SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
Current Report
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported):
December 8, 2003
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CNE Group, Inc.
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(Exact Name of Registrant as Specified in Charter)
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Delaware 1-9224 56-2346563
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(State or Other Jurisdiction (Commission File Number) (I.R.S. Employer
of Incorporation) Identification No.)
200 West 57th Street, Suite 507
New York, New York 10019
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(Address of Principal Executive Offices) (Zip Code)
212-977-2200
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Registrant's telephone number, including area code
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(Former name or former address, if changed since last report)
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Item 5. OTHER INFORMATION
1. Description Of Business:
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General
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We are a holding company whose primary operating subsidiary is SRC Technologies,
Inc. ("SRC Technologies"). SRC Technologies has three operating subsidiaries;
Connectivity, Inc. ("Connectivity") and Econo-Comm, Inc., both located in
Lauderhill, Florida, and U.S. Commlink, Ltd. ("U.S. Commlink"), located in
Livermore, California. Econo-Comm, Inc. conducts business under the name of
Mobile Communications and is referred to herein as "Mobile Comm." These
companies, which we acquired on April 23, 2003, manufacture remote radio and
cellular-based emergency response products and market them to a number of
federal, state and local government agencies as well as other vertical markets
located throughout the United States. They also maintain and repair these
products for their customers. 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.
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 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 U.S. 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 U.S. Commlink install their products. Mobile Comm is
also an authorized dealer of Motorola products.
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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.
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. U.S. Commlink also provides
service and maintenance contracts to its customers.
Connectivity, Inc.
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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;
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.
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U.S. Commlink, Ltd.
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Although US Commlink commenced operations in June 2003, its management has been
engaged, primarily in the State 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. U.S. 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, 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.
Mobile Comm
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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.
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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
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Mobile Comm's and Connectivity's revenue accounted for approximately 67%, and
33%, respectively, of SRC Technologies' revenue for the fiscal year ended
December 31, 2002. Maintaining radio systems, maintaining and servicing call
boxes, and other services accounted for approximately 75%, 15% and 10%,
respectively, of Mobile Comm's revenue for the fiscal year ended December 31,
2002.
Competition
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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 our 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;
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 our emergency call box systems,
including
o Signal Communications Corporation (www.sigcom.com),
o Comarco, Inc. (NYSE symbol CMRO),
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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.
Research and Development
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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 for. 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
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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,
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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
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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 products
of our wireless call boxes and other products.
Industry Practices Impacting Working Capital
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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. Sales to non-U.S.
customers generated approximately 2% of our revenues for the fiscal year ended
December 31, 2002. On projects, we generally receive 25% of our payment when we
begin and the balance 30 days after completion.
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Employees
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As of December 1, 2003, including our six executive officers, we employed 30
employees, 20 by Mobile Comm, four by Connectivity (two sales and two
administrative personnel), two by U.S. Commlink (one in construction management
and the other an administrative person) and four at our executive offices in New
York City (two administrative and two clerical). The majority of our employees
are professional, technical or administrative personnel who possess training and
experience in engineering, computer science, or management. Mobile Comm has four
engineers, ten wireless communications technicians and six administrative
personnel. We have no union contracts. We believe that our employee relations
are satisfactory.
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.
Facilities
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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 Technologies,
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 Eichstadt, who is one of our employees. 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 we pay a base monthly rental of $1,981.
2. Risk Factors:
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Risks Related to our Financial Condition
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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.
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From April 2003, when we acquired SRC Technologies, Inc. and its affiliated
companies, through September 30, 2003, we operated at an average monthly
negative cash flow rate of approximately $175,000. We estimate that, based on
our current rate of operations, we must generate an aggregate of at least
approximately $580,000 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 three
months ending December 31, 2003, 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. Although we had income from continuing operations for the
three months ended September 30, 2003 of approximately $89,000, for the nine
months ended September 30, 2003 we incurred a loss from continuing operations of
approximately $820,000. For our fiscal years ended December 31, 2002 and
December 31, 2001 we incurred losses from continuing operations of approximately
$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
$580,000 per month while keeping our expenses as low as possible. 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
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, 2002 and 2001 and our unaudited consolidated
financial statements for the nine month period ended September 30, 2003 include
language reflecting that substantial doubt exists as to our ability to continue
as a going concern. Our management's notes to these financial statements include
a discussion of our ability to continue as a going concern. They describe the
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reasons why there is substantial doubt about our ability to continue as a going
concern. Our financial statements show an accumulated deficit as of September
30, 2003 of approximately $18,457,000 and an accumulated deficit as of 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 Technologies 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 April 2004, one year after we acquired them, 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.
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.
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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 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. Pursuant to 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 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.
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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, 2002, we had a federal income tax net operating loss
carryforward of approximately $30 million. Section 382 of the Internal Revenue
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 or financial condition as well as the price of our common
stock.
In general, for purposes of the Internal Revenue 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 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.
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.
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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, it could have a material and adverse effect on
our business, financial condition, and operating results.
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 have a material and adverse effect on our financial
condition and operating results.
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
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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. In addition, in order to take advantage of
volume pricing discounts, we purchase certain customized components from single
sources. 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 a material and adverse
effect on our financial condition and operating results.
If we fail to obtain a bidding partner, our business could be adversely
affected.
Approximately 35% of our gross and net revenues for our fiscal year ended
December 31, 2002 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 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,
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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 the competitors' offerings.
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 recalls and loss or
delay in market acceptance, which could have a material and adverse effect upon
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, if we fail to adapt our
products to meet this changing technology, our operating results could suffer.
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.
If we fail to maintain rights to our intellectual property, our business could
be adversely affected.
We generally rely upon patent and trade secret laws, and agreements with our
employees, customers, and partners to establish and maintain our proprietary
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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 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.
All of these efforts require varying levels of management resources, which may
divert our attention from other business operations.
If we lose the services of our executive officers, or if we cannot recruit and
retain additional skilled personnel, our business may suffer.
We depend on the continued services and performance of George W. Benoit, our
Chairman and Chief Executive Officer, and Michael J. Gutowski, our President and
Chief Operating Officer, for our future success. If either Mr. Benoit or Mr.
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Gutowski 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 the 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. If we are unsuccessful
in attracting and training new employees, or retaining and motivating our
current and future employees, our business could suffer significantly.
We may be unable to effectively manage growth that we may experience, which
could place a continuous strain on 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 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 were liquidated now, owners of our common
stock would not receive any proceeds from the liquidation.
As of September 30, 2003, we had outstanding indebtedness of approximately
$3,611,000 and outstanding preferred stock with an aggregate liquidation
preference of $3,137,961. Accordingly, if we were 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.
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Your ability to sell any common stock may be restricted, because there is a
limited trading market for our common stock.
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 purchase could be
significantly and adversely affected.
Although our common stock is listed for trading on the American Stock Exchange,
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. Accordingly, we believe that we currently
comply with this requirement, subject to the possible impairment loss that could
affect the amount of our future stockholders' equity. The last annual meeting of
our stockholders was held on June 1, 2000; however, pursuant to a proxy
statement that has been mailed to our stockholders, we anticipate that our 2003
annual meeting of stockholders will be held on December 18, 2003, so that we
will then also comply with this requirement. We did not hold stockholders
meetings in 2001 and 2002 because of our weak financial condition and the effect
that the catastrophe of September 11, 2001 had on our business because we
maintained our offices at Two World Trade Center on that date. The AMEX has
informed us that during 2004 it will review us periodically to insure our
continuing compliance with its requirements. If we fail to retain compliance
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 quotations as to the price 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.
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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 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 purchase.
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 they 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 us. These 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 provides for the
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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 they
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 22.6% 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 have the effect of delaying or preventing a
change in control of us 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.
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 fend off 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
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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 approximately $0.15 to $6.00 per share, represent approximately
69.8% of our total 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 of shares
resulting from the exercise of options and warrants in the public market could
adversely affect prevailing market prices for our common stock. Moreover, our
ability to obtain 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 should occur.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Current Report on Form 8-K contains forward-looking statements. 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," "potential" or
o "continue,"
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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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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CNE GROUP, INC.
Date: December 8, 2003 By: /s/Anthony S. Conigliaro
----------------- ---------------------------
Anthony S. Conigliaro,
Chief Financial Officer
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