report on Form 8-K filed on May 6, 2003).
10.6 Employment Agreement between Connectivity, Inc. and Carol
Gutowski (Incorporated by reference to the Registrant's
Current Report on Form 8-K filed on May 6, 2003).
10.7 Employment Agreement between Econo-Comm, Inc. and Gary
Eichsteadt (Incorporated by reference to the Registrant's
Current Report on Form 8-K filed on May 6, 2003).
10.8 Employment Agreement between CNE Group, Inc. and Larry M. Reid
(Incorporated by reference to the Registrant's Current Report
on Form 8-K filed on May 6, 2003).
10.9 Employment Agreement between CNE Group, Inc. and Michael J.
Gutowski (Incorporated by reference to the Registrant's
Current Report on Form 8-K filed on May 6, 2003).
10.10 Employment Agreement between Econo-Comm, Inc. and Thomas L.
Sullivan (Incorporated by reference to the Registrant's
Current Report on Form 8-K filed on May 6, 2003).
21.0 Subsidiaries of the Registrant.
SRC Technologies, Inc. (Florida) and CareerEngine Network,
Inc. (Delaware). SRC's subsidiaries are Connectivity, Inc.
(Florida), Econo-Comm, Inc. (Florida) and U.S. Commlink, Ltd.
(California). CareerEngine Network, Inc.'s subsidiaries are
CareerEngine, Inc. (New York) Helmstar Funding, Inc.
(Pennsylvania), Burrows, Hayes Company, Inc (New York), Shaw
Realty Company, Inc. (New York), Helmstar Funding, Inc. (New
York), Dover, Sussex Company, Inc. (New York), Housing Capital
Corporation (New York), Randel, Palmer & Co., Inc. (New York),
Parker, Reld & Co., Inc. (New York), McAdam, Taylor & Co.,
Inc. (New York) and Ryan, Jones & Co., Inc. (New York).
CareerEngine, Inc.'s wholly-owned subsidiaries are Advanced
Digital Networks, Inc. (New York) and A.E. Lander Corp. (New
York).
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 from the Company's Chief Executive Officer
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 from the Company's Chief Financial Officer
32.1 Certification of the Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of the Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
65
(b) During the last quarter of the period covered by this report
the Company filed a report on Form 8K on December 8, 2003
relating to a description of the Company's business and risk
factors with respect thereto as set forth in Item 5 of that
report.
Item 14. Principal Accountant Fees and Services
(1) Audit Fees
The aggregate fees billed for professional services rendered by our
independent auditors for the audit of our annual financial
statements and review of our financial statements included in our
quarterly reports or services that are normally provided by the
independent auditors in connection with statutory and regulatory
filings or engagements were $125,261 for the fiscal year ended
December 31, 2003 and $85,000 for the fiscal year ended December
31, 2002.
(2) Audit-Related Fees
During our last two fiscal years our independent auditors did not
perform any assurance and related services that were reasonably
related to the performance or review of our financial statements for
which we were billed except as may have been included in the fees
set forth in Paragraph (1) above.
(3) Tax Fees
Our independent auditors did not provide us with any tax compliance,
tax advice or tax planning services during our last two fiscal years
and, accordingly, did not bill us for such services during these
years.
(4) All Other Fees
During our last two fiscal years our independent auditors did not
provide us with any products and did not provide us with or bill us
any fees for services other than those set forth in Paragraph (1)
above, except a certain record re-creation assignment amounting to
approximately $31,200 in 2002 which was necessitated due to the
catastrophe of September 11, 2001. The Company had maintained its
offices at Suite 2112, Two World Trade Center, New York, NY.
66
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 on the 14th day of April,
2004.
CNE Group, Inc.
/s/ George W. Benoit
----------------------------------------------------
George W. Benoit, Chairman of the Board
and Chief Executive Officer
/s/ Anthony S. Conigliaro
----------------------------------------------------
Anthony S. Conigliaro, Vice President
and Chief Financial Officer
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 in
the capacities indicated on the 14th day of April, 2004.
Signature Title
--------- -----
/s/ George W. Benoit Chairman of the Board, President,
-------------------------- Chief Executive Officer
(George W. Benoit)
/s/ Joseph G. Anastasi Director
--------------------------
(Joseph G. Anastasi)
/s/ Charles W. Currie Director
--------------------------
(Charles W. Currie)
/s/ Michael J. Gutowski Director
--------------------------
(Michael J. Gutowski)
/s/ David W. Dube Director
--------------------------
(David W. Dube)
67
/s/ Carol L. Gutowski Director
--------------------------
(Carol L. Gutowski)
/s/ Larry M. Reid Director
--------------------------
(Larry M. Reid)
68