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, 2004 ____________
|_| 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
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CNE Group, Inc.
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(Name of Small Business Issuer in Its Charter)
DELAWARE 56-2346563
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
200 West 57th Street, Suite 507, New York, NY 10019
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(Address of Principal Executive Offices) (Zip Code)
212-977-2200
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(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
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Common stock - par value $0.00001 American Stock Exchange
Securities registered under Section 12(g) of the Exchange Act:
None
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(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
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(Cover page 1 of 2 pages)
2
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 2004, its most recent fiscal year, were $2,675,986.
As of April 8, 2005, the aggregate market value of voting stock held by
non-affiliates of the Issuer was approximately $2,178,600.
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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, 2005
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Common stock - par value $0.00001 10,790,915
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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.,
U.S. Commlink, Ltd. and CareerEngine Network, Inc.
General
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We are a holding company whose primary operating subsidiaries are SRC
Technologies, Inc. ("SRC") and U.S. Commlink, Ltd. ("US Commlink"). SRC
has two operating subsidiaries; Connectivity, Inc. ("Connectivity") and
Econo-Comm, Inc. ("ECI"). 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, and is not significant to
the operations of the Company.
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 solutions that deliver safety, convenience and
security
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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 for a like
period of time. To date, we have not received notice of any warranty
claims. We have accrued $1,000 for future warranty claims for the year
ended December 31, 2004.
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.
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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;
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o hospitals;
o air/sea ports;
o parking facilities; and
o amusement/county parks.
The retail prices for these products range from $2,500 to over $5,000,
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, 2003, Connectivity sold
approximately 84% of its products directly to end users and approximately
16% 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, 2004, Connectivity sold approximately 29% of its products
directly to end users and approximately 71% to dealers for resale.
Motorola accounted for approximately 63% of Connectivity's 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
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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.
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 38%, 46%, and 12%, respectively, of CNE's revenue for the
year ended December 31, 2004. Maintaining radio systems, maintaining and
servicing call boxes, and other maintenance services accounted for
approximately 66% of Mobile Comm's revenue for the year ended December 31,
2004.
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 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 years ended
December 31, 2004 and 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, 2005, including our two executive officers, we employed 19
employees; 13 by Mobile Comm (two engineers, eight wireless communications
technicians, two administrative personnel, and one executive personnel),
two by Connectivity (two sales personnel), two by US Commlink (one in
construction management and one executive) and three at our executive
offices in New York City (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. All of
our employees are currently covered by this plan.
Our Discontinued Operations
---------------------------
In August 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.
Subsidiaries
------------
Our active subsidiaries are SRC Technologies, Inc., U.S. Commlink, Ltd.,
and CareerEngine Network, Inc. SRC's subsidiaries are Connectivity, Inc.
and Econo-Comm, Inc. (d/b/a/ Mobile Communications). CareerEngine Network,
Inc.'s subsidiaries are CareerEngine, Inc., 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
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We do not believe that our business is subject to regulation as it is
currently being conducted.
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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
is assessed on an ongoing basis and we continue to 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.
For the year ended December 31, 2004, we operated at an
average monthly negative cash flow rate of approximately
$158,000. 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. We cannot assure you when
or if we will ever be able to operate on a positive cash flow
basis. 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 but not limited to reducing our
operations, seeking an acquisition and/or merging with another
entity, that could materially change and/or 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.
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We have not had income from continuing operations since our
fiscal year ended December 31, 1997. For our fiscal years
ended December 31, 2004 and December 31, 2003 we incurred
losses from continuing operations of approximately $2,334,000
and $1,703,000, 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
at current levels. In January, June and October 2004, and in
February and April 2005 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
o otherwise adversely affect our business and
financial condition.
If we are unable to pay or otherwise satisfy substantial
indebtedness that becomes due at the end of April and in June
2005, way may be unable to continue our business.
On April 30 and June 30, 2005, in accordance with the terms of
currently outstanding principal indebtedness, we will be
required to pay approximately $1,750,000 and $150,000
respectively. If we are unable to pay or otherwise reschedule
or satisfy this indebtedness, we will most likely be unable to
continue our business. We currently do not have the financial
resources to pay this indebtedness and have no agreement to
reschedule or otherwise satisfy it. Accordingly, we cannot
assure you
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that we will be able to satisfy this indebtedness.
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, 2004 and 2003
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, 2004 of
approximately $21,500,000 and an accumulated deficit at
December 31, 2003 of approximately $19,100,000. 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, and US Commlink 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 2005, one year
after our last valuation, we may incur an impairment loss that
could decrease the value of our goodwill and adversely affect
our stockholders' equity 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
such 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 affected. 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, 2004, we had a federal income tax net
operating loss carryforward of approximately $38.8 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
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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 70% of our gross and net revenues for our fiscal
year ended December 31, 2004 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 for a period of one year 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 and
Anthony S. Conigliaro, our Chief Financial Officer, for our
future success. If either Mr. Benoit 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.
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, 2004, we had outstanding indebtedness of
approximately $3,994,000 and outstanding preferred stock with
an aggregate liquidation preference of $4,137,966.
Accordingly, if we liquidated, based on our current financial
condition, no assets would be available for distribution to
our common
26
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.
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 is
assessed on an ongoing basis and we continue to 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.
27
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 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,
28
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 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 17.2% of our
outstanding common stock. These stockholders, if they act
together, may be able to exercise substantial influence
29
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.
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
30
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 73.8% 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 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 $6,750. This lease is with affiliates of Thomas
Sullivan, who is one of our
31
executive officers and Gary L. Eichsteadt, who is one of our directors and
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, 2004.
Item 4. Submission of Matters to a Vote of Security-Holders.
On June 18, 2004, we held an annual meeting of our stockholders at which
our stockholders elected three directors, ratified the selection of our
auditors for 2004 and approved and adopted an amendment to our 2003 Stock
Incentive Plan.
Our stockholders elected George W. Benoit, David W. Dube and Carol A.
Gutowski for three 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
---------------- --- ------- -------- --------- -----
George W. Benoit 7,747,103 -- 35,243 -- --
David W. Dube 7,747,203 -- 35,143 -- --
Carol L. Gutowski 7,747,203 -- 35,143 -- --
Our stockholders ratified the selection of Rosen Seymour Shapss Martin &
Company LLP as our auditors for 2004. The vote was 7,751,5033 for, 21,733
against, none withheld, 9,110 abstained and no broker no votes. Our
stockholders also ratified the resolution to approve and adopt an
amendment to the 2003 Stock Incentive Plan. The vote was 5,400,591 for,
89,087 against, none withheld, 2,525 abstained and 2,143,865 broker no
votes.
On June 30, 2004, Ms. Gutowski resigned from our board, and on June 28,
2004, Anthony S. Conigliaro, our Vice President and Chief Financial
Officer, was appointed to our board. On January 11, 2005, as part of the
settlement of litigation with Mr. Gutowski and Larry M. Reid, the both
resigned as directors. On April 6, 2005, we terminated Rosen Seymour
Shapss Martin & Company LLP as our independent auditors and appointed
Wheeler, Herman, Hopkins & Lagor, P.A.
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, 2005 was
approximately 287.
Equity Sale Prices:
-------------------
Common Stock
------------
High Sales Price Low Sales Price
---------------- ---------------
2004
----
1st Quarter 1.20 0.50
2nd Quarter 1.35 0.37
3rd Quarter 0.40 0.23
4th Quarter 0.50 0.30
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
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, 2004, 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,
-----------------------
2004 2003
---- ----
(in thousands, except share data)
Statement of Operations Data
Revenues $ 2,676 $ 2,149
Net loss $(2,333) $(1,119)
Net loss per
common share:
Basic $ (.22) $ (.16)
Diluted $ (.22) $ (.18)
Weighted average number of common shares
outstanding:
Basic 10,545,082 7,161,756
Diluted 10,545,082 10,541,956
December 31,
2004 2003
---- ----
(in thousands)
Balance Sheet Data
Working capital $ (3,147) $ (544)
Total assets $ 9,589 $10,141
Total liabilities $ 3,994 $ 3,873
Stockholders' equity $ 5,595 $ 6,268
General
-------
We are a holding company whose primary operating subsidiaries are SRC and
US Commlink. SRC, also a holding company, is the parent of Connectivity
and ECI. 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
35
as well as other vertical markets located throughout the United 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, US Commlink 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 US
Commlink, and those of SRC and ECI from the date of their 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
our non-voting Series C Preferred Stock and a like number of ten year
Class C Warrants, each to purchase one share of our 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 our non-voting Series A Preferred Stock and a like number of ten year
non-detachable Class A Warrants, each to purchase one share of our 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.
On January 10, 2005, as part of the a litigation settlement with Messrs.
Reid and Gutowski and Mrs.
36
Gutowski, they agreed to exchange all of their Class AA, Class A and Class
C Preferred Stock, and all of their 1,550,000 incentive stock options for
850,000 shares of our common stock if the exchange is made on or prior to
May 9, 2005, 950,000 shares if the exchange is made on or prior to June 9,
2005, or 1,050,000 shares if the exchange is made on or prior to July 9,
2005.
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.
ECI
---
On April 23, 2003, the Company issued to Gary L. 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. 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, in 2003 we transferred our
title to the ECI Patent to SRC. In 2004 we transferred title back to us as
collateral for certain or our 24% secured notes.
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 and on June 18, 2004 Messrs, Eichsteadt and Sullivan also converted
their note into 1,000,000 shares of the Company's Series AA Preferred
Stock. As noted above, Mr. Gutowski and Mrs. Gutowski's Series AA
Preferred Stock are subject to an exchange agreement for common 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
37
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.
38
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 value
$ 2,589,743 $ 4,126,427 $ 6,716,170
=========== =========== ===========
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
---------------------------------
In 2001, our headquarters were located at Suite 2112 of Two World Trade
Center in New York City. In April and September 2002, and August 2003, we
received governmental assistance grants related to the catastrophe
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 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, 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.
39
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, 2004, our allowance for doubtful accounts was $51,000 or
22.9% of gross receivables, compared to $51,500 or 18.8% of grow
receivables as of December 31, 2003. The increase in the reserve as a
percentage of gross receivable from prior year is the result of a decrease
in accounts receivable and a requirement for an allowance for doubtful
accounts of an almost equal amount to that required in 2003.
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,
40
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 the asset's new carrying value, which we depreciate
over the remaining estimated useful life of the asset. See Note D
"Intellectual Property Rights and Goodwill."
Recent Accounting Pronouncements
--------------------------------
In January 2003, the FASB issued FIN 46, Consolidation of Variable
Interest Entities (VIE's), and a revision to FIN 46 in December 2003
(together, "FIN 46"), which requires identification of the Company's
participation
41
in VIE's. VIE's are defined as entities with a level of invested equity
that is not sufficient to fund future activities to permit them to operate
on a stand-alone basis, or whose equity holders lack certain
characteristics of a controlling financial interest. For entities
identified as VIE's, FIN 46 sets forth a model to evaluate potential
consolidation based on the assessment of which party to a VIE, if any,
bears a majority of the risk of the VIE's expected losses, or stands to
gain from a majority of the VIE's expected returns. FIN 46 also sets forth
certain disclosures regarding interest in VIE's that are deemed
significant, even if consolidation is not required. FIN 46 is effective
for all VIE's created after January 31, 2003. The Company adopted FIN 46
during 2003 and the adoption of this interpretation did not have an impact
on the Company's consolidated financial statements in 2004 or 2003.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity.
SFAS No. 150 establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both
liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances). Many of those instruments were previously classified as
equity. SFAS No. 150 is effective for financial instruments entered into
or modified after May 31, 2003. The Company adopted this standard during
2003 and the adoption did not have an impact on the Company's consolidated
financial statements in 2004 or 2003.
During December 2004, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 153, Exchanges of Nonmonetary Assets -- An Amendment of
APB Opinion No. 29. APB Opinion No. 29, Accounting for Nonmonetary
Transactions ("APB 29") required that nonmonetary exchanges be accounted
for at fair value, subject to certain exceptions. SFAS 153 has removed the
exception for nonmonetary exchanges of similar productive assets, and
replaced it with an exception for exchanges that lack commercial
substance. The provisions of SFAS 153 are effective prospectively for all
nonmonetary asset exchanges in fiscal periods beginning after June 15,
2004. Early adoption is permitted. The Company does not expect the
adoption of SFAS No. 153 to have a material impact on the Company's
consolidated financial statements.
42
During December 2004, FASB issued SFAS No. 123 (Revised 2004), Share-Based
Payment ("SFAS 123R"). SFAS 123R replaces SFAS No. 123, Accounting for
Stock-Based Compensation (SFAS 123), and supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees. SFAS 123R requires companies to
recognize the compensation cost related to share-based payment
transactions with employees in the financial statements. The compensation
cost is measured based upon the fair value of the instrument issued.
Share-based compensation transactions with employees covered within SFAS
123R include share options, restricted share plans, performance-based
awards, share appreciation rights, and employee share purchase plans. SFAS
123 included a fair-value-based method of accounting for share-based
payment transactions with employees, but allowed companies to continue to
apply the guidance in APB 25 provided that they disclose in the footnotes
to the financial statements the pro forma net income if the
fair-value-based method been applied. The Company is currently reporting
share-based payment transactions with employees in accordance with APB 25
and provides the required disclosures. SFAS 123R will be effective for the
Company beginning January 1, 2006.
In implementing SFAS 123R the Company will apply the modified prospective
application transition method. The modified prospective application
transition method requires the application of this standard to:
o All new awards issued after the effective date;
o All modifications, repurchased or cancellations of existing
awards after the effective date; and
o Unvested awards at the effective date.
For unvested awards, the compensation cost related to the remaining
"requisite service' that has not been rendered at the effective date will
be determined by the compensation cost calculated currently for either
recognition or pro forma disclosures under SFAS 123. The Company will be
adopting the modified prospective application of SFAS 123R.
A. Results of Operations: 2004 Compared to 2003
--------------------------------------------
Revenues
43
Total revenues from continuing operations increased to $2,675,986 for the
year ended December 31, 2004 from $2,149,370 for the year ended December
31, 2003.
Product sales income increased to $1,884,751 for the year ended December
31, 2004 from $1,445,324 for the year ended December 31, 2003 due to the
increase in sales to our dealers, primarily Motorola, Inc.
Service fee income increased to $686,647 for the year ended December 31,
2004 from $548,762 for the year ended December 31, 2003 due to our Florida
operations being awarded new contracts in 2004.
Internet related income decreased to $104,588 for the year ended December
31, 2004 from $155,284 for the year ended December 31, 2003 as the
operations of our subsidiary, CareerEngine, Inc. continue 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 $1,553,749 for the year ended December 31, 2004
from $1,176,900 for the year ended December 31, 2003 due to our increased
revenue from continuing operations.
Other Expenses
Total other expenses from continuing operations increased to $2,943,177
for the year ended December 31, 2004 from $2,666,457 for the year ended
December 31, 2003.
Selling expenses decreased to $35,522 for the year ended December 31, 2004
from $47,806 for the year ended December 31, 2003 due to the decrease in
the number of trade shows we participated in 2004 as compared to 2003.
Compensation and related costs decreased to $1,081,175 for the year ended
December 31, 2004 from $1,212,150 for the year ended December 31, 2003 due
primarily to the termination of three officers of the Company in September
2004.
General and administrative expenses increased to $1,446,671 for the year
ended December 31, 2004 from $1,247,096 for the year ended December 31,
2003
44
primarily due to an increase in legal and audit related services.
Depreciation and amortization expenses increased to $196,491 for the year
ended December 31, 2004 from $159,405 for the year ended December 31,
2003, primarily due to the effect of a complete year of depreciation in
2004 compared to a partial year of depreciation in 2003 on those assets
purchased in April, 2003.
Other Items
Amortization of debt discount decreased to $199,710 for the year ended
December 31, 2004 from $467,000 for the year ended December 31, 2003 due
to the effect of the change in the rate of amortization from 12 months to
24 months commencing the date the maturity of the notes was extended.
Interest expense decreased to $316,051 for the year ended December 31,
2004 from $423,625 for the year ended December 31, 2003 due primarily to
the net effect of a decrease in (i) the average outstanding balance of our
indebtedness and effective interest rates, for the year ended December 31,
2004 as compared to the year ended December 31, 2003.
The Tax Settlement adjustment of $895,622, for the year end December 31,
2003 relates to the accepted and paid Offer in Compromise with the
Internal Revenue Service ($50,000) pertaining to a previous years'
estimated $945,000 tax liability of a subsidiary of the Company.
Operating Loss
On a pre-tax basis, we had a loss from continuing operations of $2,333,695
for the year ended December 31, 2004 compared with a loss from continuing
operations of $1,688,990 for the year ended December 31, 2003.
Our loss from continuing operations for the year ended December 31, 2004
was $2,333,695 compared with a loss from continuing operations of
$1,702,955 for the year ended December 31, 2003. For the year ended
December 31, 2004, loss per common share from continuing operations, basic
and diluted, was $0.24 per share. For the year ended December 31, 2003,
loss per common share
45
from continuing operations, basic and diluted, was $0.22 per share.
Income from discontinued operations of $583,634 for the year ended
December 31, 2003 relates to a gain on the sale of one of our
subsidiaries. For the year ended December 31, 2003, basic income per
common share from discontinued operations was $0.08 per share and diluted
income per common share from discontinued operations was $0.06 per share.
Our net loss for the year ended December 31, 2004 was $2,333,695 compared
with net a net loss of $1,119,321 for the year ended December 31, 2003.
For the year ended December 31, 2004, basic and diluted net loss per
common share was $0.22 per share. For the year ended December 31, 2003,
basic net loss per common share from was $0.16 per share and diluted net
loss per common share was $0.18 per share.
B. Liquidity and Capital Resources
As reflected in the 2004 and 2003 financial statements, the Company has
incurred substantial losses from continuing operations, sustained
substantial cash outflows from operating activities, and at December 31,
2004 had a working capital and stockholders' 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, 2004 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 and June 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. However, as is the case for all listed issuers,
our continued listing eligibility is assessed on an ongoing basis and we
continue to 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. There is no assurance that the Company can
obtain additional financing or achieve profitable operations or generate
46
possible cash flow. The 2004 and 2003 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 ongoing concern uncertainty
Off-Balance Sheet Arrangements
------------------------------
At December 31, 2004, we had no off-balance sheet arrangements.
Operating Activities
--------------------
We utilized $1,220,212 of cash in operating activities during the year
ended December 31, 2004. We had a net loss from continuing operations of
$2,333,695 during this period which included an aggregate of $445,701 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.. In addition to the net impact of
non-cash items, our operating activities for the year ended December 31,
2004 also reflected an increase in inventory, accounts payable, accrued
expenses and other liabilities. These were offset in part by decreases in
accounts receivable, other current and non-current assets and deferred
income.
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.
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
47
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.
Furthermore, in July through December 2004 we restructured and issued
approximately $450,000 of our debt securities.
Financing Activities
--------------------
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 certain 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. 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.
48
In April 2005, the Company will notify the Class B Warrant holders that,
to satisfy the now 19% non-dilutive provisions of their Warrants, these
Warrants were now exercisable for an additional of 1,122,100 shares of the
Company's common stock at approximately $0.40 per share.
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 its Common
Stock at $0.40 per share. The net proceeds of the transaction amounted to
$571,000. The Company used the funds obtained from this financing
primarily for working capital purposes.
On June 24, 2004 the Company repaid, in full, one of its outstanding lines
of credit amounting to approximately $146,000. On the same date the
Company issued a secured note payable to an employee of a subsidiary of
the Company in the amount of $150,000. This employee is also a director of
the Company. The note is secured by the furniture and equipment of a
subsidiary of the Company. The note bears interest at 10% per annum and
the principal and all interest thereon was due on September 24, 2004. In
consideration of extending the maturity date of the note to April 30, 2005
and deferring the payment of all accrued interest for the period June 24,
2004 through April 30, 2005, the individual was issued Warrants to
purchase 101,000 shares of the Company's common stock at $0.28 per share.
In July and August 2004, the Company issued $150,000 of its 24% Secured
Notes due April 30, 2005 to the wife of the Chief Executive Officer and an
existing 10% subordinated noteholder of the Company. Interest on the notes
is payable quarterly in arrears. The notes are secured by (i) all the
stock of SRC and USCL, and (ii) the pledge of Patent Nos. 6,060,979,
6,047,173 and 5,701,338 - all owned by the Company. On October 1, 2004,
the holders of 100% of the Company's 24% Secured Notes agreed to defer
$5,867 of interest due on such date to January 1, 2005 in consideration of
the Company issuing to them 53,333 Class B Warrants of the Company, each
to give the holder thereof the right to purchase a share of common stock
at $0.33 per share. On January 1, 2005, the holders of 100% of the
Company's 24% Secured Notes agreed to defer $9,200 of interest due on such
date and further defer the interest that was due and
49
deferred on October 1, 2004 ($5,867) to April 1, 2005 in consideration of
the Company issuing to them 113,000 Class B Warrants of the Company, each
to give the holder thereof the right to purchase a share of common stock
at $0.40 per share.
In October 2004, the Company and USCL entered into a two-year Project
Financing Agreement with an institutional lender relating to USCL's
anticipated participation in the "Cellular Call Box Upgrade and
Maintenance Service" projects for numerous Service Authority for Freeway
Emergencies ("SAFE") programs within the state of California. These call
box programs operate over 17,000 motorist aid analog call boxes that will
require upgrades to digital cellular technology available through USCL. We
cannot assure you that we will participate in these projects or, if we do,
to what extent such participation will be. This agreement provides the
Company with finished goods and accounts receivable financing of up to
$2,000,000 relating to these potential aforementioned projects. The
effective interest rate is approximately 3% per month on the outstanding
balance of the amount receivables financed. The finished goods and
accounts receivable to be financed, as well as all the other assets of the
Company not previously pledged, will secure the borrowings under this
agreement.
In October, November and December 2004, the Company issued (i) $150,000 of
its 10% Convertible Subordinated Notes due June 30, 2005 and (ii) 945,000
Class C Cashless Warrants of the Company, each to give the holder thereof
the right to purchase a share of common stock at $0.50 per share. The
notes were sold to the wife of the Chief Executive Officer of the Company
and other accredited investors and are convertible by the holder, at any
time, into common stock of the Company at $0.50 per share. The warrants
expire on April 30, 2013. Interest on the notes is due at maturity.
On or about April 1, 2005, two individuals, both of whom are adult
children of the Company's Chief Executive Officer, purchased 545,000
shares of the Company's Series G Preferred Stock at a price of $0.20 per
share. The Series G Preferred Stock is non voting, has no liquidating
preference over the common stock and each share is automatically
convertible into two shares of common stock when such conversion has been
approved by the Company's common stockholders. This transaction was exempt
from the registration provisions of the Securities Act of 1933 pursuant to
Section 4(2) thereof.
On or about April 12, 2005, four individuals, three of whom are adult
children or related thereto of the Company's Chief Executive Officer,
purchased 500,000 shares of the Company's Series G Preferred Stock at a
price of $0.20 per share. This transaction was exempt from the
registration provisions of the Securities Act of 1933 pursuant to Section
4(2) thereof.
On or about March 15, 2005, the Company borrowed $25,000 from a lender
evidenced by a secured convertible subordinated note due on September 15,
2005 and bearing interest at the annual rate of 20% payable at maturity.
The note is (i) secured by approximately $42,000 in one of the Company's
bank accounts; (ii) convertible into the Company's common stock at the
rate of $0.24 per share, subject to certain anti-dilution provisions; and
(iii) subordinated to the Company's Senior Indebtedness as that term is
defined therein. At April 15, 2005 the outstanding principal balance of
the note was $15,000. In addition, on or about April 11, 2005, the Company
sold to this lender, for an aggregate purchase price of $100,000, 333,333
shares of restricted common stock and three-year warrants to purchase an
aggregate of 100,000 shares at $0.50 per share, subject to appropriate
anti-dilution provisions. The sale of the restricted stock and warrants
was exempt from the registration provisions of the Securities Act of 1933
pursuant to Section 4(2) thereof.
We are using the funds obtained from these financings 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, 2004.
C. Inflation
---------
50
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.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of CNE Group, Inc.
We have audited the accompanying balance sheets of CNE Group, Inc. and
Subsidiaries as of December 31, 2004, and the related statements of income,
stockholders' equity and comprehensive income, and cash flows for each of the
years in the two-year period ended December 31, 2004. 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 audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of CNE Group, Inc. and
Subsidiaries as of December 31, 2004, and the results of its operations and its
cash flows for each of the years in the two-year period ended December 31, 2004
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 and
sustained net operating cash outflows from continuing operations and anticipates
that such conditions will continue into fiscal year 2005. 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
WHEELER, HERMAN, HOPKINS & LAGOR, P.A.
CERTIFIED PUBLIC ACCOUNTANTS
Tampa, Florida
April 15, 2005
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
of CNE Group, Inc.
We have audited the consolidated statements of operations, changes in (capital
deficit) stockholders' equity and cash flows for the year ended December 31,
2003. 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 referred to above present fairly, in
all material respects, the results of operations and cash flows of CNE Group,
Inc. and Subsidiaries for the year ended December 31, 2003 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 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-2
CNE GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
December 31, 2004
ASSETS
Current:
Cash and cash equivalents $ 84,408
Accounts receivable, net of allowance for doubtful accounts of $51,000 172,010
Inventory 260,487
Other 8,273
------------
Total current assets 525,178
Fixed assets, net 394,509
Intellectual property rights, net 1,361,948
Goodwill 7,285,894
Prepaid expenses and other assets 21,265
------------
Total assets $ 9,588,794
============
LIABILITIES
Current:
Accounts payable and accrued expenses $ 1,476,124
Interest payable 128,050
Short-term credit arrangements 191,395
Line of credit 19,199
Current portion of notes payable 17,243
Notes and debenture payable 850,000
10% subordinated notes payable 966,710
Other notes payable 23,330
------------
Total current liabilities 3,672,051
Notes payable, net of current portion 22,059
Deferred grant revenue 300,000
------------
Total liabilities 3,994,110
------------
Commitments and contingencies (Note N)
STOCKHOLDERS' EQUITY
Preferred stock (Notes A and I) 134
Common stock (Notes A and J) 121
Paid-in surplus 29,919,185
Accumulated deficit (21,451,656)
------------
8,467,784
Less treasury stock, at cost - 1,238,656 shares (2,873,100)
------------
Total stockholders' equity 5,594,684
------------
Total liabilities and stockholders' equity $ 9,588,794
============
See Notes to Consolidated Financial Statements. F-3
CNE GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Year Ended December 31,
-------------------------
2004 2003
----------- -----------
Revenues:
Product sales $ 1,884,751 $ 1,445,324
Service fee income 686,647 548,762
Internet related income 104,588 155,284
----------- -----------
2,675,986 2,149,370
Costs of goods sold 1,553,749 1,176,900
----------- -----------
Gross profit 1,122,237 972,470
Other expenses:
Advertising 35,522 47,806
Compensation and related costs 1,081,175 1,212,150
General and administrative 1,446,671 1,247,096
Product development 183,319 --
Depreciation and amortization 196,491 159,405
----------- -----------
2,943,177 2,666,457
----------- -----------
Loss from continuing operations
before other income and (expenses) (1,820,940) (1,693,987)
Amortization of debt discount (199,710) (467,000)
Interest expense (316,051) (423,625)
Tax settlement adjustment (Note M) -- 895,622
Interest income 3,006 --
----------- -----------
Loss from continuing operations before income taxes (2,333,695) (1,688,990)
Income tax provision -- 13,965
----------- -----------
Loss from continuing operations (2,333,695) (1,702,955)
Discontinued operations:
Income from discontinued operations -- 583,634
----------- -----------
Net income (loss) $(2,333,695) $(1,119,321)
=========== ===========
See Notes to Consolidated Financial Statements. F-4
CNE GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations, continued
Year Ended December 31,
------------------------
2004 2003
---------- ----------
Income (loss) per common share:
Basic:
Loss from continuing operations $ (.22) $ (.24)
Income from discontinued operations -- .08
---------- ----------
Net income (loss) $ (.22) $ (.16)
========== ==========
Diluted:
Loss from continuing operations $ (.22) $ (.24)
Income from discontinued operations -- .06
---------- ----------
Net income (loss) $ (.22) $ (.18)
========== ==========
Weighted average number of common
shares outstanding:
Basic 10,545,082 7,161,756
========== ==========
Diluted 10,545,082 10,541,956
========== ==========
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, 2004 and 2003
Common Stock Preferred Stock
--------------------------- --------------------------- Paid-in Accumulated
Shares Amount Shares Amount Surplus Deficit
------------ ------------ ------------ ------------ ------------ ------------
Balance - January 1, 2003 6,829,600 $ 682,960 $ -- $ 16,290,691 $(17,998,640)
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 (1,119,321)
------------ ------------ ------------ ------------ ------------ ------------
Balance - January 1, 2004 10,129,571 $ 101 12,438,241 $ 124 $ 28,258,215 $(19,117,961)
Sale of common stock for cash 1,750,000 18 570,982
Conversion of $1,000,000 8%
Promissory Notes to Equity 1,000,000 100 999,990
Common stock issued for services,
at market value 150,000 2 49,998
Capital contributions by an
officer and employee in the form
of interest forgiveness 40,000
Net loss (2,333,695)
------------ ------------ ------------ ------------ ------------ ------------
Balance - December 31, 2004 12,029,571 $ 121 13,438,241 $ 134 $ 29,919,185 $(21,451,656)
============ ============ ============ ============ ============ ============
Treasury Stock
---------------------------
Shares Amount Total
------------ ------------ ------------
Balance - January 1, 2003 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)
------------ ------------ ------------
Balance - January 1, 2004 1,238,656 $ (2,873,100) $ 6,267,379
Sale of common stock for cash 571,000
Conversion of $1,000,000 8%
Promissory Notes to Equity 1,000,000
Common stock issued for services,
at market value 50,000
Capital contributions by an
officer and employee in the form
of interest forgiveness 40,000
Net loss (2,333,695)
------------ ------------ ------------
Balance - December 31, 2004 1,238,656 $ (2,873,100) $ 5,594,684
============ ============ ============
See Notes to Consolidated Financial Statements. F-6
CNE GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Year Ended December 31,
--------------------------
2004 2003
----------- -----------
Cash flows from operating activities:
Loss from continuing operations $(2,333,695) $(1,702,955)
Adjustments to reconcile loss from continuing operations to net cash
provided by (used in) operating activities:
Depreciation and amortization 196,491 159,405
Issuance of common stock for services 50,000 135,250
Provision for doubtful accounts (500) 16,500
Amortization of debt discount 199,710 467,000
Tax settlement adjustment (895,622)
Changes in:
Accounts receivable 35,848 (123,754)
Inventory (13,768) (15,833)
Prepaid expenses and other assets 17,263 15,066
Accounts payable, accrued expenses and other liabilities 652,059 551,184
Deferred revenue (23,620) 23,620
Deferred grant revenue 8,173
----------- -----------
Cash used in continuing operations (1,220,212) (1,361,966)
Cash provided by discontinued operations -- --
----------- -----------
Net cash used in operating activities (1,220,212) (1,361,966)
----------- -----------
Cash flows from investing activities:
Purchase of furniture and equipment (30,224) (35,478)
----------- -----------
Net cash used in investing activities (30,224) (35,478)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance 1,250,000 shares of Common Stock -- 500,000
Proceeds from issuance 1,750,000 shares of Common Stock 571,000
Proceeds from issuance of 10% notes payable 1,000,000
Proceeds from other notes payable 300,000
Proceeds from 18% note payable 300,000
Proceeds from 10% secured notes payable 150,000
Proceeds from 24% secured notes payable 150,000
Proceeds from 10% convertible notes payable 150,000
Principal repayments on notes payable and line of credit (446,988) (24,924)
Payment of accounts receivable due Sellers of Econo-Comm, Inc. -- (100,000)
----------- -----------
Net cash provided by financing activities 874,012 1,675,076
----------- -----------
(Decrease) increase in cash and cash equivalents (376,424) 277,632
Cash and cash equivalents at beginning of period 460,832 183,200
----------- -----------
Cash and cash equivalents at end of period $ 84,408 $ 460,832
=========== ===========
See Notes to Consolidated Financial Statements. F-7
CNE GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, continued
Year Ended December 31,
--------------------------
2004 2003
----------- -----------
Supplemental disclosures of cash flow information related to
continuing operations:
Cash paid during the period for:
Interest $ 171,341 $ 135,931
Income taxes $ -- $ 50,000
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 40,000 13,334
8% notes payable 1,000,000 1,000,000
Debentures payable and related interest payable 2,645,000
Issuance of preferred stock (10) (10)
Issuance of common stock (12)
Paid in surplus (1,039,990) (3,854,588)
Other non-cash investing and financing activities - See Note Q
See Notes to Consolidated Financial Statements. F-8
CNE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
NOTE A - THE COMPANY
Business
--------
CNE Group, Inc. (the "Company" or "CNE") is a holding company whose primary
operating subsidiaries are SRC Technologies, Inc. ("SRC") and U.S. Commlink,
Ltd. ("USCL"). SRC, also a holding company, is the parent of Connectivity, Inc.
("Connectivity") and Econo-Comm, Inc. (d/b/a Mobile Communications) ("ECI").
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. The Company 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.
Going Concern
-------------
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As reflected in the 2004 and 2003
financial statements, the Company has incurred substantial losses from
continuing operations, sustained substantial cash outflows from operating
activities, and at December 31, 2004 had a working capital and stockholders'
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, 2004 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
and June 2004 and (iii) additional equity and debt financing activities in
addition to those set forth in these financial statements. The Company had been
notified that, subject to the procedural requirements of the American Stock
Exchange, its stock could be delisted. There is no assurance that the Company
can obtain additional financing or achieve profitable operations or generate
positive cash flow. The 2004 and 2003 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.
F-9
CNE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
NOTE A - THE COMPANY (CONTINUED)
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.
Ms. Gutowski, and Messrs. Gutowski and Reid, resigned from the Board of
Directors of the Company on June 28, 2004 and January 11, 2005, respectively.
They were terminated as officers of the Company on September 7, 2004. Anthony S.
Conigliaro, Vice President and Chief Financial Officer of the Company, was
appointed to the Board of Directors on June 18, 2004. Gary L Eichsteadt, an
employee of the Company and a substantial holder of the Company's Series AA and
Series C Preferred Stock, was appointed to the Company's Board of Directors on
January 11, 2005.
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.
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 Ms. 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.
F-10
CNE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
NOTE A - THE COMPANY (CONTINUED)
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 were 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. On August 19,
2004 SRC transferred its rights to the ECI Patent to the Company to secure
certain 24% Promissory Notes amounting to $150,000 issued by the Company.
On May 19, 2003, Mr. Eichsteadt assigned $1,500,000 of the aforementioned
8% notes equally to Mr. Sullivan, Mr. Gutowski and Ms. Gutowski. On August
31, 2003, Mr. and Ms. Gutowski converted their notes aggregating
$1,000,000 into 1,000,000 shares of the Company's Series AA Preferred
Stock. Further on June 18, 2004, Mr. Eichsteadt and Mr. Sullivan 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 a liquidating preference over all other
CNE equity of $2,000,000. 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 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
=========== =========== ===========
F-11
NOTE A - THE COMPANY (CONTINUED)
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.
On January 10, 2005, as part of the settlement of a litigation with the
Company, Messrs. Reid and Gutowski and Ms. Gutowski agreed to exchange all
of their Class AA, Class A and Class C Preferred Stock, and all of their
1,550,000 incentive stock options for 850,000 shares of the Company's
common stock if the exchange is made on or prior to May 9, 2005, 950,000
shares if the exchange is made on or prior to June 9, 2005, or 1,050,000
shares if the exchange is made on or prior to July 9, 2005.
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.
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. In April 2005, the Company will
notify the Class B Warrant holders that, to satisfy the now 19%
non-dilutive provisions of their Warrants, these Warrants were now
exercisable for an additional of 1,122,100 shares of the Company's
common stock at approximately $0.40 per share.
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.
F-12
CNE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
NOTE A - THE COMPANY (CONTINUED)
3. 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. The
Company is currently negotiating new terms with regard to this note.
4. 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 $571,000. The Company used the funds obtained from this
financing primarily for working capital purposes.
5. On June 9, 2004, the two holders of the Company's 8% Subordinated
Promissory Notes, in the aggregate principal amount of $1,000,000,
converted their notes into 1,000,000 shares of the Company's Series
AA 8% Cumulative Preferred Stock, par value $0.00001 per share (the
"Series AA Preferred Stock").
6. On June 10, 2004, as amended as of September 28, 2004, an officer
and employee of a subsidiary relinquished all their rights to an
aggregate 420,000 vested incentive stock options of the Company for
104 equal weekly cash payments, commencing December 1, 2004,
aggregating $50,000. The individuals or their designee were also
issued, in the aggregate, Warrants to purchase 235,000 shares of the
Company's common stock at $0.28 per share.
7. In June 2004, in an effort to conserve the financial resources of
the Company, the Board of Directors of the Company deferred 100% of
the salaries of four officers of the Company until such time as the
Board deems otherwise. In September 2004, three of the
aforementioned officers were terminated by the Company. The
accompanying financial statements include the accrued salary owed to
the non-terminated officer for the amounts so deferred.
8. On June 24, 2004 the Company repaid, in full, one of its outstanding
lines of credit amounting to approximately $146,000. On the same
date the Company issued a secured note payable to an employee of a
subsidiary of the Company in the amount of $150,000. The note is
secured by the furniture and equipment of a subsidiary of the
Company. The note bears interest at 10% per annum and the principal
and all interest thereon was due on September 24, 2004. In
consideration of extending the maturity date of the note to April
30, 2005 and deferring the payment of all accrued interest for the
period June 24, 2004 through April 30, 2005, the individual was
issued Warrants to purchase 101,000 shares of the Company's common
stock at $0.28 per share.
9. As of July 1, 2004, the holders of 55% of the Company's 10%
subordinated notes agreed to defer $13,750 of interest due on such
date to October 1, 2004 in consideration of the Company issuing to
them 105,769 Class B Warrants of the Company, each to give the
holder thereof the right to purchase a share of common stock at
$0.39 per share. The noteholders include two officers of the
Company.
F-13
CNE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
NOTE A - THE COMPANY (CONTINUED)
10. In July and August 2004, the Company issued $150,000 of its 24%
Secured Notes due April 30, 2005 to the wife of the Chief Executive
Officer and an existing 10% subordinated noteholder of the Company.
Interest on the notes is payable quarterly in arrears. The notes are
secured by (i) all the stock of SRC and USCL, and (ii) the pledge of
Patent Nos. 6,060,979, 6,047,173 and 5,701,338 - all owned by the
Company. On October 1, 2004, the holders of 100% of the Company's
24% Secured Notes agreed to defer $5,867 of interest due on such
date to January 1, 2005 in consideration of the Company issuing to
them 53,333 Class B Warrants of the Company, each to give the holder
thereof the right to purchase a share of common stock at $0.33 per
share. On January 1, 2005, the holders of 100% of the Company's 24%
Secured Notes agreed to defer $9,200 of interest due on such date
and further defer the interest that was due and deferred on October
1, 2004 $5,867 to April 1, 2005 in consideration of the Company
issuing to them 113,000 Class B Warrants of the Company, each to
give the holder thereof the right to purchase a share of common
stock at $0.40 per share.
11. As of October 1, 2004, the holders of 75% of the Company's 10%
subordinated notes agreed to defer $18,750 of interest due on such
date and further defer the interest that was due and deferred on
July 1, 2004 $13,750 to January 1, 2005 in consideration of the
Company issuing to them 295,455 Class B Warrants of the Company,
each to give the holder thereof the right to purchase a share of
common stock at $0.33 per share. The noteholders include two
officers of the Company.
12. In October 2004, the Company and USCL entered into a two-year
Project Financing Agreement with an institutional lender relating to
USCL's anticipated participation in the "Cellular Call Box Upgrade
and Maintenance Service" projects for numerous Service Authority for
Freeway Emergencies ("SAFE") programs within the state of
California. These call box programs operate over 17,000 motorist aid
analog call boxes that will require upgrades to digital cellular
technology available through USCL. This agreement provides the
Company with finished goods and accounts receivable financing of up
to $2,000,000 relating to these potential aforementioned projects.
The effective interest rate is approximately 3% per month on the
outstanding balance of the amount receivables financed. The finished
goods and accounts receivable to be financed, as well as all the
other assets of the Company not previously pledged, will secure the
borrowings under this agreement.
13. In October, November and December 2004, the Company issued (i)
$150,000 of its 10% Convertible Subordinated Notes due June 30, 2005
and (ii) 945,000 Class C Warrants of the Company, each to give the
holder thereof the right to purchase a share of common stock at
$0.50 per share. The notes were sold to the wife of the Chief
Executive Officer of the Company and other accredited investors and
are convertible by the holder, at any time, into common stock of the
Company at $0.50 per share. The warrants expire on April 30, 2013.
Interest on the notes is due at maturity.
F-14
CNE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
NOTE A - THE COMPANY (CONTINUED)
14. As of January 1, 2004, the holders of 75% of the Company's 10%
subordinated notes agreed to defer $18,750 of interest due on such
date and further defer the interest that was due and deferred on
July 1 $13,750 and October 1, 2004 $18,750 to April 1, 2005 in
consideration of the Company issuing to them 384,375 Class B
Warrants of the Company, each to give the holder thereof the right
to purchase a share of common stock at $0.30 per share. The
noteholders include two officers of the Company.
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 1933 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. In April and September 2002, and in
August 2003, the Company received government assistance grants aggregating
$300,000. The grants have a restriction that could require their repayment,
specifically if the Company were to relocate a substantial portion of 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.
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, the Company continues
to 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.
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-15
CNE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
NOTE B - SIGNIFICANT ACCOUNTING POLICIES
[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, 2004 cash equivalents consisted principally of an investment
of approximately $42,000 in a money market account securing a letter of
credit issued by the Company. At December 31, 2003 there were no cash
equivalents.
[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-16
CNE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
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, 2004 and 2003. During the fiscal year ended
December 31, 2004, only one customer, Motorola, Inc., accounted for ten
percent (10%) or more of the Company's sales, and credit losses were not
significant. During the fiscal year ended December 31, 2003 no customer
accounted for more than 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, 2004 the Company's inventory
consisted of the following:
Raw materials $ 242,061
Work in progress 15,926
Finished goods 2,500
---------
Total $ 260,487
=========
[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 indetermining 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,
---------- ----------
2004 2003
---------- ----------
Shares used in BEPS computations -
weighted average shares outstanding -- 7,161,756
10,545,082
Net effect of dilutive common share equivalents -- 3,380,200
---------- ----------
Shares used in DEPS computations 10,545,082 10,541,956
========== ==========
F-17
CNE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
NOTE B - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Common stock equivalents to purchase common stock of the Company that were
outstanding at December 31, 2004 were not included in the computation of
diluted net loss per share as their effect would have been anti-dilutive.
The anti-dilutive common stock equivalents for December 31, 2004, and the
common stock equivalents for December 31, 2003 consist 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, 2004 and 2003 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-18
CNE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
NOTE B - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
At December 31, 2004, 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,
----------------------------
2004 2003
----------- -----------
Net loss , as reported $(2,333,695) $(1,119,321)
Less, Total stock-based employee compensation
expense determined under fair value-based method for
all awards, net of related tax effects -- --
----------- -----------
Pro forma net loss $(2,333,695) $(1,119,321)
=========== ===========
Net loss per share:
As reported:
Basic $(0.22) $(0.16)
====== ======
Diluted $(0.22) $(0.18)
====== ======
Pro forma:
Basic $(0.22) $(0.16)
====== ======
Diluted $(0.22) $(0.18)
====== ======
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 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 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
January 21, 2004, incentive stock options to purchase 601,000 shares of
our common stock were granted by the Incentive Compensation Committee to
one officer and eighteen employees of the Company at a weighted average
exercise price of $0.50 per share. On September 12, 2004 incentive stock
options to purchase 500,000 shares of our common stock were granted by the
Incentive Compensation Committee to one officer of the Company at an
exercise price of $0.28 per share. On December 1, 2004, incentive stock
options to purchase 110,000 shares of our common stock were granted by the
Incentive
F-19
CNE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
NOTE B - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Compensation Committee to fifteen employees of the Company at a weighted
average exercise price of $0.40 per share. On April 30, 2003 (435,000),
November 4, 2003 (220,000) and November 21, 2003 (100,000), January 21,
2004 (295,500), September 12, 2004 (900,000) non-qualified stock options
to purchase an aggregate 1,950,500 shares of our common stock were granted
by the Board of Directors to certain independent contractors and outside
directors of the Company. No options granted have been exercised.
On June 10, 2004, as amended pursuant to an Agreement dated as of
September 28, 2004, an officer and an employee of the Company entered into
an Option Cancellation Agreement pertaining to 420,000 incentive stock
options issued on January 21, 2004 relinquishing all rights and title to
their award in consideration of 104 equal weekly cash payments aggregating
$50,000.
On January 10, 2005, as part of the settlement of a litigation with the
Company, Messrs. Reid (300,000) and Gutowski (775,000) and Ms. Gutowski
(475,000) agreed to exchange all of their incentive stock options, as well
as all of their Class AA and Class C Preferred Stock for 850,000 shares of
the Company's common stock if the exchange is made on or prior to May 9,
2005, 950,000 shares if the exchange is made on or prior to June 9, 2005,
or 1,050,000 shares if the exchange is made on or prior to July 9, 2005.
[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 $35,522 and $47,806 for the years
ended December 31, 2004 and 2003, 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, 2004 and 2003, estimated future costs relating to
warranties were $1,000 and $40,260, 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
F-20
CNE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
NOTE B - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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, 2004 and 2003.
[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 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 2004 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 January 2003, the FASB issued FIN 46, Consolidation of Variable
Interest Entities (VIE's), and a revision to FIN 46 in December 2003
(together, "FIN 46"), which requires identification of the Company's
participation in VIE's. VIE's are defined as entities with a level of
invested equity that is not sufficient to fund future activities to permit
them to operate on a stand-alone basis, or whose equity holders lack
certain characteristics of a controlling financial interest. For entities
identified as VIE's, FIN 46 sets forth a model to evaluate potential
consolidation based on the assessment of which party to a VIE, if any,
bears a majority of the risk of the VIE's expected losses, or stands to
gain from a majority of the VIE's expected returns. FIN 46 also sets forth
certain disclosures regarding interest in VIE's that are deemed
significant, even if consolidation is not required. FIN 46 is effective
for all VIE's created after January 31, 2003. The Company adopted FIN 46
during 2003 and the adoption of this interpretation did not have an impact
on the Company's consolidated financial statements in 2004 or 2003.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity.
SFAS No. 150 establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both
F-21
CNE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
NOTE B - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances). Many of those instruments were previously classified as
equity. SFAS No. 150 is effective for financial instruments entered into
or modified after May 31, 2003. The Company adopted this standard during
2003 and the adoption did not have an impact on the Company's consolidated
financial statements in 2004 or 2003.
During December 2004, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 153, Exchanges of Nonmonetary Assets -- An Amendment of
APB Opinion No. 29. APB Opinion No. 29, Accounting for Nonmonetary
Transactions ("APB 29") required that nonmonetary exchanges be accounted
for at fair value, subject to certain exceptions. SFAS 153 has removed the
exception for nonmonetary exchanges of similar productive assets, and
replaced it with an exception for exchanges that lack commercial
substance. The provisions of SFAS 153 are effective prospectively for all
nonmonetary asset exchanges in fiscal periods beginning after June 15,
2004. Early adoption is permitted. The Company does not expect the
adoption of SFAS No. 153 to have a material impact on the Company's
consolidated financial statements.
During December 2004, FASB issued SFAS No. 123 (Revised 2004), Share-Based
Payment ("SFAS 123R"). SFAS 123R replaces SFAS No. 123, Accounting for
Stock-Based Compensation (SFAS 123), and supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees. SFAS 123R requires companies to
recognize the compensation cost related to share-based payment
transactions with employees in the financial statements. The compensation
cost is measured based upon the fair value of the instrument issued.
Share-based compensation transactions with employees covered within SFAS
123R include share options, restricted share plans, performance-based
awards, share appreciation rights, and employee share purchase plans. SFAS
123 included a fair-value-based method of accounting for share-based
payment transactions with employees, but allowed companies to continue to
apply the guidance in APB 25 provided that they disclose in the footnotes
to the financial statements the pro forma net income if the
fair-value-based method been applied. The Company is currently reporting
share-based payment transactions with employees in accordance with APB 25
and provides the required disclosures. SFAS 123R will be effective for the
Company beginning January 1, 2006.
In implementing SFAS 123R the Company will apply the modified prospective
application transition method. The modified prospective application
transition method requires the application of this standard to:
o All new awards issued after the effective date;
o All modifications, repurchased or cancellations of existing
awards after the effective date; and
o Unvested awards at the effective date.
F-22
CNE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
NOTE B - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
For unvested awards, the compensation cost related to the remaining
"requisite service' that has not been rendered at the effective date will
be determined by the compensation cost calculated currently for either
recognition or pro forma disclosures under SFAS 123. The Company will be
adopting the modified prospective application of SFAS 123R.
NOTE C - FIXED ASSETS, NET
Fixed assets, net consists of the following at December 31, 2004:
Machinery and equipment $ 439,808
Office and computer equipment 66,048
Transportation equipment 23,873
Furniture and fixtures 40,505
---------
570,234
Less, accumulated depreciation (175,725)
---------
Fixed assets, net $ 394,509
=========
Depreciation expense for the years ended December 31, 2004 and 2003 totaled
$83,294 and $83,941, respectively.
NOTE D - INTELLECTUAL PROPERTY RIGHTS AND GOODWILL
Detail of intellectual property rights and goodwill is as follows at December
31, 2004:
Intellectual property rights:
Intellectual property rights, stated at lower of
cost or fair market value $ 1,550,609
Less, accumulated amortization (188,661)
-----------
Intellectual property rights, net $ 1,361,948
===========
The estimated future amortization expense of intellectual property rights is as
follows:
2005 $ 113,196
2006 113,196
2007 113,196
2008 113,196
2009 113,196
Thereafter 795,968
-----------
Total $ 1,361,948
===========
Additional amortization will be recognized in future periods if impairment of
the rights occurs. Amortization expense for the year ended December 31, 2004
totaled $113,196.
F-23
CNE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
NOTE D - INTELLECTUAL PROPERTY RIGHTS AND GOODWILL
Goodwill:
Gross carrying amount $7,285,894
Less, impairment charge --
----------
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 2004, the Company did not
incur 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 a 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 $48,931 at December 31, 2004.
From time to time during 2004, 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% - 4.00% per month. The submitted accounts receivable
secure the advances to the Company. At December 31, 2004 such factoring
arrangements amounted to $142,464.
NOTE F - LINES OF CREDIT
The Company has the following line of credit at December 31, 2004:
$20,000 unsecured line of credit with a bank. Interest payments are due monthly,
which are calculated at At December 31, 2004 the interest rate was 6.25%; 1%
above the Prime Rate. The outstanding balance of the line at December 31, 2004
is $19,199.
NOTE G - NOTES AND DEBENTURE PAYABLE
The Company has the following notes and debenture payable at December 31, 2004:
18% Promissory Note
-------------------
Promissory note payable to an individual due in one payment on February 10,
2005. The note accrues
F-24
CNE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
NOTE G - NOTES AND DEBENTURE PAYABLE (CONTINUED)
interest at 18.00% which is payable quarterly commencing May 1, 2004. The note
is unsecured. At December 31, 2004 the outstanding balance on the note is
$300,000. The Company is currently negotiating new terms with regard to this
note.
10% Promissory Note
-------------------
On June 24, 2004 the Company issued a secured note payable to an employee of a
subsidiary of the Company in the amount of $150,000. The note is secured by the
furniture and equipment of a subsidiary of the Company. The note bears interest
at 10% per annum and the principal and all interest thereon was due on September
24, 2004. In consideration of extending the maturity date of the note to April
30, 2005 and deferring the payment of all accrued interest for the period June
24, 2004 through April 30, 2005, the individual was issued Warrants to purchase
101,000 shares of the Company's common stock at $0.28 per share. At December 31,
2004 the outstanding balance on the note is $150,000.
24% Secured Notes
-----------------
In July and August 2004, the Company issued $150,000 of its 24% Secured Notes
due April 30, 2005 to the wife of the Chief Executive Officer and an existing
10% subordinated noteholder of the Company. Interest on the notes is payable
quarterly in arrears. The notes are secured by (i) all the stock of SRC and
USCL, and (ii) the pledge of Patent Nos. 6,060,979, 6,047,173 and 5,701,338 -
all owned by the Company. On October 1, 2004, the holders of 100% of the
Company's 24% Secured Notes agreed to defer $5,867 of interest due on such date
to January 1, 2005 in consideration of the Company issuing to them 53,333 Class
B Warrants of the Company, each to give the holder thereof the right to purchase
a share of common stock at $0.33 per share. On January 1, 2005, the holders of
100% of the Company's 24% Secured Notes agreed to defer $9,200 of interest due
on such date and further defer the interest that was due and deferred on October
1, 2004 ($5,867) to April 1, 2005 in consideration of the Company issuing to
them 113,000 Class B Warrants of the Company, each to give the holder thereof
the right to purchase a share of common stock at $0.40 per share. At December
31, 2004 the outstanding balance on the notes is $150,000.
10% Convertible Note
--------------------
In October, November and December 2004, the Company issued (i) $150,000 of its
10% Convertible Subordinated Notes due June 30, 2005 and (ii) 945,000 Class C
Warrants of the Company, each to give the holder thereof the right to purchase a
share of common stock at $0.50 per share. The notes were sold to the wife of the
Chief Executive Officer of the Company and other accredited investors and are
convertible by the holder, at any time, into common stock of the Company at
$0.50 per share. The warrants expire on April 30, 2013. Interest on the notes is
due at maturity. At December 31, 2004 the outstanding balance on the notes is
$150,000.
F-25
CNE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
NOTE G - NOTES AND DEBENTURE PAYABLE (CONTINUED)
12% Debenture
-------------
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, all of which are currently exercisable. 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, 2004 the
outstanding principal balance of a debenture payable of a subsidiary of the
Company is $100,000.
Other Notes
-----------
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, 2004 the outstanding balance on the note is $24,723 of
which $12,148 has been classified as current portion of notes payable.
Note payable to Ingersoll-Rand Financial Services due May 1, 2007. The note
accrues interest at an effective rate of 7.4% and is payable in monthly
installments of principal and interest of $569. The note is collateralized by
equipment owned by the Company. At December 31, 2004 the outstanding balance on
the note is $14,579 of which $5,905 has been classified as current portion of
notes payable.
Installment notes payable to two individuals, who are employees 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 was due and payable on February
1, 2004. Principal payments of $53,333 were due August 1, 2003, November 1, 2003
and February 1, 2004. The notes are unsecured. At December 31, 2004 the
outstanding principal balance of the notes is $23,330. The Company is currently
negotiating new terms with regard to this note.
NOTE H - SUBORDINATED NOTES PAYABLE
The Company has the following subordinated notes payable at December 31, 2004:
10% Subordinated Notes due April 30, 2005
-----------------------------------------
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
F-26
CNE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
NOTE H - SUBORDINATED NOTES PAYABLE (CONTINUED)
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, 2005, of which
$1,500,000 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. In April 2005, the Company will notify the Class B Warrant
holders that, to satisfy the now 19% non-dilutive provisions of their Warrants,
these Warrants were now exercisable for an additional of 1,122,100 shares of the
Company's common stock at approximately $0.40 per share. At December 31, 2004
the 10% subordinated notes had an outstanding principal balance of $966,710.
Conversion of 8% Subordinated Notes
-----------------------------------
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
was payable quarterly on a calendar year basis. The notes were secured by the
all of the issued and outstanding common stock of SRC and ECI. In 2003 and 2004
all of the 8% subordinated notes were converted into the Company's Series AA
Preferred Stock. Specifically, on August 31, 2003, two holders who were 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. On June 9, 2004,
the other two holders of the Company's 8% Subordinated Promissory Notes who are
an officer and an employee of the Company converted their notes aggregating
$1,000,000 into 1,000,000 shares of the Company's Series AA Preferred Stock. It
also has an 8% cumulative dividend, payable in common stock or cash.
Maturities of long-term debt subsequent to December 31, 2004 are as follows:
2005 17,243
2006 19,268
2007 2,791
2008 --
2009 --
---------
Total $ 39,302
=========
F-27
CNE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
NOTE I - PREFERRED STOCK
Preferred Stock consists of the following at December 31, 2004:
Par value per share $ 0.00001
Authorized number of shares 25,000,000
Issued and outstanding number of shares:
Series AA 2,000,000
Series A 1,697,966
Series B 4,400
Series C 9,735,875
Series E --
----------
Total 13,438,241
==========
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
$2,000,000. 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.
NOTE J - COMMON STOCK
Common Stock consists of the following at December 31, 2004:
Par value per share $ 0.00001
Authorized number of shares 40,000,000
Issued number of shares 12,029,571
Less, Treasury shares (1,238,656)
-----------
Issued and outstanding number of shares 10,790,915
===========
F-28
CNE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
NOTE K - WARRANTS
At December 31, 2004 outstanding warrants to acquire common stock consisted of:
Type of Exercise Shares of
Warrant Exercise Date Expiration Date Price Common Stock
------- ---------------- --------------- -------- --------------
Class A October 22, 2008 April 22, 2013 $1.00 1,697,966
Class B April 23, 2003 April 30, 2013 $0.40 5,245,200
Class B March 12, 2004 April 30, 2013 $0.50 1,708,900
Class B July 1, 2004 April 30, 2013 $0.39 105,769
Class B October 1, 2004 April 30, 2013 $0.33 295,455
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 BB January 21, 2004 February 4, 2009 $0.50 150,000
Class BB February 10, 2004 February 10, 2014 $1.00 350,000
Class BB August 29, 2004 August 29, 2009 $1.50 25,000
Class BB August 29, 2004 August 29, 2009 $2.00 25,000
Class BB August 29, 2004 August 29, 2009 $2.50 25,000
Class BB August 29, 2004 August 29, 2009 $3.00 25,000
Class BB August 29, 2004 August 29, 2009 $3.50 25,000
Class BB August 29, 2004 August 29, 2009 $4.00 25,000
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 G October 1, 2004 October 1, 2014 $0.28 736,000
Class H October 1, 2004 October 1, 2014 $0.33 53,333
Class I October, November and June 30, 2014 $0.50 945,000
December, 2004
Class B(1) Immediate March 31, 2005 $6.00 25,000
Class B(1) Immediate June 28, 2005 $6.00 62,500
-----------
22,580,998
===========
(1) Class B warrants and Units of a subsidiary of the Company are exercisable
for the Company's common shares (see Note G: Notes and Debenture Payable).
F-29
CNE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
NOTE L - CAPITAL CONTRIBUTIONS
Capital Contributions
On June 9, 2004 an officer and an employee of the Company waived $40,000 of
interest on certain the outstanding 8% promissory notes (see Note H)and has been
reflected in the financial statements as contributions to the capital of the
Company during the year ended December 31, 2004.
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.
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, 2004 and 2003:
2004 2003
------- -------
Federal $ -- $ --
State and local franchise taxes -- 13,965
------- -------
$ -- $13,965
======= =======
At December 31, 2004, 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.
The Company's deferred tax assets and liabilities consists of the following:
2004 2003
------------ ------------
Deferred tax assets:
Net operating loss carryforward $ 17,838,001 $ 16,777,000
Other 21,620 23,690
------------ ------------
Total deferred tax assets, before valuation allowance 17,859,621 16,800,690
Valuation allowance (17,859,621) (16,800,690)
------------ ------------
Total deferred tax assets $ 0 $ 0
============ ============
The valuation allowance increased (decreased) by approximately $1,058,931 during
2004 and $2,018,690 during 2003. The increase in the valuation allowance of
$1,058,931 for the year ended December 31, 2004 resulted from the increase in
the valuation allowance attributable to the deferred tax benefit of
F-30
CNE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
NOTE M - INCOME TAXES (CONTINUED)
approximately $1,061,001 on the loss from continuing operations. The increase in
the valuation allowance of $2,018,690 for the year 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 effective tax rate applicable to continuing operations varied from the
statutory federal income tax rate as follows:
Year Ended December 31,
-----------------------
2004 2003
--------- ---------
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
2004 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.
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 $6,750. This lease is with an affiliate of Thomas L. Sullivan, who is
one of the Company's executive officers and Gary L. Eichsteadt, who is a
director and 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.
F-31
CNE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
NOTE N - COMMITMENTS, LITIGATION AND OTHER MATTERS (CONTINUED)
Rental expense amounted to $120,964 and $115,791 for the years ended
December 31, 2004 and 2003, respectively. Minimum future annual rental
payments at December 31, 2004 are as follows:
2005 $ 103,905
2006 20,250
2007 --
----------
$ 124,155
==========
[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 vest immediately. There were no contributions for the years
ended December 31, 2004 and 2003.
[3] The Company has employment agreements with three executive officers. These
agreements provide for minimum salary levels. The aggregate commitment for
future salaries of these three executive officers at December 31, 2004 was
approximately $493,000. See Note 5 below.
[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.
[5] On August 19, 2004, two of the Company's then officers, Michael J.
Gutowski and Larry M. Reid, who were then also directors, informed the
Company that their employment contracts may have been breached. On August
27, 2004, these officers filed suit against the Company in the United
States District Court, Southern District of Florida, alleging that (i)
their employment contracts had been breached and (ii) certain future
compensation relating thereto to be paid to them amounting up to an
aggregate of $1,003,000 had been accelerated. On October 5, 2004, Carol L.
Gutowski, then an officer of one of the Company's subsidiaries and a
former director of the Company, instituted a suit against the subsidiary
in the Circuit Court, 17th Judicial Circuit, Broward County, Florida,
alleging (i) a breach of her employment agreement with the subsidiary and
(ii) that certain future compensation relating thereto to be paid to her
from the subsidiary amounting up to an aggregate of $274,000 had been
accelerated.
The Company reported that it did not believe that it had committed any
breach of these agreements and, accordingly, had not incurred the claims
that these officers alleged. In addition, the Company reported that it
believed that these officers had committed violations of their employment
agreements and had taken other actions that had damaged the Company.
Accordingly, the Company filed a defense to these actions and asserted
appropriate counterclaims.
On January 10, 2005, both of the aforementioned actions were settled. In
accordance therewith, the parties agreed, among other things, as follows:
F-32
CNE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
NOTE N - COMMITMENTS, LITIGATION AND OTHER MATTERS (CONTINUED)
Each party will release the other from any and all claims except for any
obligations set forth in the settlement agreement and the legal actions between
the parties, including both the Federal Court and Florida Circuit Court actions,
will be dismissed with prejudice;
1. The parties shall bear their own fees and expenses relating to
the litigation;
2. Messrs. Reid and Gutowski and Ms. Gutowski shall be released
from the non-competition provisions of their respective
employment contracts;
3. Messrs. Reid and Gutowski agreed to resign as directors of the
Company; and
4. Messrs. Reid and Gutowski and Ms. Gutowski shall exchange, in
the aggregate, (i) all of their Class AA (1,000,000 shares),
Class A (305,336 shares), and Class C (4,867,937 shares)
Preferred Stock of the Company, and (ii) all issued incentive
stock options of the Company, aggregating 1,550,000 in the
aggregate, for 850,000 shares of our common stock if the
exchange is made on or prior to May 9, 2005, 950,000 shares if
the exchange is made on or prior to June 9, 2005, or 1,050,000
shares if the exchange is made on or prior to July 9, 2005
subject to certain restrictions relating to the sale thereof.
The settlement agreement has been filed with the United States District
Court Southern District of Florida, Case No: 04-61125-Civ-Cooke/McAliley,
Michael J. Gutowski and Larry M. Reid, Plaintiffs, v. CNE Group, Inc.,
Defendant/Counter-Plaintiff, v. Michael J. Gutowski, Larry M. Reid and
Carol L. Gutowski, Counter-Defendants.
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.
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, 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, 2003 or which may result in the
future.
F-33
CNE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
NOTE O - ACQUISITIONS AND RELATED UNAUDITED PRO FORMA FINANCIAL INFORMATION
(CONTINUED)
Year Ended
December 31, 2003
-----------------
Unaudited
Revenues $ 2,703,406
Expenses 4,706,100
-------------
Loss from continuing operations $ (2,002,694)
=============
Loss from continuing operations per share:
Basic $(0.11)
=======
Diluted $(0.11)
=======
NOTE P - STOCK OPTION PLANS
At December 31, 2004, 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
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.
F-34
CNE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
NOTE -P STOCK OPTION PLANS (CONTINUED)
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
-----------------------
Weighted
Average
Exercise
Shares Price
-------- --------
Options outstanding at beginning of year 290,000 $ 2.55
Options cancelled 0
Rescission by recipients of all their
interest in options (290,000) 2.55
-------- --------
Options outstanding at end of year 0 2.55
-------- --------
Options available at end of year 0 $ 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.
Stock option activity under the terminated CareerEngine 1999 Plan is summarized
as follows:
Year Ended December 31,
----------------------------
2003
----------------------------
Weighted
Average
Shares Exercise Price
---------- ---------------
Options outstanding at
beginning of year 52,000 $ 2.50
Options cancelled 0 $ 2.50
Rescission by recipients of all their
interest in options (52,000) $ 2.50
------- -------
Options outstanding at end of year 0 $ 2.50
======= =======
Options available at end of year 0 $ 2.50
======= =======
F-35
CNE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
NOTE -P STOCK OPTION PLANS (CONTINUED)
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 3,500,000 to 5,000,000
shares of Common Stock. On June 18, 2004, 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 5,000,000 to
10,000,000 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 our
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 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 January 21, 2004, incentive stock
options to purchase 601,000 shares of our common stock were granted by the
Incentive Compensation Committee to one officer and eighteen employees of the
Company at a weighted average exercise price of $0.50 per share. On September
12, 2004 incentive stock options to purchase 500,000 shares of our common stock
were granted by the Incentive Compensation Committee to one officer of the
Company at an exercise price of $0.28 per share. On December 1, 2004, incentive
stock options to purchase 110,000 shares of our common stock were granted by the
Incentive Compensation Committee to fifteen employees of the Company at a
weighted average exercise price of $0.40 per share. On April 30, 2003 (435,000),
November 4, 2003 (220,000) and November 21, 2003 (100,000), January 21, 2004
(295,500), September 12, 2004 (900,000) non-qualified stock options to purchase
an aggregate 1,950,500 shares of our common stock were granted by the Board of
Directors to certain independent contractors and outside directors of the
Company. The Company recorded a change of $135,250 in general and administration
expenses for the year ended December 31, 2003. No options granted have been
exercised.
On June 10, 2004, as amended pursuant to an Agreement dated as of September 28,
2004, an officer and an employee of the Company entered into an Option
Cancellation Agreement pertaining to 420,000 incentive stock options issued on
January 21, 2004 relinquishing all rights and title to their award in
consideration of 104 equal weekly cash payments aggregating $50,000.
F-36
CNE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
NOTE -P STOCK OPTION PLANS (CONTINUED)
On January 10, 2005, as part of the settlement of a litigation with the Company,
Messrs. Reid (300,000) and Gutowski (775,000) and Ms. Gutowski (475,000) agreed
to exchange all of their incentive stock options, as well as all of their Class
AA and Class C Preferred Stock for 850,000 shares of the Company's common stock
if the exchange is made on or prior to May 9, 2005, 950,000 shares if the
exchange is made on or prior to June 9, 2005, or 1,050,000 shares if the
exchange is made on or prior to July 9, 2005.
Stock option activity under the 2003 Stock Incentive Plan for the year ended
December 31, 2004 is summarized as follows:
Year Ended December 31, 2004
----------------------------------------------
Weighted
Incentive Non-Qualified Average
Shares Shares Exercise Price
----------- -------------- --------------
Options outstanding at
December 31, 2003 2,937,500 755,000 $0.92
Options granted 1,211,000 1,195,500 $0.37
Options cancelled (420,000) -- $0.50
--------- ---------
Options outstanding
at December 30, 2004 3,728,500 1,950,500 $0.85
========= =========
Options available
at December 30, 2004 4,321,000 $0.84
=========
The following table presents information relating to stock options outstanding
at December 31, 2004 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 5,679,000 $ .85 7.86 4,321,000 $ 0.84
F-37
CNE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
NOTE P - STOCK OPTION PLANS (CONTINUED)
Stock option activity under the 2003 Stock Incentive Plan for the year ended
December 31, 2003 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
On August 15, 2003 the Company, for a nominal amount, 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.
NOTE R - PROJECT FINANCING AGREEMENT
In October 2004, the Company and USCL entered into a two-year Project Financing
Agreement with an institutional lender relating to USCL's anticipated
participation in the "Cellular Call Box Upgrade and Maintenance Service"
projects for numerous Service Authority for Freeway Emergencies ("SAFE")
programs within the state of California. These call box programs operate over
17,000 motorist aid analog call boxes that will require upgrades to digital
cellular technology available through USCL. This agreement provides the Company
with finished goods and accounts receivable financing of up to $2,000,000
relating to these potential aforementioned projects. The effective interest rate
is approximately 3% per month on the outstanding balance of the amount financed.
The finished goods and accounts receivable to be financed, as well as all the
other assets of the Company not previously pledged, will secure the borrowings
under this agreement.
F-38
CNE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
NOTE S - SUBSEQUENT EVENTS
[1] As of January 1, 2005, certain holders of the Company's 10% subordinated
notes agreed to defer $18,750 of interest due on such date and further
defer the interest that was due and deferred on July 1, 2004 ($13,750) and
October 1, 2004 ($18,750) to April 1, 2005 in consideration of the Company
issuing to them 384,375 Class B Warrants of the Company, each to give the
holder thereof the right to purchase a share of common stock at $0.40 per
share. The noteholders include two officers of the Company.
[2] On April 1, 2005, the holders of the Company's 10% subordinated notes were
asked to agree to defer $25,000 of interest due on such date and further
defer the interest that was due and deferred on July 1, 2004 ($13,750),
October 1, 2004 ($18,750) and January 1, 2005 ($187,50) to April 30, 2005
in consideration of the Company issuing to them 254,167 Class B Warrants
of the Company, each to give the holder thereof the right to purchase a
share of common stock at $0.30 per share. The noteholders include two
officers of the Company.
[3] On January 1, 2005, the holders of the Company's 24% Secured Notes agreed
to defer $9,200 of interest due on such date and further defer the
interest that was due and deferred on October 1, 2004 ($5,867) to April
30, 2005 in consideration of the Company issuing to them 113,000 Class H
Warrants of the Company, each to give the holder thereof the right to
purchase a share of common stock at $0.30 per share.
[4] On April 1, 2005, the holders of the Company's 24% Secured Notes were
asked to agree defer $9,200 of interest due on such date and further defer
the interest that was due and deferred on October 1, 2004 ($5,867) and
January 1, 2005 ($92,00) to April 30, 2005 in consideration of the Company
issuing to them 80,222 Class H Warrants of the Company, each to give the
holder thereof the right to purchase a share of common stock at $0.30 per
share.
[5] On or about April 1, 2005, two individuals, both of whom are adult
children of the Company's Chief Executive Officer, purchased 545,000
shares of the Company's Series G Preferred Stock at a price of $0.20 per
share. The Series G Preferred Stock is non voting, has no liquidating
preference over the common stock and each share is automatically
convertible into two shares of common stock when such conversion has been
approved by the Company's common stockholders. This transaction was exempt
from the registration provisions of the Securities Act of 1933 pursuant to
Section 4(2) thereof.
[6] On or about April 12, 2005, four individuals, three of whom are adult
children or related thereto of the Company's Chief Executive Officer,
purchased 500,000 shares of the Company's Series G Preferred Stock at a
price of $0.20 per share. This transaction was exempt from the
registration provisions of the Securities Act of 1933 pursuant to Section
4(2) thereof.
[7] On or about March 15, 2005, the Company borrowed $25,000 from a lender
evidenced by a secured convertible subordinated note due on September 15,
2005 and bearing interest at the annual rate of 20% payable at maturity.
The note is (i) secured by approximately $42,000 in one of the Company's
bank accounts; (ii) convertible into the Company's common stock at the
rate of $0.24 per share, subject to certain anti-dilution provisions; and
(iii) subordinated to the Company's Senior Indebtedness as that term is
defined therein. At April 15, 2005 the outstanding principal balance of
the note was $15,000. In addition, on or about April 11, 2005, the Company
sold to this lender, for an aggregate purchase price of $100,000, 333,333
shares of restricted common stock and three-year warrants to purchase an
aggregate of 100,000 shares at $0.50 per share, subject to appropriate
anti-dilution provisions. The sale of the restricted stock and warrants
was exempt from the registration provisions of the Securities Act of 1933
pursuant to Section 4(2) thereof.
F-39
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.On April 6, 2005, we terminated Rosen
Seymour Shapss Martin & Company LLP as our independent auditors and
appointed Wheeler, Herman, Hopkins & Lagor, P.A.
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.
51
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 68 Chairman of the Board and Chief Executive Officer
Anthony S. Conigliaro 54 Vice President, Chief Financial Officer and Director
Gary L. Eichsteadt 55 Director
David W. Dube 48 Director
Joseph G. Anastasi 67 Director
Charles W. Currie 61 Director
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
2007.
ANTHONY S. CONIGLIARO has been our Vice President and Chief Financial
Officer since March 1999 and he became a Director in June 2004. He is also
Chief Financial Officer of SRC, Connectivity, ECI and US Commlink. Mr.
Conigliaro is a certified public accountant. His term expires in 2005.
GARY L. EICHSTEADT has been a Director since January 14, 2005 when he was
also appointed to our Executive
52
Committee. He was the co-founder in 1984 of Econo-Comm, Inc. and from that
date through its acquisition by us in April 2003 was its President and
sole director. He is currently and since April 2003 has been an employee
of Econo-Comm. 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
2007.
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.
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.
There are no family relationships among our directors or executive
officers.
(b) Meetings of the Board and its Committees
During 2004, the Board had 15 meetings.
53
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 June 17, 2004, the Executive Committee,
consisted of Messrs. Benoit, Gutowski, Reid and Dube, and it had ten
meetings. For the period June 18, 2004 through September 11, 2004, the
Executive Committee consisted of Messrs. Benoit, Dube, Anastasi, Gutowski
and Reid and it had four meetings. For the period September 12, 2004
through January 14, 2005 the Executive committee consisted of Messrs.
Benoit, Anastasi, Dube, Currie, Conigliaro and Anastasi and it had four
meetings. On January 15, 2005, Mr. Eichsteadt joined the Executive
Committee.
The Board also has an Audit Committee that consists of three outside
Directors. This committee discusses audit 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 December 31, 2004, the Audit
Committee, consists of Joseph J. Anastasi, Charles W. Currie and David W.
Dube, had seven 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. We believe 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 2004 this Committee consisted of
Messrs. Benoit, Gutowski, Reid and Dube and
54
had no meetings. Messrs. Gutowski, Reid were removed from the Committee on
September 11, 2005.
The Board also has a Nominating Committee to propose nominees for election
to the Board. During 2004 this Committee, which consisted of Messrs.
Benoit, Gutowski, Reid and Dube, had no meetings. Messrs. Gutowski, Reid
were removed from the Committee on September 11, 2005. The Nominating
Committee will consider suggestions for potential nominees submitted by
stockholders if mailed to the Chairman of the Board.
The Board also has an Incentive Compensation Committee for the purpose of
administering and making incentive compensation awards under our Incentive
Compensation Plans. During 2004 this Committee, which consisted of Messrs.
Dube, Anastasi and Currie, had two meetings.
During 2004 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.
(c) Compliance with Section 16(a) of the Exchange Act
-------------------------------------------------
This information will be included in our definitive proxy statement to be
sent to our stockholders for our next annual stockholders meeting and is
incorporated herein by reference.
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
55
2004, 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
2004, 2003 and 2002.
Summary Compensation Table
--------------------------
Name and
Principal All Other
Position Year Salary Bonus Compensation
-------- ---- ------ ----- ------------
George W. Benoit, President, 2004
Chief Executive Officer and 2003
Chairman 2002
Anthony S. Conigliaro, Vice 2004
President and Chief 2003
Financial Officer 2002
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 2004.
We have three-year employment agreements, commencing April 2003, with each
of our executive officers. These agreements provide for annual salaries as
follows:
56
Executive Officers Annual Salary
------------------ -------------
George W. Benoit $ 150,000
Anthony S. Conigliaro $ 110,000
Thomas L. Sullivan $ 100,000
During 2004, Mr. Benoit was paid no salary and Mr. Conigliaro was paid
$45,846. We have accrued the unpaid salaries.
In 2004, the Company had employment agreements with three former executive
officers. These three agreements were terminated in September 2004.
Compensation paid to each of these individuals pursuant to these
agreements did not exceed $100,000 during 2004.
(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 10,000,000 shares of
our common stock. The purpose of the 2003 Plan is to provide incentives to
officers, key employees,
57
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 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 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
58
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 January 21, 2004, incentive
stock options to purchase 601,000 shares of our common stock were granted
by the Incentive Compensation Committee to one officer and eighteen
employees of the Company at a weighted average exercise price of $0.50 per
share. On September 12, 2004 incentive stock options to purchase 500,000
shares of our common stock were granted by the Incentive Compensation
Committee to one officer of the Company at an exercise price of $0.28 per
share. On December 1, 2004, incentive stock options to purchase 110,000
shares of our common stock were granted by the Incentive Compensation
Committee to fifteen employees of the Company at a weighted average
exercise price of $0.40 per share. On April 30, 2003 (435,000), November
4, 2003 (220,000) and November 21, 2003 (100,000), January 21, 2004
(295,500), September 12, 2004 (900,000) non-qualified stock options to
purchase an aggregate 1,950,500 shares of our common stock were granted by
the Board of Directors to certain independent contractors and outside
directors of the Company. No options granted have been exercised.
On June 10, 2004, as amended pursuant to an Agreement dated as of
September 28, 2004, an officer and an employee of the Company entered into
an Option Cancellation Agreement pertaining to 420,000 incentive stock
options issued on January 21, 2004 relinquishing all rights and title to
their award in consideration of 104 equal weekly cash payments aggregating
$50,000.
On January 10, 2005, as part of the settlement of a litigation with us,
Messrs. Reid (300,000) and Gutowski (775,000) and Ms. Gutowski (475,000)
agreed to exchange all of their incentive stock options, as well as all of
their Class AA and Class C Preferred Stock as follows: for 850,000 shares
of our common stock if the exchange is made on or prior to May 9, 2005,
950,000 shares if the exchange is made on or prior to June 9, 2005, or
1,050,000 shares if the exchange is made on or prior to July 9, 2005.
(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,
59
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.
Accrued Director compensation, in the aggregate, amounted to $58,000 in
2004.
60
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, at April 1, 2005, 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
Common Stock Voting Power and
Name of Beneficially Outstanding Equity
Beneficial Owner(1) Owned(2) Owned(3)
------------------- -------- --------
Grace C. Lindblom (13) 3,406,883 26.47
George W. Benoit (4)(7)(9)(10)(14)(15) 2,229,120 19.40
Maureen Benoit (9)(14) 3,057,903 22.08
Frank Ciolli (21) 1,542,833 12.51
G. Martin Fell 590,833 5.19
Barry W. Blank (8) 2,569,795 19.80
Michael J. Gutowski and Carol A. Gutowski (16) (19) 775,000 6.70
Kevin J. Benoit(5)(7)(10)(12) 681,577 5.98
Anthony S. Conigliaro (12)(17) 1,316,277 10.87
Gary L. Eichsteadt (24) 218,500 1.98
Charles W. Currie (6) 504,280 4.57
David W. Dube (18) 104,000 *
Joseph G. Anastasi (22) 234,700 2.13
Thomas L. Sullivan (20) 117,500 1.08
All Directors and Executive Officers as a group
(7 persons) 7,782,280 46.42
* Owns less than one (1%) percent.
(1) The address of all the beneficial owners except Mr. Blank, Ms. Lindblom,
Mr. Gutowski, Mr. Ciolli and Mr. Fell, 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,
61
Orlando,FL 32804, Mr. Gutowski's address is 1271 SE 9th Avenue, Pompano
Beach, FL 33060, Mr. Ciolli's address is 7 Jessup Lane, Westhampton Beach,
NY 11978, and Mr. Fell's address is 150 East 58th Street, 23rd Floor, New
York, NY 10155.
(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 8, 2005. On such date we had 10,790,915
shares of common stock issued 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, (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; and (d) 207,500 shares
of common stock that he can acquire by exercising warrants issued in
conjunction with his purchase of our 10% Convertible Notes.
(7) Ownership and percentage numbers include 50,000 shares of common stock
that each of these individuals can acquire by exercising warrants.
(8) Ownership and percentage numbers include (i) 150,000 shares of common
stock that Mr. Blank can acquire by exercising warrants of the Company and
(ii) 1,885,695 shares of common stock that Mr. Blank can acquire by
exercising warrants issued to him in conjunction with his purchase of our
10% Promissory Notes.
(9) George W. Benoit and Maureen Benoit are husband and wife.
(10) George W. Benoit is the father of Kevin J. Benoit.
(11) not used
(12) Ownership and percentage numbers include 514,277 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 2,081,550 shares of common stock
that Ms. Lindblom can acquire by exercising
62
warrants issued to her in conjunction with her purchase of our 10%
Promissory Notes.
(14) Ownership and percentage numbers consist of (i) 2,571,388 shares of common
stock that Mrs. Benoit can acquire by exercising warrants issued in
conjunction with her purchase of our 10% Promissory Notes and (ii) 207,500
shares of common stock that she can acquire by exercising warrants issued
in conjunction with her purchase of our 10% Convertible Notes, and (iii)
279,015 shares of common stock that she can acquire by exercising warrants
issued in conjunction with her purchase of our 24% Secured Notes. George
Benoit disclaims beneficial ownership of these securities.
(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. Michael Gutowski and
Carol Gutowski are husband and wife.
(17) Ownership and percentage numbers include 800,000 shares of common stock
that Mr. Conigliaro can acquire by exercising incentive stock options
issued to him 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 include 117,500 shares of common stock
that Mr. Sullivan can acquire by exercising.
(21) Ownership and percentage numbers consist of 1,542,833 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 (i) 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 and (ii) 207,500 shares
of common stock that he can acquire by exercising warrants issued in
conjunction with his purchase of our 10% Convertible Notes.
(23) Ownership and percentage numbers consist of (i) 462,849 shares of common
stock that Mr. Fell can acquire by exercising warrants issued in
conjunction with his purchase of our 10% Promissory Notes and (ii) 127,984
shares of common stock that he can acquire by exercising warrants issued
in conjunction with his purchase of our 24% Secured Notes.
(24) Ownership and percentage numbers include 218,500 shares of common stock
that Mr. Eichsteadt can acquire by exercising.
63
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. 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.
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. On January
10, 2005, as part of the a litigation settlement with Mr. and Mrs.
64
Gutowski, they agreed to exchange all of their Class AA, Class AA and
Class C Preferred Stock, and all of their incentive stock options for
shares of our common stock if the exchange is made on or prior to July 9,
2005.
Messrs. Sullivan and Eichsteadt, in the aggregate, currently own (i) 50%
our Series AA Preferred Stock 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 "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. Commencing
December 1, 2004 this lease agreement was amended to provide for a monthly
base rent of $6,750 through the expiration date of the lease.
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
65
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 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).
66
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).
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 l.
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
67
Section 151(g) of the Delaware General Corporation Law.
10.1 Asset Purchase Agreement between CNE Group, Inc. and Gary L.
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 L. 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 L. 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).
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 L. 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
68
the Registrant's Current Report on Form 8-K filed on May 6, 2003).
21.0 Subsidiaries of the Registrant.
U.S. Commlink, Ltd. (California), SRC Technologies, Inc. (Florida)
and CareerEngine Network, Inc. (Delaware). SRC's subsidiaries are
Connectivity, Inc. (Florida) and Econo-Comm, Inc. (Florida).
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
(b) During the last quarter of the period covered by this report the
Company filed no reports on Form 8K
69
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
$172,600 for the fiscal year ended December 31, 2004 and $125,261 for the
fiscal year ended December 31, 2003.
(2) Audit-Related Fees
Duringour 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.
70
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 15th day of April,
2005.
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 15th day of April, 2005.
Signature Title
--------- -----
/s/ George W. Benoit Chairman of the Board,
-------------------- President,
(George W. Benoit) Chief Executive Officer
/s/ Joseph G. Anastasi Director
----------------------
(Joseph G. Anastasi)
/s/ Charles W. Currie Director
---------------------
(Charles W. Currie)
/s/ David W. Dube Director
-----------------
(David W. Dube)
/s/ Anthony S. Conigliaro Director
-------------------------
(Anthony S. Conigliaro)
71
Director
-----------------------
(Gary L. Eichsteadt)