-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NgZQB+OZ4KQAObsrz9O5Sl8nww5f8ir5OVVXqvT82RvX1toDZmYDyp4fYHZK30SN qt9tJU0yK85U24LX/TSvZA== 0001015402-04-001510.txt : 20040415 0001015402-04-001510.hdr.sgml : 20040415 20040414193322 ACCESSION NUMBER: 0001015402-04-001510 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20031231 FILED AS OF DATE: 20040415 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CRESCENT COMMUNICATIONS INC CENTRAL INDEX KEY: 0000768216 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] IRS NUMBER: 870565948 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-22711 FILM NUMBER: 04734429 BUSINESS ADDRESS: STREET 1: 701 NORTH POST OAK ROAD STREET 2: SUITE 630 CITY: HOUSTON STATE: TX ZIP: 77024 BUSINESS PHONE: 7136827400 MAIL ADDRESS: STREET 1: 701 NORTH POST OAK ROAD STREET 2: SUITE 630 CITY: HOUSTON STATE: TX ZIP: 77024 FORMER COMPANY: FORMER CONFORMED NAME: BERENS INDUSTRIES INC DATE OF NAME CHANGE: 19990823 FORMER COMPANY: FORMER CONFORMED NAME: NATIONAL AIR CORP DATE OF NAME CHANGE: 19970521 10KSB 1 doc1.txt CRESCENT COMMUNICATIONS, INC. UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-KSB [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED: DECEMBER 31, 2003 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO ______ COMMISSION FILE NUMBER: 0-22711 CRESCENT COMMUNICATIONS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) NEVADA 87-05065948 (State or Other Jurisdiction of (IRS Employer identification No.) Incorporation or Organization) 701 North Post Oak Rd., Suite 630, Houston, Texas 77024 (Address of Principal Executive Offices, Including Zip Code) (713) 682-7400 (Registrant's Telephone Number, Including Area Code) Securities Registered Under Section 12(b) of The Exchange Act: Title of Each Class: Not Applicable. Name of Each Exchange on Which Registered: Not Applicable Securities Registered Pursuant To 12(g) of The Exchange Act: Title of Each Class: Common Stock, $.001 Par Value Indicate by check mark whether the registrant (i) has filed all reports require 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 (ii) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statement incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [X] Issuer's revenues for the year ended December 31, 2003 were $2,235,142. The aggregate market value of Common Stock held by non-affiliates of the registrant at March 31, 2003, based upon the last reported sales prices on the Over-the-Counter Bulletin Board, was $8,284,633. As of March 31, 2004, there were approximately 37,657,424 shares of Common Stock outstanding. 1 TABLE OF CONTENTS PAGE PART I Item 1. Business 3 Item 2. Properties 12 Item 3. Legal Proceedings 12 Item 4. Submission of Matters to a Vote of Security Holders 12 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. 13 Item 6. Management's Discussion and Analysis of Financial Condition and Results of Operations 14 Item 7. Financial Statements 18 Item 8. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 18 Item 8A Controls and Procedures 19 PART III Item 9. Directors and Executive Officers of the Registrant 20 Item 10. Executive Compensation 21 Item 11. Security Ownership of Certain Beneficial Owners and Management 23 Item 12. Certain Relationships and Related Transactions 25 PART IV Item 13. Exhibits and Reports on Form 8-K 26 Item 14 Principal Accountant Fees and Services 26 2 PART I ITEM 1. DESCRIPTION OF BUSINESS GENERAL - ------- We are a Nevada corporation that began operations on July 23, 2001, providing co-location hosting and connectivity systems to small to mid-size businesses in Texas. The Company was formed through a Stock Exchange Agreement ("Agreement") whereby the shareholders of Solis Communications, Inc ("Solis") exchanged all the issued and outstanding shares of Solis for 600 shares of newly issued Series A Convertible Non-Redeemable Preferred Stock of Berens Industries, Inc. ("Berens"). Solis, the ultimate acquirer of Berens in this reverse merger, agreed to contribute $600,000 cash and cash equivalents. Berens began operations as d.b.a. Crescent Broadband, a broadband network service provider (NSP), serving as a nexus for Internet connectivity, application delivery, co-location hosting and security to the small-to-mid-tier business markets. At the date of the agreement, Berens was a development stage enterprise involved in the development of an online auction site for exclusive paintings and other art works, and had ceased all activity due to their inability to generate sufficient revenue or obtain additional capital funding. On September 17, 2001 Berens filed a name change to Crescent Communications, Inc. d.b.a. Crescent Broadband and approved a 5-for-1 reverse stock split to be effective on September 24, 2001. On a fully convertible post-split basis, the former shareholders of Solis beneficially own an aggregate of approximately 28,000,000 shares of common stock, or approximately 43% of the outstanding common stock. The Series A Preferred Stock does not receive dividends. Of the $600,000 committed under the Agreement, $105,000 was used to purchase certain assets of Crescent Services Corporation, a Houston, Texas based company that provided broadband and wireless services. The assets were purchased under the review and approval of the court appointed trustee as part of an involuntary petition under Chapter 7 of the U.S. Bankruptcy Code, filed against Crescent in the U.S. Bankruptcy Court in the Southern District of Texas in January 2001. Approximately $196,000 of connectivity assets were contributed by Solis as partial satisfaction of its $600,000 commitment and $194,000 was used to fund working capital requirements. OPERATIONS - ---------- Crescent Communications, Inc. (OTCBB: CCES), headquartered in Houston, Texas, is a Value Added Network (VAN) provider that develops and deploys specific technological Internet related solutions for businesses. Crescent has provided such services for small to medium enterprises for over seven years. Our mission statement is to provide value driven, premium connectivity solutions for our customers. In 2001, Crescent acquired the assets and customer base of a Cisco-Powered Network(TM) as its core network infrastructure. The network is physically co-located in Houston using existing fiber backbone networks of Time Warner and EPGN. Backbone Internet connectivity is delivered over the nation-wide infrastructure and ATM capabilities of network partners such as New Edge Networks, Covad Communications, SBC Corporation, Time Warner, and ElPaso Global Networks. At present, Crescent supports approximately 1,000 businesses in the Texas market place, still only a small percentage of network capacity is being used. Our revenues have grown since the acquisition, despite the simultaneous telecommunications industry "meltdown". Telecommunications companies are disappearing at a previously unheard of rate. Crescent is one of the few survivors in this industry shakeout. 3 Crescent acquired a number of its approximately 1,000 business customers from a variety of providers exiting the market. Because of Crescent's under utilized network capacity, the company can continue to add customers at a steadily declining cost as existing network capacity is absorbed. Crescent's management team carefully identified, formulated and is implementing a business plan and communications strategy to take advantage of the opportunities that current market conditions present. At the center of this plan are two strategic initiatives that leverage the Company's current business, technological expertise and management experience. The first is to continue to profitably develop our core business by providing connectivity and information technology solutions to small to medium enterprises, under our Crescent brand name. The second initiative is to develop, on top of our core Crescent business, a medical vertical market under the Bluegate brand name, selling connectivity and medical related applications to medical organizations of all sizes. PRODUCTS - -------- CONNECTIVITY, APPLICATION HOSTING/DELIVERY AND CO-LOCATION Crescent currently provides connectivity, hosting, and co-location services to small to medium enterprises. SECURE COMMUNICATIONS FOR THE HEALTHCARE INDUSTRY The Health Insurance Portability and Accountability Act ("HIPAA") passed by Congress mandates that the entire U.S. health care industry process all health care information, including billing and record storage, through a secure data interchange beginning on April 14, 2003. The legislation is often described as the most important business and legal issue in medicine today. The theory underlying HIPAA is standardization of communication of information in the healthcare industry, while maintaining adequate controls on the information and its distribution. HIPAA regulations change the way the healthcare community communicates patient information, stores information, secures the physical grounds, and transmits and accesses data. Security and reliability of information to improve the patient healthcare system is a key goal of HIPAA reform. The security aspects of the legislation promote good IT practices that are currently deployed in medical enterprise environments, to the "last mile" or edge of the medical network, i.e. physician's offices. The public policy goal is to continue improving our healthcare system, which benefits our community. HIPAA mandates the adoption of many new technical standards designed to increase efficiency in the administration of healthcare. HIPAA compliance is an opportunity for the healthcare industry to reduce administrative costs and claims processing cycle times, and to drive e-health initiatives. Once the investment in compliance is made, healthcare organizations stand to enjoy significant efficiency gains and economic benefits. Achieving this compliance however will not be easy. HIPAA requires that IT professionals in the healthcare industry implement fundamental changes to their existing technology infrastructure. Information technology implementation in healthcare generally suffers from inertia. HIPAA alters that; it mandates change. To comply with the HIPAA standards, organizations will have to quickly launch comprehensive programs to standardize transactions, supply a secure infrastructure, and ensure patients' privacy while providing them access to their health information. And that is only the beginning. HIPAA calls not only for initial compliance, but it requires ongoing maintenance to meet new requirements that will take effect each year as the law is updated. Compliance with HIPAA is a major driver for expenditures in IT and telecommunications services, and compliments the growth in secure data pipes to deliver patient records and information. Regulations impose an upgrade in telecommunications services, more specifically the two-way transmission of data services through secure pipelines. 4 BLUEGATE (TM) is our branded HIPAA compliant broadband digital connectivity offering for health care providers nationally. Aside from our network, there is not a generally accepted and available secure broadband answer to physicians' "last mile" problem; the space between the digital telecommunications backbone and the offices of independent healthcare providers. Bluegate bridges that mile using a variety of local and national data networks that create a vast footprint for our high speed secure data network. Bluegate's mission is to support the medical community by providing secure, reliable connectivity driven by knowledge and creativity. We provide medical facilities, both public and private, with a highly secure, private network that meets the specific and exacting needs of healthcare providers for affordable, reliable, rapid and secure connectivity across the continuum of care. Highly secure, because doctors and other healthcare providers are ethically and legally required to maintain absolute confidentiality of patient data. Broadband, so doctors can access and use the clinical applications requiring high bandwidth that are becoming standard in medical and Internet technology. High-speed, highly secure digital broadband connectivity will provide important benefits to a broad community of users; not only Bluegate doctor-subscribers, but also the healthcare business partners of these doctors. Bluegate links doctor's practices to hospitals, laboratories, pharmacies, insurers and other healthcare businesses, as well as to the public internet. Our private, high-speed backbone network is robust, well-proven broadband technology, optimally scaled for the medical office buildings where doctors cluster. Bluegate created and currently operates, what we believe to be, the first industry specific (health care) Virtual Private Network "VPN". The network was designed around an MPLS Packet Core using Cisco hardware and IOS for the network foundation. This architecture will offer required flexibility and expandability A "traditional" Virtual Private Network (VPN) is an enterprise network deployed on a shared infrastructure employing the same security, management, and throughput policies applied in a private network. A VPN can utilize the most pervasive transport technologies available today: the public Internet, service provider IP backbones, as well as service provider Frame Relay and ATM networks. VPNs use advanced encryption and tunneling to permit organizations to establish secure, end-to-end, private network connections over third-party networks, such as the Internet or extranets The benefits of a traditional VPN dedicated to the healthcare industry are as follows: - COST SAVINGS - VPNs enable health care organizations to utilize cost-effective third-party Internet transport to connect remote physician offices and remote users to the main corporate site, thus eliminating expensive dedicated WAN links and modem banks. Furthermore, the advent of cost-effective, high-bandwidth technologies like DSL, organizations can use VPNs to reduce their connectivity costs while simultaneously increasing remote connection bandwidth. - SECURITY - VPNs provide the highest level of security using advanced encryption and authentication protocols that protect data from unauthorized access. - SCALABILITY - VPNs enable hospitals, insurance companies, pharmacies and labs to utilize easy to provision Internet infrastructure that allow for the easy addition of new users. Therefore, these organizations are able to add large amounts of capacity without adding significant infrastructure, or technology management resources. - COMPATIBILITY WITH BROADBAND TECHNOLOGY - VPNs allow remote healthcare providers to take advantage of cost effective, high-speed, broadband connectivity, such as DSL and Cable, when gaining access to the larger healthcare organization's networks, providing the level of security and significant efficiency sought to be implemented by HIPAA. A second key component of Bluegate is the ability for our customers to easily use our proprietary, branded secure email platform to communicate with others inside and outside of the Bluegate network. Our secure email platform is called BLUEGATE MAIL(TM). Our proprietary research shows that the medical market is extremely receptive to employing a secure email system, and HIPAA is the catalyst for widespread implementation of such a product. Bluegate Mail was designed with the user in mind, to ensure quick and easy adoption with no additional burden on our customer's IT resources. 5 SENDER BENEFITS EASE-OF-USE: Bluegate Mail is transparent: customers send email the way they always have. POLICY-BASED CONTROL: Security policies are enforced at the gateway, controlling what is encrypted, virus scanned, filtered, archived, or flagged for review. This takes the burden off the employee, ensuring that confidential information is always protected. MESSAGE CONTROL: The customer as the sender maintains control over his message. He decides who can read the document, when and for how long. He can de-authorize a recipient or even shred the key before the document is read. RECIPIENT BENEFITS PUSH DELIVERY: The recipient receives the secure email just like they receive conventional email. MULTIPLE RECIPIENT OPTIONS: Decryption is invisible if the partner or customer has an Affiliate Gateway, or is done in one easy step with a Plug-In or using our unique Send Anywhere option. Alternately, the recipient's S/MIME system can decrypt the email. SECURE REPLY: With our Secure Reply feature, recipients can safely reply to an encrypted message and engage in two-way confidentiality without any client-side software. The third component to Bluegate is to offer our customers the ability to securely use Instant Messenger (IM) with other physicians on our network. We call our product BLUEGATE CONSULT (TM). It enables doctors to securely consult with other doctors in real time. We own an OEM license for an Instant Messaging product named Sametime (TM) from IBM. In conjunction with such license, we are a member in IBM's Partner World for Developers program. IBM's product will be seamlessly integrated into our Gateway software. The primary capabilities of IBM's product are: - Instant Messaging - ability to communicate real-time with another party using different methods of encryption to secure communications depending on the need and feature being used - Instant Message Conferencing - ability to communicate real-time with multiple parties - Instant Meeting - ability to view screen contents and communicate real-time with multiple parties - Other features that may prove to be beneficial include audio/video conferencing. Lotus Sametime is by far the leading instant messaging, presence awareness and web conferencing application of choice for business. Osterman Research has reported that over two-thirds of the companies that have standardized on an instant messaging (IM) platform have selected Lotus Sametime and IDC has already credited Lotus Sametime as the market leader in Web conferencing. Over 60% of the Global Fortune 100 currently use Sametime to boost productivity and control costs, including 8 out of the top 10 worldwide commercial banks, 7 out of the top 10 worldwide automobile manufacturers, 4 out of the top 5 worldwide diversified financial institutions and 5 out of the top 10 US pharmaceuticals companies. IM is rapidly moving from teenagers' computer screens to their parents' in the workplace. International Data Corp., a Framingham, Mass., market-research firm, reported that by the end of 2002, 20 million people world-wide were using IM in businesses, and it predicts that figure will soar to 300 million by the end of 2005. A final, but vitally important, component to Bluegate is BLUEGATE SHIELD(TM) our security consulting division. Medical institutions face a complicated situation with the coming of HIPAA legislation. This act will soon require all organizations, such as hospitals, nursing homes, managed care organizations, and medical insurance companies that deal with private patient data in electronic form, to secure and transfer that data appropriately. But to comply with this federal act, an organization must first know where its electronic vulnerabilities are, and how to address them. 6 To answer such questions in this high-stakes environment, only premier expertise will suffice. For this reason, Bluegate offers network security consulting services to provide highly specialized, unmatched expertise largely gained from years of experience in military and classified backgrounds. These services focus on providing comprehensive, operational security for corporate IP networks. Instead of concentrating on policy-intensive exercises and reviews, Bluegate security consulting teams focus on the bits and bytes of the network-where the security vulnerabilities are, how to fix them, and what architectural changes the network should undergo to provide the level of security that patients want and organizations must provide. In a customized offering tailored toward the healthcare industry, and in conjunction with Bluegate's IT Solutions Group, we offer a comprehensive HIPAA Security Posture Assessment. By providing a network security-oriented "snapshot in time" and by taking the unique perspective of quantifying the current level of network security, Bluegate's Security Posture Assessment service can help an organization effectively and objectively understand the security state of the network and identify areas to improve. To reach its objective, Bluegate will offer services as cost-effectively as possible to physicians, ensuring that each expansion of the customer base is profitable. This can be accomplished by securing complementary revenues from firms that value these doctors as clients or that rely on broadband connectivity to create or enhance business partnerships with doctors. These firms would include, but not limited to, insurance companies, pharmaceutical companies, laboratories, transcription services, financial services, application service providers and others. When selling our solutions to the health care community, we use HIPAA compliance as a persuasive; but nevertheless, secondary marketing tool. Instead, what creates Bluegate's immediate value proposition to physicians to join our network is the economic benefit and single source of solutions that our total offering provides. On March 25, 2004, Memorial Hermann Health Net Providers (MHHNP), announced to its members, its exclusive contract with Bluegate as the newest member value program for all its member physicians. Bluegate will be MHHNP's preferred Internet provider to establish a secure data communication network among the MHHNP membership. The installation schedule will begin immediately and full implementation is expected to take the remainder of calendar year 2004. MHHNP has been working towards a goal of establishing a secure data communication network among our physician membership. This secure information platform (also called a virtual private network) will drive increased clinical integration within its physician organization and more tightly align MHHNP physicians with the necessary patient information shared with Memorial Hermann Hospital System. MHHNP/Bluegate's secure virtual private network provides a significant step towards ensuring HNP's physician network as compliant with the HIPAA Security regulations prior to the April 2005 deadline. In support of this goal, MHHNP will provide each MHHNP physician with up to $1000 of hardware and support services as a result of being a MHHNP member in good standing. Contracting with Bluegate enables MHHNP to seamlessly support its physician's use of the Memorial Hermann Care4 clinical information network, whether they are on campus, in their office, or at home. In practical terms, it is the difference between dealing with several IS support systems and/or internet service providers OR interfacing with a single point of contact when physicians -- are in need of internet and/or information systems support. MHHNP is an independent network of physicians. It was founded in 1982 and is affiliated with the Memorial Hermann Healthcare System. MHHNP is governed by its own board of directors, all of whom are physicians, as state law requires. MHHNP membership includes nearly 3,000 physicians covering 15 counties in Southeast Texas. The network's goals are to improve the overall quality of patient care and create efficiencies that help lower the cost of healthcare for patients and providers. 7 CONNECTIVITY Crescent's core Internet service offering includes such services as: Managed and un-managed Internet connectivity: Crescent offers a traditional un-managed service that allows the customer to have complete control over the Internet connection and router, as well as a fully managed service. The managed service provides proactive monitoring of the Internet connection and router, providing the best possible turn-around time for repair issues. Crescent's managed service also offers added values such as network utilization information and uptime statistics Enterprise VPN (Virtual, Private Network) Services: Crescent utilizes its own enterprise VPN concentrator that is installed at the core of the network to provide connectivity to multiple customer locations and access to corporate applications across the Internet. Managed Hosting Services: Crescent offers managed hosting services to customers that require "hands on" support of applications or services. Co-location Services: Crescent also provides "colo" space to customers that need only high availability and redundant access to customer supported applications and services. Crescent derives revenue from professional services performed by its engineering staff, relative to design, configuration, installation, monitoring, and maintenance. As part of a complete solution Crescent offers high-end network services such as monitoring and maintenance of sophisticated VPNs and security implementations firewalls. Unlike many service providers, Crescent's core network infrastructure is especially designed and equipped to offer these high-level managed services. HARDWARE As a component of connectivity solutions, Crescent sells, installs, and maintains network components such as routers, Ethernet switches, and load-balancing devices from vendors like Dell, Cisco, Netopia, etc. As part of its network security solutions, Crescent also sells and configures hardware components for corporate firewalls. When these hardware components are sold as part of an enterprise network solution, they typically drive additional revenue in the form of professional engineering services. PROFESSIONAL AND MANAGED SERVICES Crescent derives revenue from professional services performed by its engineers or outsourcing partners relative to design, configuration, installation, monitoring, and maintenance. As part of a complete solution Crescent offers high-end network services such as monitoring and maintenance of sophisticated VPNs and security implementations (firewalls). Unlike many Service Providers, Crescent's core network infrastructure is especially designed and equipped to offer these high-level managed services. NETWORK PARTNERS - ----------------- The Company benefits from leveraging the infrastructure of its network partners, which includeLevel (3) Communications, SBC Communications, Time-Warner, Covad Communications, New Edge Networks, and ElPaso Global. These partners allow Crescent to offer tier-1 facilities for hosting and collocation with multiple paths to the Internet, and to extend the reach of its network to nationwide coverage without significant additional investment in infrastructure. While these relationships are transparent to the end user, they allow the Company to focus on those service components that attract multiple customers and recurring revenue. Additionally, leads for enterprise network integration projects are generated from certain network partners whose motivation is to have their own circuits included as part of a value-added solution. 8 REGULATION - ---------- In general, internet and data services are not regulated at the federal level. ISPs are not required to pay access charges to local telephone companies. Similarly, local phone companies cannot impose any charges on the ISP, even if they are forced to pay reciprocal compensation for traffic delivered by an Incumbent Local Exchange Carrier (ILEC) or Competitive Local Exchange Carrier (CLEC) to that ISP, because the phone company has no direct billing relationship with the ISP. The FCC has a special exemption for ISPs, under which ISPs are treated as local phone customers and are exempt from interstate access charges paid by carriers. Thus, rather than paying higher access charges, ISPs simply purchase phone lines from the local phone company. COMPETITION - ----------- The Internet and data services market is extremely competitive, highly fragmented and has grown dramatically in recent years. The market is characterized by the absence of significant barriers to entry and the rapid growth in Internet usage among customers. Sources of competition are: - access and content providers, such as AOL, Microsoft , Earthlink and Time Warner, - local, regional and national Internet service providers, such as Megapath, EarthLink, XO Communications and Mindspring; - regional, national and international telecommunications companies, such as SBC, Worldcom and Allegiance Telecom. - On-line services offered by incumbent cable providers such as Time Warner. - DSL providers such as Covad. Most of our competitors have greater financial and other resources than we have, and there is no assurance that we will be able to successfully compete in our markets. RISK FACTORS - ------------- RISK FACTORS THAT MAY AFFECT OUR RESULTS OF OPERATIONS AND FINANCIAL CONDITION. In connection with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, set forth below are cautionary statements identifying important risk factors that could cause actual events or results to differ materially from any forward-looking statements made by or on behalf of us, whether oral or written. We wish to ensure that any forward-looking statements are accompanied by meaningful cautionary statements in order to maximize to the fullest extent possible the protections of the safe harbor established in the Private Securitites Litigation Reform Act of 1995. Accordingly, any such statements are qualified in their entirety by reference to, and are accompanied by, the following important factors that could cause actual events or results to differ materially from our forward-looking statements. You should carefully consider the risks described below before making an investment decision. The risks and uncertainties described below are not the only ones facing our company. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations. If any of the following risks actually occur, our business could be harmed. BECAUSE WE HAVE A LIMITED OPERATING HISTORY, OUR FUTURE SUCCESS IS UNCERTAIN We have a limited operating history for you to analyze or to aid you in making an informed judgment concerning the merits of an investment in our securities. We can provide no assurance that we will be able to generate significant revenue from our future operations. In addition, our business strategy requires some level of capital investment., which we do not currently have. We are actively seeking additional funding and have entered into a letter of intent to sell certain assets of the company so that we may concentrate on the development of our healthcare services business. 9 WE ARE DEPENDENT ON OUTSIDE SOURCES OF CAPITAL TO FUND OUR OPERATIONS We may have to consider alternatives that include: - Sale of additional securities that may have a significant dilutive impact on existing shareholders; - Reduction of key operating personnel that may have a negative impact on our long -term ability to operate; - Business combination or merger. The company is considering all alternatives to raise sufficient cash to operate and fund growth. WE EXPECT TO CONTINUE TO HAVE LOSSES AND WE MAY NEVER BECOME PROFITABLE We cannot assure you that we will ever achieve profitability or, if we ever achieve profitability, that it will be sustainable. Since inception, we have experienced an accumulated net loss of $6,703,378 We anticipate increased expenses as we continue to: - expand and improve our infrastructure; - expand our sales and marketing efforts; and - pursue additional industry relationships. As an emerging growth company, we do not have the operating experience to estimate what the extent of these expenditures will be at this time, but they will increase as we expand. OUR SUCCESS DEPENDS ON OUR ABILITY TO ATTRACT AND RETAIN KEY PERSONNEL Our success is substantially dependent on the continued service and performance of our senior management and key personnel. The loss of any key management could have a negative effect on our business. If we do lose any of these people, we will be required to hire new employees, which is time consuming and may not be possible due to the shortage of qualified personnel in our industry. Our future success also depends on our ability to attract, hire, and retain other highly skilled personnel. Competition for personnel in our industry is intense, and we may not be able to successfully attract, assimilate, or retain qualified personnel. OUR HARDWARE MAY BE DAMAGED, EITHER PHYSICALLY OR THROUGH COMPUTER VIRUSES Our success largely depends on the efficient and uninterrupted operation of our computer and communications hardware systems. Our hardware, located in a leased facility in Houston, Texas, is vulnerable to: - computer viruses; - electronic break-ins; and - physical vulnerability to damage or interruption from fire, long-term power loss, and telecommunications failures. These events could lead to delays, loss of data, or interruptions in service, which could subject us to liability or loss of business that may materially and adversely affect our ability to operate. 10 OUR MARKET IS INTENSELY COMPETITIVE The market for our services is rapidly evolving and intensely competitive, and we expect competition to intensify in the future. Barriers to entry are relatively low, and current and new competitors can initiate service at a relatively low cost using commercially available software. We currently or potentially compete with a number of other companies. The principal competitive factors in our market include the following: - system reliability; - customer service; - pricing; - brand recognition; Current and potential competitors have longer company operating histories, larger customer bases and greater brand recognition in other business and Internet markets than we do. Some of these competitors also have significantly greater financial, marketing, technical and other resources. Other broadband connectivity and web hosting companies may be acquired by, receive investments from or enter into other commercial relationships with larger, well established and well financed companies. As a result, some of our competitors with other revenue sources may be able to devote more resources to marketing and promotional campaigns, adopt more aggressive pricing policies and devote substantially more resources to attract customers than we are able to. Increased competition may result in reduced operating margins, loss of market share and diminished value of our brand. We may be unable to compete successfully against current and future competitors. Recently, however, the telecommunications landscape has changed to Crescent's favor with the ongoing failures of local and nationwide competition. Crescent has successfully capitalized on these competitors' failures by acquiring and obtaining stranded customer bases. WE MUST KEEP PACE WITH RAPID TECHNOLOGICAL CHANGE TO REMAIN COMPETITIVE The market in which we compete is characterized by rapidly changing technology, evolving industry standards, frequent new service and product introductions and enhancements and changing customer demands. These market characteristics are worsened by the emerging nature of the Internet and the apparent need of companies from a multitude of industries to offer Web-based products and services. Our future success therefore will depend on our ability to adapt to rapidly changing technologies, to adapt our services to evolving industry standards and to continually improve the performance, features and reliability of our service. Crescent has adapted quite well with the deployment of Bluegate and other higher value services to its existing as well as potential customers. Our failure to adapt to such changes would harm our business. OUR STOCK PRICE IS VOLATILE The market for our securities is highly volatile. The closing price of our common stock has fluctuated widely. The stock markets have in general, and technology companies in particular, experienced extreme stock price volatility. It is likely that the price of our common stock will continue to fluctuate widely in the future. In addition, the following factors, among others, may cause the price of our common stock to fluctuate: - sales of large amounts of our common stock by current shareholders; - new legislation or regulation; - variations in our revenue, net income and cash flows; - the difference between our actual results and the results expected by investors and analysts; - announcements of new service offerings, marketing plans or price reductions by us or our competitors; - technological innovations, and - mergers, acquisitions or strategic alliances. 11 EMPLOYEES - --------- At December 31, 2003 we had 20 full time employees of whom four are in management. None of our employees are represented by a labor union, and we consider relations with our employees to be good. ITEM 2. DESCRIPTION OF PROPERTY Our headquarters are located in Houston, Texas at a leased facility that is approximately 6,032 square feet. The square footage will increase to 7,161 in April 2004 through October 2004. It will increase to 8,932 in November 2004 through 2008. Rent for 2003 was $7,288.67. It will increase to $8,652.88 in April 2004. In November rent will increase to $10,792.83. ITEM 3. LEGAL PROCEEDINGS None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None 12 PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS Our common stock trades under the symbol "CCES" on the OTC Electronic Bulletin Board. The market for our common stock on the OTC Electronic Bulletin Board is limited, sporadic, and highly volatile. The following table sets forth the high and low bid prices per share of our common stock for the years ended December 31, 2003 and 2002. HIGH LOW FISCAL 2002 First Quarter $0.74 $0.20 Second Quarter $1.65 $0.30 Third Quarter $0.95 $0.33 Fourth Quarter $0.75 $0.26 FISCAL 2003 ----------- First Quarter $0.58 $0.20 Second Quarter $0.33 $0.19 Third Quarter $0.35 $0.17 Fourth Quarter $0.47 $0.17 Our share price as of March 31, 2003 was $0.14. The number of outstanding shares at December 31, 2003 was 37,657,424 It is our present policy not to pay cash dividends and to retain future earnings to support our growth. Any payment of cash dividends in the future will be dependent upon the amount of funds legally available, our earnings, financial condition, capital requirements, and other factors that we may deem relevant. We have not paid any dividends during the period since inception July 23, 2001 through December 31, 2003 and we do not anticipate paying any cash dividends in the foreseeable future. RECENT SALES OF UNREGISTERED SECURITIES The Company entered into various agreements to sell common stock under Regulation S to foreign investors. Among other things, the agreements provided for the company to issue Regulation S stock at 35% of the average bid price of the stock as priced on the U.S. Exchange. During the 4th quarter 2003, we issued the following shares:
DATE ISSUED TITLE OF SECURITIES SHARES PRICE October 2, 2003 Common Stock 309,838 $ 18,130 October 14, 2003 Common Stock 392,000 19,992 October 17, 2003 Common Stock 177,500 9,052 November 4, 2003 Common Stock 113,304 8,629 November 11, 2003 Common Stock 362,500 17,580 November 19, 2003 Common Stock 3,073,084 157,196 --------- -------- Total 4,428,226 $230,579 ========= ========
13
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS FOR FISCAL YEAR ENDED DECEMBER 31, 2003 - ------------------------- --------------------------- --------------------------- --------------------------- Number of Securities remaining available for Number of Securities to be future issuance under issued upon exercise of Weighted-average price of equity compensation outstanding options, outstanding options plans(excluding securities Plan Catagory warrants and rights warrants and rights reflected in column (a) - ------------------------- --------------------------- --------------------------- --------------------------- (a) (b) (c) - ------------------------- --------------------------- --------------------------- --------------------------- Equity compensation plans approved by security holders None None 450,000 - ------------------------- --------------------------- --------------------------- --------------------------- Equity compensation plans not approved by security holders 7,801,600 $ 0.19 - - ------------------------- --------------------------- --------------------------- --------------------------- TOTAL 7,801,600 $ 0.19 450,000 - ------------------------- --------------------------- --------------------------- ---------------------------
For information relating to equity compensation see Financial Statement Note 9. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS FORWARD-LOOKING STATEMENT AND INFORMATION The Company is including the following cautionary statement in this Form10-KSB to make applicable and take advantage of the safe harbor provision of the Private Securities Litigation Reform Act of 1995 for any forward-looking statements made by, or on behalf of, the Company. Forward-looking statements include statements concerning plans, objectives, goals, strategies, expectations, future events or performance and underlying assumptions and other statements which are other than statements of historical facts. Certain statements contained herein are forward-looking statements and, accordingly, involve risks and uncertainties which could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements. The Company's expectations, beliefs and projections are expressed in good faith and are believed by the Company to have a reasonable basis, including without limitations, management's examination of historical operating trends, data contained in the Company's records and other data available from third parties, but there can be no assurance that management's expectations, beliefs or projections will result or be achieved or accomplished. In addition to other factors and matters discussed elsewhere herein, the following are important factors that, in the view of the Company, could cause actual results to differ materially from those discussed in the forward-looking statements: the ability of the Company's management to operate on a global basis; the ability of the Company to effectuate and successfully operate acquisitions, and new operations; the ability of the Company to obtain acceptable forms and amounts of financing to fund current operations and planned acquisitions; the political, economic and military climate in nations where the Company may have interests and operations; the ability to engage the services of suitable consultants or employees in foreign countries; and competition and the ever-changing nature of the home automation industry. The Company has no obligation to update or revise these forward-looking statements to reflect the occurrence of future events or circumstances. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The Company's discussion and analysis of its financial condition and results of operations are based upon its consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, the Company evaluates its estimates. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. These estimates and assumptions provide a basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions, and these differences may be material. 14 The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements. REVENUE RECOGNITION Revenue from broadband telecommunications services are recognized based upon contractually determined monthly service charges to individual customers. Telecommunications services are billed in advance and, accordingly, revenues are deferred until the period in which the services are provided. At December 31, 2003, deferred service revenue was $193,038. STOCK-BASED COMPENSATION Financial Accounting Standard No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123") established financial accounting and reporting standards for stock-based employee compensation plans. It defined a fair value based method of accounting for an employee stock option or similar equity instrument and encouraged all entities to adopt that method of accounting for all of their employee stock compensation plans and include the cost in the income statement as compensation expense. However, it also allows an entity to continue to measure compensation cost for those plans using the intrinsic value based method of accounting prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees". The Company accounts for compensation cost for stock option plans in accordance with APB Opinion No. 25. The following description of business, our financial position and our results of operations should be read in conjunction with our Financial Statements and the Notes to Financial Statements contained in this report on Form 10-KSB. INTRODUCTION Crescent Communications, Inc., headquartered in Houston, Texas, is a Value Added Network (VAN) provider that develops and deploys specific technological Internet related solutions for businesses. Crescent has provided such services for small to medium enterprises for over five years. Our mission statement is to provide value driven, premium connectivity solutions for our customers. In 2001, Crescent acquired the assets and customer base of a Cisco-Powered Network(TM) as its core network infrastructure. The network is physically co-located in Houston using existing fiber backbone networks of Level3 Communications and WorldCom. Backbone Internet connectivity is delivered over the nation-wide infrastructure and ATM capabilities of network partners such as New Edge Networks, Covad Communications, SBC Corporation, Time Warner, ElPaso Global Networks, and UUnet. At present, Crescent supports approximately 1,000 businesses in the Texas market place, still only a small percentage of network capacity is being used. Our revenues have grown substantially since the acquisition, despite the simultaneous telecommunications industry "meltdown". Telecommunications companies are disappearing at a previously unheard of rate. Crescent is one of the few strong survivors in this industry shakeout and continues to increase market share in the Texas region. Crescent acquired a number of its approximately 1,000 business customers from a variety of providers exiting the market. Because of Crescent's under utilized network capacity, the company can continue to add customers at a steadily declining cost as existing network capacity is absorbed. Crescent's management team carefully identified, formulated and is implementing a compelling business plan and communications strategy to take full advantage of the opportunities that current market conditions present. At the center of this plan are two strategic initiatives that leverage the Company's current business, technological expertise and management experience. The first is to continue to profitably develop our core business by providing connectivity and information technology solutions to small to medium enterprises, under our Crescent brand name. The second initiative is to develop, on top of our profitable core Crescent business, a medical vertical market under the Bluegate brand name, selling connectivity and medical related applications to medical organizations of all sizes. 15 GOING CONCERN ISSUE During the year ended December 31, 2003 and during the period from inception, July 23, 2001, to December 31, 2002 the Company has been unable to generate cash flows sufficient to support its operations and has been dependent on debt and equity raised from qualified individual investors. During the year ended December 31, 2002 and the period from inception, July 23, 2001 to December 31, 2001, the Company experienced negative financial results as follows.
2003 2002 2001 Net loss $(2,543,629) $(2,946,382) $(1,213,367) Negative cash flow from operations (1,423,363) (1,833,837) (396,500) Negative working capital (1,743,942) (1,276,547) (1,072,959) Stockholders' deficit (1,140,379) (472,332) (430,687)
These factors raise substantial doubt about the Company's ability to continue as a going concern. The Company has supported current operations by: 1) raising additional operating cash through private placements of its common stock, 2) issuing debt convertible to common stock to certain key stockholders and 3) issuing stock and options as compensation to certain employees and vendors in lieu of cash payments. These steps have provided the Company with the cash flows to continue its business plan, but have not resulted in significant improvement in the Company's financial position. Management is considering alternatives to address its critical cash flow situation that include: - Raising capital through additional sale of its common and preferred stock and/or debt securities. - Merging the Company with another business that compliments current activities. - Reducing cash operating expenses to levels that are in line with current revenues. Reductions can be achieved through the issuance of additional common shares of the Company's stock in lieu of cash payments to employees or vendors. These alternatives could result in substantial dilution of existing stockholders. There can be no assurances that the Company's current financial position can be improved, that it can raise additional working capital or that it can achieve positive cash flows from operations. The Company's long-term viability as a going concern is dependent upon the following: - The Company's ability to locate sources of debt or equity funding to meet current commitments and near term future requirements. - The ability of the Company to achieve profitability and ultimately generate sufficient cash flow from operations to sustain its continuing operations. Based on the above considerations, the Company's independent accountants included an explanatory paragraph in their reports of independent accountants, at both December 31, 2003 and 2002, addressing the uncertainty about the Company's ability to continue as a going concern. RESULTS OF OPERATIONS - - YEAR ENDED DECEMBER 31, 2003 AS COMPARED TO THE YEAR ENDED DECEMBER 31, 2002 For the year ended December 31,2003, the Company's revenue from connectivity systems, web site hosting, engineering services and hardware sales was $2,235,142 versus $1,735,524 for the year ended December 31, 2002. This increase of $499,618 is a 29 percent improvement and is primarily attributable to higher connectivity revenue helped to a lesser degree by the roll-out of Bluegate (TM). The Company has realized improvement in the areas of Engineering and Product sales throughout 2003. Bluegate (TM) is our branded HIPAA compliant broadband digital connectivity offering for health care providers. 16 Cost of sales for the year ended December 31,2003 was $1,638,956 versus $1,357,120 for the comparable 2002 period. The increase is due to the higher interconnect fees and product costs associated with the larger customer base being served. The gross margin for the year just ended is 27% as compared with the 22% gross margin for the year ended December 31,2002. Selling, general and administrative expenses of $3,100,122 for the year ended December 31,2003, represents a decrease of $42,609 as compared to the previous year. The moderate decrease is attributable to lower costs associated with stock based compensation slightly offset by higher direct payroll expenses. Interest expense is lower in 2003 by $142,362 due almost entirely to the cost associated with convertible notes issued to related parties in 2002. The discounts on the notes associated with the conversion feature resulted in the entire stated amount of the notes of $134,000 being charged to interest expense. No significant capital expenditures were made during the period. PLAN OF OPERATIONS, LIQUIDITY AND CAPITAL RESOURCES At December 31, 2003 the Company was in a book overdraft position of $63,705. Operations since inception have been funded by the capital committed as part of the Agreement, convertible debt provided by stockholders, sales of common stock, vendor financing and internal operations. The Company is seeking additional capital to fund expected future operating costs until cash flow break even can be attained. We believe funding alternatives include public or private offerings of equity securities, debt or convertible debt securities or other sources. Stockholders should assume that any additional funding that we obtain would cause substantial dilution to current stockholders. If we are unable to raise additional funding, we may have to limit our operations to an extent that we cannot presently determine. The effect on our business may include the sale of certain assets, the reduction or curtailment of new customer acquisition, reduction in the scope of current operations or the cessation of business operations. We can make no assurance that we will be able to successfully overcome our liquidity problems or ultimately achieve profitability. Our ability to achieve profitability will depend upon our ability to raise additional operating capital, continued growth in demand for connectivity services and our ability to execute and deliver high quality, reliable connectivity services. We have experienced rapid sales growth since inception as many connectivity providers have exited the marketplace and we have moved quickly to serve their customer bases. We anticipate more connectivity provider churn and believe we will continue to successfully secure these un-served customer bases. The report from our independent accountants, included in this Annual Report on Form 10-KSB, includes an explanatory paragraph that describes substantial doubt concerning our ability to continue as a going concern, without continuing additional contributions to capital. See "Consolidated Financial Statements - - Report of Independent Accountants " included elsewhere in this annual report on Form 10-KSB. ACCOUNTING MATTERS AND RECENTLY ISSUED PRONOUNCEMENTS In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," which addresses financial accounting and reporting for costs associated with exit or disposal activities and supersedes Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. In addition, SFAS No. 146 establishes that fair value is the objective for initial measurement of the liability. SFAS No. 146 is effective for exit or disposal activities initiated after December 31, 2002, but early adoption is permitted. The implementation of SFAS No. 146 is not expected to have any impact on the Company's results of operations or financial position. 17 In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock Based Compensation", which amends SFAS No. 123 to provide alternative methods of transaction for an entity that voluntarily changes to the fair value method of accounting for stock based employee compensation. It also amends the disclosure provisions of SFAS No. 123 to require prominent disclosure about the effects on reported net income of an entity's accounting policy decisions with respect to stock based employee compensation. Finally, SFAS No. 148 amends APB Opinion No. 28, "Interim Financial Reporting", to require disclosure of those effects in interim financial statements. SFAS No. 148 is effective for fiscal years ended after December 15, 2002, but early adoption is permitted. The Company will continue to follow the provisions of APB Opinion No. 25 in recognizing employee stock-based compensation; however, the Company began following the disclosure requirements of SFAS No. 148 in January 2003. In January 2003, the FASB issued FASB Interpretation (FIN) No. 46 "Consolidation of Variable Interest Entities." FIN No. 46 requires a company to consolidate a variable interest entity ("VIE") if the company has variable interests that give it a majority of the expected losses or a majority of the expected residual returns of the entity. Prior to FIN No. 46, VIEs were commonly referred to as SPEs. FIN No. 46 is effective immediately for VIEs created after January 31, 2003. This interpretation did not have a material effect on the Company's financial condition or results of operations. In April 2003, the FASB issued SFAS No. 149, Amendment to Statement No. 133 on Derivative Instruments and Hedging Activities. This statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under SFAS No. 133. The changes in SFAS No. 149 improve financial reporting by requiring that contracts with comparable characteristics be accounted for similarly. Those changes will result in more consistent reporting of contracts as either derivatives or hybrid instruments. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, except in certain instances detailed in the statement, and hedging relationships designated after June 30, 2003. Except as otherwise stated in SFAS No. 149, all provisions should be applied prospectively. The adoption of this statement did not have a material effect on the Company's financial condition or results of operations. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150, which is effective at the beginning of the first interim period beginning after June 15, 2003, must be implemented by reporting the cumulative effect of a change in accounting principle for financial instruments created before the issuance date of the statement and still existing at the beginning of the interim period of adoption. The statement requires that a financial instrument which falls within the scope of the statement to be classified and measured as a liability. The following financial instruments are required to be classified as liabilities: (1) shares that are mandatorily redeemable, (2) an obligation to repurchase the issuer's equity shares or one indexed to such an obligation and that requires or may require settlement by transferring assets and (3) the embodiment of an unconditional obligation that the issuer may or may not settle by issuing a variable number of equity shares if, at inception, the monetary value of the obligation is based on certain measurements defined in the statement. The adoption of this statement did not have a material effect on the Company's financial condition or results of operations. OFF-BALANCE SHEET ARRANGEMENTS None ITEM 7. CONSOLIDATED FINANCIAL STATEMENTS The financial information required by this item is included as set forth beginning on Page F-1. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None 18 ITEM 8A CONTROLS AND PROCEDURES The Company evaluated the effectiveness of the design and operation of its disclosure controls and procedures as of the end of the period covered by this report. The evaluation was carried out under the supervision of and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer. Based on the evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective in timely alerting them to material information relating to the Company, including its consolidated subsidiaries, required to be included in reports the Company files with or submits to the SEC under the Securities Exchange Act of 1934. There have been no changes in the Company's internal control over financial reporting that occurred during the fourth quarter of fiscal year 2003 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. Manfred Sternberg, our Chief Executive Officer and Michael McDonald, our Chief Financial Officer, have concluded that our disclosure controls and procedures are appropriate and effective. They have evaluated these controls and procedures as of a date within 90 days of the filing date of this report on Form 10-KSB. There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. 19 PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT The following is a list of our directors and executive officers as of December 31, 2003, including such person's name, age, positions and offices held with Crescent Communications, Inc., the period served in such position and the prior employment of such person: NAME AGE POSITION ----- ---- --------- Manfred Sternberg 43 Director and Chief Executive Officer Robert Davis 46 Director Jeff Olexa 45 Director Gilbert Gertner 79 Director William Koehler 38 Director Mike McDonald 56 Chief Financial Officer Manfred Sternberg, age 43, has been Chief Executive Officer and a director since inception. Prior to founding Crescent Communications, Mr. Sternberg was an investor and board member of several broadband providers in Houston, Texas. He is a graduate of Tulane University and Louisiana State University School of Law. Mr. Sternberg is licensed to practice law in Texas, Louisiana and the District of Columbia and is Board Certified in Consumer and Commercial Law by the Texas Board of Legal Specialization. Robert Davis, age 46, has been a Director since July 2001. Mr. Davis was the founder of Solis Communications, Inc., which was acquired by the Company in July 2001. Mr. Davis is also involved in the energy industry, having founded several successful companies including, Upland Energy, Inc. in 1985, MPH Production Co. in 1988, and. Laguna Rig Service, Inc. in 1999. Mr. Davis has been the President of Upland Energy, Inc. since its incorporation and has primarily been involved in the oil and gas business since that time. Mr. Davis received a BBA in Finance from Texas A&M University in 1980. Jeff Olexa, age 45, has been a director since inception. He has 18 years experience in Technical and Consultative selling in the Telecommunications and Internet industries. Mr. Olexa was previously employed with CXR Telecom, and National Business Group, a nation-wide integration company where he served as Regional Manager over the South Central Region. Prior to his commercial experience, Mr. Olexa was in the armed forces where he maintained an Air Force telecommunication facility. Gilbert Gertner is a private investor and co-founder of a number of industrial, real estate development and high-tech companies. Mr. Gertner is known for his philanthropic endeavors including the construction of schools and medical facilities in developing countries. Mr. Gertner currently serves as Chairman of the Board and CEO of Worldwide Petromoly, Inc., a company with which he has been associated since 1993. During the period from 1994 to 1997 Mr. Gertner served as a Director of Citadel Computer Systems and prior to 1996, Mr. Gertner also served as a Director of Data Software Systems, Inc. 20 William Koehler is a co-founder and has been the President/CEO of Trilliant Corporation since 2000. From 1992 until 2000, Mr. Koehler was the Vice President of Business Development of an Electrical Engineering firm that specialized in the assessment, design and project implementation of technology efforts for their clients. Trilliant is a Technology Consulting firm serving Fortune 500 companies, K-12 and higher education and companies with specialized IT applications. Mr. Koehler has a BBA from Texas A&M in Business Analysis, with a specialization in Production Operation Management. Mr. Koehler has spent the last 15 years of his career working in the IT and Professional Services industry and has a broad range of skills. His experience ranges from the design and management of the implementation of multination voice and data networks to the needs assessment and the development of a Global technology strategy for large multinational corporations. The customers that Mr. Koehler has worked with reads like the who's who of the fortune 500: Pennzoil, American General Insurance, Texaco, British Petroleum, Brown and Root, Enron and many others. At the same time he has worked with dozens of school districts to ascertain and assist in the development of more cost effective and robust systems in an attempt to assist these districts to spread technology out to the classrooms and help children learn. Mr. Koehler has spoken at many state and local events about technology and continues to look for opportunities to continue this effort Mike McDonald, age 56, became Chief Financial Officer in December 2002. Mr. McDonald has over 27 years of experience in the medical administration field. He has managed several physician groups with a range of revenues over $12 million and for 10 years was C.O.O. for Harris County Medical Society, Medserv, Inc. Harris County Medical Society is the largest county society in the country. During his time at the medical society he helped raise over $6 million as a registered agent for a stock offering to start an insurance company owned by physicians, he helped coordinate a joint venture to do verification of credentials of physicians, administered the production of a pictorial directory with over 13,000 distribution in Houston, produced two trade shows per year for the physician membership, and was responsible for reviewing and recommending products and services for endorsement by the Harris County Medical Society. COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934: Section 16(a) of the Securities Exchange Act of 1934 requires our directors and executive officers, and persons who own beneficially more than ten percent of our common stock, to file reports of ownership and changes of ownership with the Securities and Exchange Commission. Based solely on the reports we have received and on written representations from certain reporting persons, we believe that the directors, executive officers, and greater than ten percent beneficial owners have complied with all applicable filing requirements. Code of Ethics - ---------------- The Company has adopted a Code of Ethics for its Principal Executive and Senior Financial Officers which is attached hereto as Exhibit 14.1. ITEM 10. EXECUTIVE COMPENSATION The following table sets forth the annual compensation of our executive officers and certain other executives(for accounting purposes the company commenced operations in 2001): 21
SUMMARY COMPENSATION TABLE Annual Compensation Long Term Compensation --------------------- -------------------------- Awards Payouts All Other Securities Other Name and Annual Restricted Underlying LTIP Com- Principal Compen- Stock Options/ Pay- pen- Position Year Salary Bonus sation Awards SARs outs sation Manfred Sternberg CEO, Director 2003 $180,000 $ -0- $ -0- -0- -0- $ -0- $ -0- 2002 $ 94,800 $ -0- $ -0- -0- -0- $ -0 $34,000(1) 2001 $ 72,000 $ -0- $ -0- -0- -0- $ -0- $66,185(1) David Loeschner President 2003 $120,000 $ -0- $ -0- -0- -0- $ -0- $ -0- 2002 $ -0- $ -0- $ -0- -0- -0- $ -0- $ -0- 2001 $ -0- $ -0- $ -0- -0- -0- $ -0- $ -0- Jeff Olexa VP Director 2003 $144,000 $ -0- $ -0- -0- -0- $ -0- $ -0- 2002 $172,304 $ -0- $ -0- -0- -0- $ -0- $ -0- 2001 $ 74,398 $ -0- $ -0- -0- -0- $ -0- $ -0- Mike McDonald CFO 2003 $ 77,400 $ -0- $ -0- -0- -0- $ -0- $ -0- 2002 $ -0- $ -0- $ -0- -0- -0- $ -0- $ -0- 2001 $ -0- $ -0- $ -0- -0- -0- $ -0- $ -0- Note (1): Value of the note payable conversion feature for funds loaned to the Company by Mr. Sternberg. The value is based on the difference in the common stock conversion price and the market value at the date of the loan.
INDIVIDUAL GRANTS - ----------------- POTENTIAL REALIZABLE VALUE NUMBER OF % OF TOTAL AT ASSUMED ANNUAL RATES SECURITIES OPTIONS OF STOCK PRICE APPRECIATION UNDERLYING GRANTED TO EXERCISE OR OPTION TERM(2) OPTIONS EMPLOYEES IN PRICE EXPIRATION ---------------------------------- NAME GRANTED (#) FISCAL YEAR ($/SHARE) DATE 5% 10% - ----------------- ----------- ------------- ---------- ---------- --------------- ---------------- Manfred Sternberg 0 0 N/A N/A $ 0 $ 0 David Loeschner . 1,000,000 37% $ 0.10 2008 $ 180,000 $ 254,300 650,000 24% $ 0.20 2008 $ 52,520 $ 100,295 Jeff Olexa. . . . 0 0 N/A N/A $ 0 $ 0 Mike McDonald . . 100,000 4% $ 0.30 2008 $ 0 $ 8,080 350,000 13% $ 0.20 2008 $ 28,280 $ 54,005
As of December 31, 2003, stock options issued to employees aggregated 4,470,800 shares with an exercise price of $0.10 to $.30 per share. Of such amount, 3,853,800 are vested at December 31, 2003 and the remainder vest in October 2004. The value of outstanding options is $ 364,446 at December 31, 2002. None of these options were issued to executive management. 22 The Company issued warrants aggregating 2,330,800 shares to certain non-employees that remain outstanding as of December 31, 2003. The warrants have exercise prices ranging from $0.10 to $0.75 per share. At December 31, 2003, 2,330,800 warrants are vested . The value of outstanding warrants is $61,700 at December 31, 2003
AGGREGATED OPTION EXERCISES IN FISCAL 2003 AND DECEMBER 31, 2003 OPTION VALUES NUMBER OF SECURITIES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED SHARES OPTIONS AT FISCAL YEAR-END IN-THE-MONEY OPTIONS AT ACQUIRED VALUE (SHARES) FISCAL YEAR-END($) --------------------------- --------------------------- ON EXERCISE REALIZED NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ---- ------------ --------- ----------- -------------- ----------- -------------- Manfred Sternberg . 0 0 0 0 -0- -0- David Loeschner . . 0 0 1,000,000 650,000 -0- -0- Jeff Olexa. . . . . 0 0 0 0 -0- -0- Mike McDonald . . . 0 0 100,000 350,000 -0- -0-
EMPLOYMENT AGREEMENTS None. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth, as of March 31, 2004 the number and percentage of outstanding shares of our common stock owned by: - - - each person known to beneficially own more than 5% of its outstanding common stock; - - - each director; - - - each named executive officer; and - - - all executive officers and directors as a group. 23
NAME AND NUMBER OF SHARES OF COMMON PERCENTAGE OF ADDRESS OF OWNER STOCK BENEFICIALLY OWNED BENEFICIAL OWNERSHIP Manfred Sternberg, 8,360,450 18.1%(1) 701 N. Post Oak, Suite 630 Houston, Texas 77024 Robert Davis 13,621,050 26.6%(2) 701 N. Post Oak, Suite 630 Houston, Texas 77024 Jeff Olexa 7,284,000 16.2%(3) 701 N. Post Oak, Suite 630 Houston, Texas 77024 David Loeschner 1,650,000 4.2%(4) 701 N. Post Oak, Suite 630 Houston, TX 77024 Mike McDonald 450,000 1.2%(5) 701 N. Post Oak, Suite 630 Houston, Texas 77024 Yolana Partnership, Ltd. 2,608,000 6.5%(6) 701 N. Post Oak, Suite 350 Houston, TX 77024 George Speaks 7,525,000 16.7%(7) 701 N. Post Oak, Suite 630 Houston, Texas 77024 All executive officers and directors as a group (6) 31,365,500 45.4%(8) Note 1: Of the 8,360,450 shares beneficially owned by Mr. Sternberg, 6,174,400 are common shares issuable upon the conversion of preferred shares, 2,003,700 are common shares issuable upon conversion of certain notes payable at Mr. Sternberg's election, and 182,350 shares are owned by Mr. Sternberg. Note 2: Of the 13,621,050 shares beneficially owned by Mr. Davis, 9,202,600 are common shares issuable upon the conversion of preferred shares, 4,000,000 are common shares issuable upon conversion of certain notes payable at Mr. Davis's election, and 418,450 shares are owned by Mr. Davis. Note 3: The 7,284,000 shares beneficially owned by Mr. Olexa are common shares issuable upon the conversion of preferred shares, of which preferred shares, Mr. Olexa granted an option for the number of preferred shares convertible into an aggregate of 3,109,000 shares of common stock to Messrs. Sternberg and Davis Note 4: Includes 1,000,000 shares underlying options that are immediately exerciseable. Note 5: Includes 100,000 shares underlying options that are immediately exerciseable. Note 6: Yolana Partnership, Ltd. Is the record owner of these shares. 24 Note 7: Of the 7,525,000 shares beneficially owned by Mr. Speaks, 7,525,000 are common shares issuable upon the conversion of preferred shares. Note 8: Of the 31,365,500 shares beneficially owned by Mr.'s Sternberg, Davis, Loeschner, McDonald, and Olexa, 22,661,000 are common shares issuable upon the conversion of preferred shares, 6,003,700 are common shares issuable upon conversion of certain notes payable, 600,800 shares are owned by Mr. Sternberg and Mr. Davis, and 1,650,000 are shares underlying Mr. Loeschner's options and 450,000 underlying Mr. McDonald's options.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS During the years ended December 31, 2003 and 2002, the Company engaged in various related party transactions as follows: - During the year ended December 31, 2002, Manfred Sternberg and Robert Davis, officer and/or primary stockholders of the Company or companies which they control made loans to the Company under convertible debt agreements totaling $166,185. These notes bear interest at a stated rate of 8% per year and are due on demand. If demand is not made by the note holders, the final maturity dates of these notes will occur at various dates through October Interest is due monthly. These notes provide the holders an option for immediate conversion into shares of the Company's common stock at a conversion price of $0.05 per share. The conversion price at the date these notes were negotiated was below the fair value of the Company's common stock. Accordingly, these notes were issued at discounts equal to their entire stated value and because the notes were immediately convertible, the discounts were charged directly to interest expense at the date the notes were funded, resulting in an effective annual interest rate exceeding 100% in the year of origination. The total amount due under convertible notes payable to related parties at December 31, 2003 is $262,710. - During the year ended December 31, 2002, the Company entered into a factoring arrangement with Mr. Sternberg on its accounts receivable. The amount due under this factoring arrangement was $34,265 at December 31, 2002. This factoring arrangement called for interest at 10 percent and was repaid in the year ended December 31, 2003. - During the period from inception to December 31, 2001, the company entered into a $150,000 line of credit agreement with Manfred Sternberg and Robert Davis. The total amount due under this line of credit agreement at December 31, 2003 is $100,756. This line of credit is due on demand and bears interest at the rate of prime (4.00%) at December 31, 2003 plus 1.25%. - During the years ended December 31, 2003 and 2002, the Company incurred interest expenses on related party debt of approximately $35,000 and $163,000,respectively. - In October 2001, Mr. Davis and a commonly controlled company loaned the Company $100,000 to fund operating expenses. The loan is convertible at Mr. Davis's election into common stock at a conversion price of $.05 per share. The Company recognized interest expense of $100,000 related to the discount between the conversion price and the common stock's current market price. In March 2002 Mr. Davis loaned the Company $100,000 to fund operating expenses under the same terms and conditions as his previous loan. - In January and February 2002, Mr. Sternberg loaned the Company $34,000. The loan is convertible at Mr. Sternberg's election into common stock at a conversion price of $.05 per share terms, similar to conditions of his previous loan. 25 PART IV ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K (a.) The following exhibits are to be filed as part of this Form 10-KSB: 14.1 Code of Ethics 31.1 Certification of Chief Financial Officer of Crescent Communications, Inc. required by Rule 13a-14(l) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of Chief Executive Officer of Crescent Communications, Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and Section 1350 of 19 U.S.C. 63. 32.2 Certification of Chief Financial Officer of Crescent Communications, Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and Section 1350 of 19 U.S.C. 63. (b.) Reports on Form 8-K None ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES AUDIT FEES Ham, Langston & Brezina, L.L.P. billed us in the aggregate amount of $24,000 and $21,342 for professional services rendered for their audit of our annual financial statements and their reviews of the financial statements included in our Forms 10-KSB for the years ended December 31, 2003 and December 31, 2002, respectively. AUDIT-RELATED FEES Ham, Langston & Brezina, L.L.P. did not bill us for, nor perform professional services rendered for assurance and related services that were reasonably related to the performance of audit or review of the Company's financial statements for the years ended December 31, 2003 and December 31, 2002. FINANCIAL INFORMATION SYSTEMS DESIGN AND IMPLEMENTATION FEES For the fiscal years ended December 31, 2003 and December 31, 2002, Ham, Langston & Brezina, L.L.P. did not bill us for, nor perform, any financial information systems design or implementation. For the fiscal years ended December 31, 2003 and December 31, 2002, we were not billed for professional services from any other accounting firm for information systems design or implementation. TAX FEES Ham, Langston & Brezina, L.L.P. billed us in the aggregate amount of $1,500 and $1,500 for professional services rendered for tax related services for the years ended December 31, 2003 and December 31, 2002, respectively. ALL OTHER FEES We were not billed for any other professional services for the fiscal year ended December 31, 2003. AUDITOR INDEPENDENCE Our Board of Directors considers that the work done for us in the year ended December 31, 2003 by Ham, Langston & Brezina, L.L.P. is compatible with maintaining Ham, Langston & Brezina, L.L.P.'s independence. 26 AUDITOR'S TIME ON TASK All of the work expended by Ham, Langston & Brezina, L.L.P. on our December 31, 2003 audit was attributed to work performed by Ham, Langston & Brezina, L.L.P.'s full-time, permanent employees. SIGNATURES In accordance with the requirements of Section 13 of 15(d) of the Exchange Act, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on April 14, 2004. Crescent Communications, Inc. By: /s/ Manfred Sternberg ------------------------ Manfred Sternberg Director, Chief Executive Officer, Treasurer and Secretary Pursuant to the requirements of the Exchange Act, this report has been signed below by the following persons in the capacities and on the dates indicated: SIGNATURE TITLE DATE - --------- ----- ---- /s/ Manfred Sternberg Director, April 14, 2004 - ----------------------- Chief Executive Officer, Manfred Sternberg Treasurer and Secretary /s/ Robert E. Davis Director April 14, 2004 - ---------------------- Robert E. Davis /s/ Jeff Olexa Director and Chief April 14, 2004 - ---------------- Technical Officer Jeff Olexa /s/ Mike McDonald Chief Financial Officer April 14, 2004 - ------------------- Mike McDonald /s/ Gilbert Gertner Director April 14, 2004 - ------------------- Gilbert Gertner /s/ William Koehler Director April 14, 2004 - ------------------- William Koehler 27 CRESCENT COMMUNICATIONS, INC. __________ CONSOLIDATED FINANCIAL STATEMENTS WITH REPORT OF INDEPENDENT ACCOUNTANTS FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002 F-1 CRESCENT COMMUNICATIONS, INC. TABLE OF CONTENTS __________ PAGE ---- Report of Independent Accountants F-3 Consolidated Financial Statements: Consolidated Balance Sheet as of December 31, 2003 F-4 Consolidated Statement of Operations for the years ended December 31, 2003 and 2002 F-5 Consolidated Statement of Stockholders' Deficit for the years ended December 31, 2003 and 2002 F-6 Consolidated Statement of Cash Flows for the years ended December 31, 2003 and 2002 F-8 Notes to Consolidated Financial Statements F-9 F-2 REPORT OF INDEPENDENT ACCOUNTANTS ------------------------------------ To the Stockholders and Directors Crescent Communications, Inc. We have audited the accompanying consolidated balance sheet of Crescent Communications, Inc. as of December 31, 2003, and the related statements of operations, stockholders' deficit and cash flows for each of the two years in the period then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based upon our audits. We conducted our audits 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 consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Crescent Communications, Inc. as of December 31, 2003, and the results of its operations and its cash flows for each of the two years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As shown in the consolidated financial statements and discussed in Note 2, the Company has incurred recurring losses from operations, is in a book overdraft, negative working capital and stockholders' deficit position at December 31, 2003, and is dependent on outside sources of funding for continuation of its operations. These factors raise substantial doubt about the Company's ability to continue as a going concern. Management's plans with regard to these matters are also discussed in Note 2. These consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ Ham, Langston & Brezina, L.L.P. Houston, Texas March 28, 2004, except for Note 11 as to which the date is April 7, 2004 F-3
CRESCENT COMMUNICATIONS, INC. CONSOLIDATED BALANCE SHEET DECEMBER 31, 2003 __________ ASSETS ------ Current assets: Cash and cash equivalents $ 9,485 Accounts receivable, net of allowance for doubtful accounts of $80,000 155,425 Employee advances 2,100 ------------ Total current assets 167,010 Property and equipment, net of accumulated depreciation of $393,772 403,217 Goodwill 200,346 ------------ Total assets $ 770,573 ============ LIABILITIES AND STOCKHOLDERS' DEFICIT - ------------------------------------- Current liabilities: Book overdraft $ 63,705 Notes payable 124,658 Notes payable to related parties 514,670 Accounts payable 717,188 Accrued liabilities 297,693 Deferred revenue 193,038 ------------ Total current liabilities 1,910,952 ------------ Commitment and contingencies Stockholders' deficit: Series A Convertible Non-Redeemable Preferred stock, $.001 par value, 20,000,000 shares authorized, 115.726 shares issued and outstanding, $5,000 per share liquidation preference ($578,630 aggregate liquida- tion preference) - Series B Convertible Non-Redeemable Preferred stock, $0.001 par value, 10,000,000 shares authorized, no shares issued and outstanding - Common stock, $.001 par value, 50,000,000 shares auth- orized, 34,540,174 shares issued and outstanding 34,540 Additional paid-in capital 5,540,467 Deferred compensation (12,008) Accumulated deficit (6,703,378) ------------ Total stockholders' deficit (1,140,379) ------------ Total liabilities and stockholders' deficit $ 770,573 ============
The accompanying notes are an integral part of these consolidated financial statements. F-4
CRESCENT COMMUNICATIONS, INC. CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002 __________ 2003 2002 ------------ ------------ Service revenue $ 2,235,142 $ 1,735,524 Cost of services 1,638,956 1,357,120 ------------ ------------ Gross margin 596,186 378,404 Selling, general and administrative expenses 3,100,122 3,142,731 ------------ ------------ Loss from operations (2,503,936) (2,764,327) Interest expense (39,693) (182,055) ------------ ------------ Net loss $(2,543,629) $(2,946,382) ============ ============ Basic and diluted net loss per common share $ (0.10) $ (0.38) ============ ============ Weighted average shares outstanding 24,677,426 7,850,246 ============ ============
The accompanying notes are an integral part of these consolidated financial statements. F-5
CRESCENT COMMUNICATIONS, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT, CONTINUED FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002 __________ SERIES A SERIES B COMMON STOCK PREFERRED STOCK PREFERRED STOCK ADDITIONAL RECEIVABLE ------------------ -------------- -------------- PAID-IN FROM DEFERRED ACCUMULATED SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL STOCKHOLDER COMPENSATION DEFICIT ---------- ------ ------ ------ ------ ------ --------- ------------ ------------- ----------- Balance at December 31, 2001 4,278,699 4,278 120 - - - 1,172,785 (136,976) (257,407) (1,213,367) Collection of subscrip- tion receivable from stockholder - - - - - - 13,024 136,976 - - Issuance of common stock for compensation 467,500 468 - - - - 149,356 - - - Value of conversion feature associated with convertible debt - - - - - - 134,000 - - - Compensatory stock options and warrants issued to employees and consultants - - - - - - 500,301 - 164,307 - Issuance of common stock for cash 8,891,312 8,891 - - - - 1,724,646 - - - Preferred stock issued to repay certain debts assumed in July 31, 2001 acquisition (Note 2) - - - - 23 - 72,768 - - - Net loss - - - - - - - - - (2,946,382) ---------- ------ ------ ------ ------ ------ --------- ------------ ------------- ----------- Balance at December 31, 2002 13,637,511 13,637 120 - 23 - 3,766,880 - (93,100) (4,159,749) ---------- ------ ------ ------ ------ ------ --------- ------------ ------------- ----------- TOTAL ----------- Balance at December 31, 2001 (430,687) Collection of subscrip- tion receivable from stockholder 150,000 Issuance of common stock for compensation 149,824 Value of conversion feature associated with convertible debt 134,000 Compensatory stock options and warrants issued to employees and consultants 664,608 Issuance of common stock for cash 1,733,537 Preferred stock issued To repay certain debts assumed in July 31, 2001 acquisition (Note 2) 72,768 Net loss (2,946,382) ----------- Balance at December 31, 2002 (472,332) -----------
The accompanying notes are an integral part of these consolidated financial statements. F-6
CRESCENT COMMUNICATIONS, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT, CONTINUED FOR THE YEAR ENDED DECEMBER 31, 2003 AND 2002 __________ SERIES A SERIES B COMMON STOCK PREFERRED STOCK PREFERRED STOCK ADDITIONAL RECEIVABLE -------------------- ---------------- ---------------- PAID-IN FROM DEFERRED SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL STOCKHOLDER COMPENSATION ---------- -------- ------- ------- ------- ------- ----------- ------------ -------------- Balance at December 31, 2002 13,163,511 13,637 120 - 23 - 3,766,880 - (93,100) Issuance of common stock for cash 18,052,663 18,053 - - - 1,281,145 - Issuance of common stock upon conver- sion of 23 shares of Series B Prefer- red Stock 1,150,000 1,150 - - (23) - (1,150) - - Issuance of common stock upon conver- sion of 4.274 shares of Series A Prefer- red Stock 1,000,000 1,000 (4) - - - (1,000) - - Issuance of common stock to pay pro- fessional fees 850,000 850 - - - - 254,150 - - Compensatory stock options and warrants issued to employees and consultants - - - - - - 240,292 - 81,092 Cancellation of common stock (150,000) (150) - - - - 150 - - Net loss - - - - - - - - - ---------- -------- ------- ------- ------- ------- ----------- ------------ -------------- Balance at December 31, 2003 34,540,174 $34,540 116 $ - - $ - $5,540,467 $ - $ (12,008) ========== ======== ======= ======= ======= ======= =========== ============ ============== ACCUMULATED DEFICIT TOTAL ------------ ------------ Balance at December 31, 2002 (4,159,749) (472,332) Issuance of common stock for cash - 1,299,198 Issuance of common stock upon conver- sion of 23 shares of Series B Prefer- red Stock - - Issuance of common stock upon conver- sion of 4.274 shares of Series A Prefer- red Stock - - Issuance of common stock to pay pro- fessional fees - 255,000 Compensatory stock options and warrants issued to employees and consultants - 321,384 Cancellation of common stock - - Net loss (2,543,629) (2,543,629) ------------ ------------ Balance at December 31, 2003 $(6,703,378) $(1,140,379) ============ ============
The accompanying notes are an integral part of these consolidated financial statements. F-7
CRESCENT COMMUNICATIONS, INC. CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002 __________ 2003 2002 ------------ ------------ Cash flows from operating activities: Net loss $(2,543,629) $(2,946,382) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation expense 197,506 139,066 Provision for bad debt 111,671 73,864 Deferred revenue 46,143 57,910 Amortization of loan costs - 134,000 Common stock issued for services 255,000 149,824 Compensatory stock options 321,384 664,608 Preferred stock issue for accrued liabilities - 72,768 Changes in operating assets and liabilities: Accounts receivable (11,113) (153,624) Prepaid and other assets 64,497 1,814 Accounts payable 95,502 55,010 Accrued liabilities 42,663 (85,682) Advances from employees (2,987) 2,987 ------------ ------------ Net cash used in operating activities (1,423,363) (1,833,837) ------------ ------------ Cash flows from investing activities: Purchase of computers and equipment (20,715) (189,940) ------------ ------------ Net cash used in investing activities (20,715) (189,940) ------------ ------------ Cash flows from financing activities: Proceeds from book overdraft 29,807 33,898 Proceeds from notes payable to related parties 131,080 134,000 Repayment of notes payable to related parties (41,000) (69,480) Proceeds from notes payable 98,183 81,264 Repayment of notes payable (63,705) (50,215) Proceeds from issuance of common stock 1,299,198 1,733,537 Collection of receivable from stockholder - 150,000 ------------ ------------ Net cash provided by financing activities 1,453,563 1,938,504 ------------ ------------ Net increase (decrease) in cash and cash equivalents 9,485 (10,773) Cash and cash equivalents at beginning of period - 10,773 ------------ ------------ Cash and cash equivalents at end of period $ 9,485 $ - ============ ============ Supplemental disclosure of cash flow information: Cash paid for interest expense $ 15,765 $ 31,407 ============ ============ Cash paid for income taxes $ - $ - ============ ============
The accompanying notes are an integral part of these consolidated financial statements. F-8 CRESCENT COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS __________ 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ----------------------------------------------------------- Crescent Communications, Inc. (the "Company") is a Nevada Corporation that was originally established to conduct an effort to capitalize on the telecommunications, industry downturn that began during 2000. The Company has now focused its efforts on providing the healthcare community BLUEGATE, the Company's secure medical network using Cisco System's(TM) virtual private network technology to assist in compliance with the Health Insurance Portability and Accountability Act of 1996 ("HIPPA"). The Company was originally incorporated as Solis Communications, Inc. ("Solis") on July 23, 2001 and adopted a name change to Crescent Communications, Inc. upon completion of a reverse acquisition of Berens Industries, Inc. Following is a summary of the Company's significant accounting policies: SIGNIFICANT ESTIMATES ---------------------- The preparation of consolidated 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 dates of the consolidated financial statements and the reported amounts of revenues and expenses during the periods. Actual results could differ from estimates making it reasonably possible that a change in the estimates could occur in the near term. PRINCIPLES OF CONSOLIDATION ----------------------------- The consolidated financial statements include the accounts of the Company and its majority owned or controlled subsidiaries after elimination of all significant intercompany accounts and transactions. CASH AND CASH EQUIVALENTS ---------------------------- The Company considers all highly liquid short-term investments with an original maturity of three months or less when purchased, to be cash equivalents. PROPERTY AND EQUIPMENT ------------------------ Property and equipment is recorded at cost and depreciated on the straight-line method over the estimated useful lives of the various classes of depreciable property as follows. Furniture and equipment 5-7 years Telecommunications networks 5 years Computer equipment 3 years Expenditures for normal repairs and maintenance are charged to expense as incurred. The cost and related accumulated depreciation of assets sold or otherwise disposed of are removed from the accounts, and any gain or loss is included in operations. IMPAIRMENT OF LONG-LIVED ASSETS ---------------------------------- In the event facts and circumstances indicate the carrying value of a long-lived asset, including associated intangibles, may be impaired, an evaluation of recoverability is performed by comparing the estimated future undiscounted cash flows associated with the asset to the asset's carrying amount to determine if a write-down to market value or discounted cash flow is required. Based upon a recent evaluation by management, an impairment write-down of the Company's long-lived assets was not deemed necessary. INCOME TAXES ------------- The Company uses the liability method of accounting for income taxes. Under this method, deferred income taxes are recorded to reflect the tax consequences on future years of temporary differences between the tax basis of assets and liabilities and their financial amounts at year-end. The Company provides a valuation allowance to reduce deferred tax assets to their net realizable value. Continued F-9 CRESCENT COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS __________ 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED --------------------------------------------------------------------------- STOCK-BASED COMPENSATION ------------------------- Financial Accounting Standard No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123") established financial accounting and reporting standards for stock-based employee compensation plans. It defined a fair value based method of accounting for an employee stock option or similar equity instrument and encouraged all entities to adopt that method of accounting for all of their employee stock compensation plans and include the cost in the income statement as compensation expense. However, it also allows an entity to continue to measure compensation cost for those plans using the intrinsic value based method of accounting prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees". The Company accounts for compensation cost for stock option plans in accordance with APB Opinion No. 25. LOSS PER SHARE ---------------- Basic and diluted net loss per share is computed on the basis of the weighted average number of shares of common stock outstanding during each period. Potentially dilutive options that were outstanding during 2003 and 2002, were not considered in the calculation of diluted earnings per share because the Company's net loss rendered their impact anti-dilutive. Accordingly, basic and diluted losses per share were identical for the years ended December 31, 2003 and 2002. FAIR VALUE OF FINANCIAL INSTRUMENTS --------------------------------------- The Company includes fair value information in the notes to consolidated financial statements when the fair value of its financial instruments is different from the book value. When the book value approximates fair value, no additional disclosure is made. COMPREHENSIVE INCOME --------------------- The Company has adopted Statement of Financial Accounting Standards ("SFAS") No. 130, Reporting Comprehensive Income, which requires a company to display an amount representing comprehensive income as part of the Company's basic consolidated financial statements. Comprehensive income includes such items as unrealized gains or losses on certain investment securities and certain foreign currency translation adjustments. The Company's consolidated financial statements include none of the additional elements that affect comprehensive income. Accordingly, comprehensive income and net income are identical. GOODWILL -------- Goodwill, which represents the excess of acquisition cost over the net assets acquired in the Company's acquisition of Berens Industries, Inc., is not being amortized because the acquisition was completed after June 30, 2001 and the acquisition is therefore immediately subject to the provisions of SFAS No. 142, "Goodwill and Other Intangible Assets". Under the provisions of SFAS No. 142, the Company must assess goodwill for impairment at least annually using implied fair value estimates that are based upon a hypothetical current purchase price allocation to a reporting unit's assets and liabilities. The resulting goodwill from that hypothetical purchase price allocation is then compared to the recorded goodwill for possible impairment. The fair values used in the hypothetical purchase price allocation should be based on the most reliable indicator of fair value such as quoted market prices in an active market or multiples of earnings or revenues. REVENUE RECOGNITION -------------------- Revenue from broadband telecommunications services are recognized based upon contractually determined monthly service charges to individual customers. Telecommunications services are billed in advance and, accordingly, revenues are deferred until the period in which the services are provided. At December 31, 2003, deferred service revenue was $193,038. Continued F-10 CRESCENT COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS __________ 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED ---------------------------------------------------------------------- RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS -------------------------------------------- In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," which addresses financial accounting and reporting for costs associated with exit or disposal activities and supersedes Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. In addition, SFAS No. 146 establishes that fair value is the objective for initial measurement of the liability. SFAS No. 146 is effective for exit or disposal activities initiated after December 31, 2002, but early adoption is permitted. The implementation of SFAS No. 146 is not expected to have any impact on the Company's results of operations or financial position. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock Based Compensation", which amends SFAS No. 123 to provide alternative methods of transaction for an entity that voluntarily changes to the fair value method of accounting for stock based employee compensation. It also amends the disclosure provisions of SFAS No. 123 to require prominent disclosure about the effects on reported net income of an entity's accounting policy decisions with respect to stock based employee compensation. Finally, SFAS No. 148 amends APB Opinion No. 28, "Interim Financial Reporting", to require disclosure of those effects in interim financial statements. SFAS No. 148 is effective for fiscal years ended after December 15, 2002, but early adoption is permitted. The Company will continue to follow the provisions of APB Opinion No. 25 in recognizing employee stock-based compensation; however, the Company began following the disclosure requirements of SFAS No. 148 in January 2003. In January 2003, the FASB issued FASB Interpretation (FIN) No. 46 "Consolidation of Variable Interest Entities." FIN No. 46 requires a company to consolidate a variable interest entity ("VIE") if the company has variable interests that give it a majority of the expected losses or a majority of the expected residual returns of the entity. Prior to FIN No. 46, VIEs were commonly referred to as SPEs. FIN No. 46 is effective immediately for VIEs created after January 31, 2003. This interpretation did not have a material effect on the Company's financial condition or results of operations. In April 2003, the FASB issued SFAS No. 149, Amendment to Statement No. 133 on Derivative Instruments and Hedging Activities. This statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under SFAS No. 133. The changes in SFAS No. 149 improve financial reporting by requiring that contracts with comparable characteristics be accounted for similarly. Those changes will result in more consistent reporting of contracts as either derivatives or hybrid instruments. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, except in certain instances detailed in the statement, and hedging relationships designated after June 30, 2003. Except as otherwise stated in SFAS No. 149, all provisions should be applied prospectively. The adoption of this statement did not have a material effect on the Company's financial condition or results of operations. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150, which is effective at the beginning of the first interim period beginning after June 15, 2003, must be implemented by reporting the cumulative effect of a change in accounting principle for financial instruments created before the issuance date of the statement and still existing at the beginning of the interim period of adoption. The statement requires that a financial instrument which falls within the scope of the statement to be classified and measured as a liability. The following financial instruments are required to be classified as liabilities: (1) shares that are mandatorily redeemable, (2) an obligation to repurchase the issuer's equity shares or one indexed to such an obligation and that requires or may require settlement by transferring assets and (3) the embodiment of an unconditional obligation that the issuer may or may not settle by issuing a variable number of equity shares if, at inception, the monetary value of the obligation is based on certain measurements defined in the statement. The adoption of this statement did not have a material effect on the Company's financial condition or results of operations. Continued F-11 CRESCENT COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED __________ 2. GOING CONCERN CONSIDERATIONS ------------------------------ During the years ended December 31, 2003 and 2002 the Company has been unable to generate cash flows sufficient to support its operations and has been dependent on debt and equity raised from qualified individual investors. During the years ended December 31, 2003 and 2002 the Company experienced negative financial results as follows:
2003 2002 ------------ ------------ Net loss $(2,543,629) $(2,946,382) Negative cash flow from operations (1,423,363) (1,833,837) Negative working capital (1,743,942) (1,276,547) Stockholders' deficit (1,140,379) (472,332) Book overdraft (63,705) (98,183)
These factors raise substantial doubt about the Company's ability to continue as a going concern. The Company has supported current operations by: 1) raising additional operating cash through private placements of its common stock, 2) issuing debt and debt convertible to common stock to certain key stockholders and 3) issuing stock and options as compensation to certain employees and vendors in lieu of cash payments. These steps have provided the Company with the cash flows to continue its business plan, but have not resulted in significant improvement in the Company's financial position. Management is considering alternatives to address its critical cash flow situation that include: - Raising capital through additional sale of its common and preferred stock and/or debt securities. - Merging the Company with another business that compliments current activities. - Reducing cash operating expenses to levels that are in line with current revenues. Reductions can be achieved through the issuance of additional common shares of the Company's stock in lieu of cash payments to employees or vendors. - Selling assets that managements feels are not critical to its future plans. (see Note 11) These alternatives could result in substantial dilution of existing stockholders. There can be no assurances that the Company's current financial position can be improved, that it can raise additional working capital or that it can achieve positive cash flows from operations. The Company's long-term viability as a going concern is dependent upon the following: - The Company's ability to locate sources of debt or equity funding to meet current commitments and near term future requirements. - The ability of the Company to achieve profitability and ultimately generate sufficient cash flow from operations to sustain its continuing operations. 3. FURNITURE AND EQUIPMENT, NET ------------------------------- Furniture and equipment, net consists of the following at December 31, 2003: Computer and internet equipment $ 576,754 Software 164,274 Office furniture and equipment 55,961 ---------- 796,989 Less accumulated depreciation (393,772) ---------- $ 403,217 ========== Depreciation expense for the years ended December 31, 2003 and 2002 was $197,506 and $139,066, respectively. All depreciation expense is presented in cost of sales in the accompanying statement of operations. Continued F-12 CRESCENT COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED __________ 4. NOTES PAYABLE Notes payable at December 31, 2003 were as follows: Convertible note payable to an individual, bearing interest at a stated rate of 8% per year and due on demand. If demand is not made by the note holder, the final maturity date is January 1, 2010. Interest is due monthly. This note provides the holders an option for immediate conversion into shares of the Company's common stock at a conversion price of $0.05 per share. The conversion price at the date this note was negotiated was below the fair value of the Company's common stock. $ 26,475 Note payable to a bank under a $100,000 line of credit bearing interest at the prime rate, as published in The Wall Street Journal (4.00% at December 31, 2003) plus 2% per year. This note is due on February 13, 2004 and is collateralized by the guarantee of the the Company's chief executive officer. $ 98,183 ---------- $ 124,658 ========== 5. NOTES PAYABLE TO RELATED PARTIES ------------------------------------ Notes payable to related parties at December 31, 2003 were as follows: Note payable to Manfred Sternberg and Robert Davis, officers/founding stockholders of the Company, under a $150,000 line of credit bearing interest at prime (4.00% at December 31, 2003) plus 1.25% per year and due on demand. If the note holders do not demand payment, the note is payable in monthly payments of interest only through May 2002 and in monthly pay- ments of principal and interest thereafter, through the final payment in May 2004. This note is collat- eralized by substantially all assets of the Company. $ 100,756 Convertible notes payable to Manfred Sternberg (officer/director/founding stockholder of the Company) and Madred Partners, Ltd. (a company controlled by Robert Davis, a director/ founding stockholder of the Company). These notes bear interest at a stated rate of 8% per year and are due on demand. If demand is not made by the note holders, the final maturity dates of these notes will occur at various dates through January 2010. Interest is due monthly. These notes provide the holders an option for immediate conversion into shares of the Company's common stock at a conversion price of $0.05 per share. The conversion price at the date these notes were negotiated was below the fair value of the Company's common stock. Accordingly, these notes were issued at discounts equal to their entire stated value and because the notes were immediately convertible, the discounts were charged directly to interest expense at the date the notes were funded, resulting in an effect- tive annual interest rate exceeding 100% in 2001. 128,710 Continued F-13 CRESCENT COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED __________ 5. NOTES PAYABLE TO RELATED PARTIES, CONTINUED ------------------------------------------------ Convertible notes payable to Manfred Sternberg (officer/director/founding stockholder of the Company)and Madred Partners, Ltd. (a company controlled by Robert Davis, an officer/founding stockholder of the Company). These notes bear interest at a stated rate of 8% per year and are due on demand. If demand is not made by the note holders, the final maturity dates of these notes will occur at various dates through January 2010. Interest is due monthly. These notes provide the holders an option for immediate conversion into shares of the Company's common stock at a conversion price of $0.05 per share. The conversion price at the date these notes were negotiated was below the fair value of the Company's common stock. Accordingly, these notes were issued at discounts equal to their entire stated value and because the notes were immediately convertible, the discounts were charged directly to interest expense at the date the notes were funded, resulting in an effective annual interest rate exceeding 100% in 2002. 134,000 Notes payable to MPH Production Company (a company controlled by Robert Davis, an officer/founding stockholder of the Company), Michael McDonald (chief financial officer) and Manfred Sternberg (an officer/founding stockholder of the Company). These notes bear interest at a stated rate of 15% per year and are due on demand. If demand is not made by the note holders, the final maturity dates of these notes will occur on January 1, 2014. Interest is due monthly beginning on February 1, 2004. These notes are collateralized by substantially all assets of the Company. 136,204 Note payable to David Loeschner (president of the Company), bearing interest at a stated rate of 10% per year and due on demand. This note is collat- eralized by substantially all assets of the Company. 15,000 ---------- Total notes payable to related parties $ 514,670 ========== 6. ACCRUED LIABILITIES -------------------- Accrued liabilities consists of the following at December 31, 2003: Accrued payroll tax liability $ 152,441 Accrued penalties on payroll tax liability 81,836 Accrued medical insurance 9,817 Accrued sales taxes 13,022 Accrued interest expense 40,577 ---------- $ 297,693 ========== The accrued payroll tax liability includes an $81,836 balance that was assumed in connection with the reverse acquisition of Berens Industries, Inc. (See Note 2). Penalties and interest incurred on this liability have been accrued through December 31, 2003; however such penalties and interest may continue to accrue. Accordingly, this payroll tax liability could increase significantly if not settled in the near term in an amount that is satisfactory to the Company. The Company is actively involved in discussions to settle this balance. Continued F-14 CRESCENT COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED __________ 7. INCOME TAXES ------------- The composition of deferred tax assets and the related tax effects at December 31, 2003 were as follows:
Liability --------- Basis of goodwill $ 11,353 Basis of property and equipment 8,500 ------------ Total liabilities 19,853 ------------ Assets - ---------------------------------- Benefit from carryforward of net 2,130,337 operating loss Allowance for doubtful accounts 27,200 ------------ Total assets 2,157,537 Less valuation allowance (2,177,390) ------------ (19,853) ------------ Net deferred tax asset $ - ============
The difference between the income tax benefit in the accompanying statement of operations and the amount that would result if the U.S. Federal statutory rate of 34% were applied to pre-tax loss for the years ended December 31, 2003 and 2002 is as follows:
YEAR ENDED YEAR ENDED DECEMBER 31, 2003 DECEMBER 31, 2002 ------------------------- ------------------------ AMOUNT PERCENT AMOUNT PERCENT ---------- ------------- ----------- ----------- Benefit for income tax at federal statutory rate $ 864,834 34.0% $1,001,770 34.0% Non-deductible meals and entertainment (4,115) (0.2) (1,379) - Non-deductible interest expense - (45,560) (1.5) Non-deductible compensation (195,971) (7.7) (291,927) (10.0) Increase in valuation allowance (664,748) (26.1) (662,904) (22.5) ---------- ------------- ----------- ----------- Total $ - -% $ - -% ========== ============= =========== ===========
At December 31, 2003, for federal income tax and alternative minimum tax reporting purposes, the Company has approximately $6,300,000 of unused net operating losses available for carryforward to future years. The benefit from carryforward of such net operating losses will expire in various years through 2023. Under the provisions of Section 382 of the Internal Revenue Code, the benefit from utilization of approximately $1,144,000 of net operating losses incurred prior to July 23, 2001 was significantly limited as a result of the change of control that occurred in connection with the Company's reverse acquisition of Berens Industries, Inc. (See Note 2). The benefit could be subject to further limitations if significant future ownership changes occur in the Company. 8. STOCKHOLDERS' EQUITY --------------------- COMMON STOCK ------------- The Company sold certain common shares to accredited private investors for cash under a Regulation D Private Placement Memorandum. A total of 500,000 shares were sold during April and June to two investors at prices ranging from $0.10 to $0.25 per share. No discounts or commissions were paid and the aggregate amount raised was $110,000. Continued F-15 CRESCENT COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED __________ 8. STOCKHOLDERS' EQUITY, CONTINUED --------------------------------- COMMON STOCK, CONTINUED ------------------------- In June 2002 the Company entered into an agreement with Pacific Continental Securities UK to sell common stock under Regulation S to various foreign investors. Among other things, the Agreement provided for the Company to issue up to 3,000,000 shares of Regulation S stock at 35% of the average bid price for the 5-day period preceding the exercise, with a floor price of $0.40. The term was originally to expire August 31, 2002, but was amended and extended at various dates. As of December 31, 2002 the Company has issued 7,767,726 shares for $1,610,147 under this arrangement. On October 24, 2002 the Company entered into a second agreement with similar terms allowing for up to 10 million shares to be issued through January 31, 2003. The first 3 million shares were to have a floor price of $0.40 and the remainder were to have a floor price of $0.70. The Company amended the second agreement to eliminate the floor price and increase the number of shares to be issued. During the years ended December 31, 2003 and 2002, the Company issued 18,052,663 and 623,586 shares, respectively, under the second agreement at prices ranging from approximately $0.05 to approximately $0.14 per share. During the years ended December 31, 2003 and 2002, the Company issued common stock to an attorney and to various consultants for legal and financial services. These transactions were exempt pursuant to Section 4(2) of the Securities Act of 1933. During the years ended December 31, 2003 and 2002, the Company issued 850,000 and 467,500 shares for services aggregating $255,000 and $268,585, respectively, under these arrangements. REVERSE STOCK SPLIT --------------------- Effective September 24, 2001, the Company's board of directors declared a 5 for 1 reverse stock split. The reverse stock split has been reflected in the accompanying consolidated financial statements and all references to common stock outstanding, additional paid in capital, weighted average shares outstanding and per share amounts prior to the record date of the reverse stock split have been restated to reflect the stock split on a retroactive basis. SERIES A PREFERRED STOCK --------------------------- During 2001 the Company's board of directors approved the issuance of 120 shares of Series A voting convertible non-redeemable preferred stock with a par value of $0.001 per share and a liquidation value of $5,000 per share. Each share of Series A convertible preferred stock may be converted, at the option of the shareholder, into 233,975 shares of common stock with fractional shares permitted. SERIES B PREFERRED STOCK --------------------------- During 2002 the Company's board of directors approved the issuance of 100 shares of Series B convertible non-redeemable preferred stock with a par value of $0.001 per share and a liquidation value of $200 per share. On October 11, 2002 the Company issued 23 shares of such stock to retire certain liabilities totaling $72,768 and to obtain indemnification from certain contingencies assumed in the reverse acquisition of Berens Industries, Inc. (See Note 2) Each share is convertible, at the option of the shareholder, into 50,000 shares of common stock with fractional shares permitted. STOCK OPTIONS -------------- The Company periodically issues incentive stock options to key employees, officers and directors to provide additional incentives to promote the success of the Company's business and to enhance the ability to attract and retain the services of qualified persons. The issuance of such options is approved by the board of directors. The exercise price of an option granted is determined by the fair market value of the stock on the date of grant, less a discount approved by the board of directors. The options vest immediately or over a period of time as determined at the date of grant. STOCK OPTION PLAN ------------------- The Company has adopted the 2002 Stock and Stock Option Plan (the "Plan") under which incentive stock options for up to 450,000 shares of the Company's common stock may be awarded to officers, directors and key employees. The Plan is designed to attract and reward key executive personnel. As of December 31, 2003, the Company had granted no options or shares under the Plan. Continued F-16 CRESCENT COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED __________ 8. STOCKHOLDERS' EQUITY, CONTINUED --------------------------------- STOCK OPTION PLAN, CONTINUED ------------------------------- Stock options granted pursuant to the Option Plan expire as determined by the board of directors. All of the options granted by the Company are to be granted at an option price equal to the fair market value of the common stock at the date of grant. PRO-FORMA DISCLOSURES ---------------------- The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related Interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under FASB Statement No. 123, "Accounting for Stock-Based Compensation", requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the Company's employee stock options is greater than or equals the market price of the underlying stock on the date of grant, no compensation expense has been recognized. Proforma information regarding net income and earnings per share is required by Statement 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model. The Black-Scholes option valuation model was developed for use in estimating fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of proforma disclosures, the estimated fair value of the options is included in expense over the option's vesting period or expected life. The Company's proforma information for the years ended December 31, 2003 and 2002 follows:
2003 2002 ----------- ----------- Net loss as reported $2,543,629 $2,946,382 Proforma net loss $2,685,006 $3,162,186 Basic and diluted loss per share as reported $ 0.10 $ 0.38 Proforma basic and diluted loss per share $ 0.11 $ 0.40 Risk free interest rate 3.5% 4% Dividend yield -0- -0- Weighted average volatility 100% 200% Weighted-average expected life of options 3 yrs. 3 yrs.
Continued F-17 CRESCENT COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED __________ 8. STOCKHOLDERS' EQUITY, CONTINUED ------------------------------- SUMMARY OF STOCK OPTIONS --------------------------- A summary of the Company's stock option activity and related information for the years ended December 31, 2003 and 2002 follows:
NUMBER OF WEIGHTED- SHARES AVERAGE UNDER EXERCISE EXERCISE OPTIONS PRICE PRICE ---------- ----------- ------ Outstanding - December 31, 2001 1,363,512 $ 0.10 $ 0.10 Granted 1,881,825 $ 0.10 $ 0.10 Cancelled (491,537) $ 0.10 $ 0.10 ---------- Outstanding - December 31, 2002 2,753,800 $ 0.10 $ 0.10 Granted 1,717,000 $0.10-$0.30 $ 0.15 Cancelled - ---------- Outstanding - December 31, 2003 4,470,800 $0.10-$0.30 $ 0.12 ==========
The weighted-average fair value of options granted during the years ended December 31, 2003 and 2002 was $0.19 and $0.23, respectively. The compensation expense associated with these options is being recognized ratably over the service period required of the employees.
NUMBER OF REMAINING COMMON STOCK CURRENTLY CONTRACTUAL EXERCISE EQUIVALENTS EXERCISABLE EXPIRATION DATE LIFE (YEARS) PRICE - ------------ ----------- --------------- ------------ --------- 1,363,512 1,363,512 November 2011 7.8 $ 0.10 1,340,288 1,340,288 February 2012 8.2 0.10 50,000 50,000 October 2012 8.8 0.10 100,000 100,000 January 2008 4.0 0.30 250,000 250,000 January 2008 4.0 0.10 166,666 166,666 April 2008 4.3 0.10 166,667 166,667 July 2008 4.5 0.10 166,667 166,667 October 2008 4.8 0.10 617,000 October 2008 4.8 0.20 250,000 250,000 December 2008 4.9 0.10 - ------------ ----------- 4,470,800 3,853,800 ============ ===========
SUMMARY OF STOCK WARRANTS ---------------------------- A summary of the Company's warrant activity and related information for the years ended December 31, 2003 and 2002 follows:
NUMBER OF WEIGHTED- SHARES AVERAGE UNDER EXERCISE EXERCISE OPTIONS PRICES PRICE --------- -------------------- --------- Outstanding - December 31, 2001 - - - Granted 1,470,000 $0.10 - $0.50 $0.41 --------- Outstanding - December 31, 2002 1,470,000 0.10 - 0.50 0.41 Granted 860,000 0.01 - 0.20 0.19 --------- Outstanding - December 31, 2003 2,330,000 0.01 - 0.50 0.33 =========
Continued F-18 CRESCENT COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED __________ 8. STOCKHOLDERS' EQUITY, CONTINUED --------------------------------- SUMMARY OF STOCK WARRANTS, CONTINUED The weighted-average fair value of warrants granted during the year ended December 31, 2003 and 2002 was $0.23 and $0.29, respectively $0.38 and . Compensation expense associated with certain of the warrants granted in 2002 was recognized at issuance because there was no vesting period.
NUMBER OF REMAINING COMMON STOCK CURRENTLY CONTRACTUAL EXERCISE EQUIVALENTS EXERCISABLE EXPIRATION DATE LIFE (YEARS) PRICE - ------------ ----------- --------------- ------------ --------- 750,000 750,000 November 2005 2.9 $ 0.50 100,000 100,000 February 2008 2.2 0.10 220,000 220,000 July 2008 2.5 0.10 400,000 400,000 March 2009 2.2 0.50 300,000 225,000 March 2008 4.3 0.20 500,000 500,000 July 2008 4.5 0.19 50,000 50,000 November 2008 4.8 0.10 10,800 10,800 November 2008 4.8 0.01 - ------------ ----------- 2,330,800 2,295,800 ============ ===========
9. LEASE COMMITMENT ----------------- The Company operates from leased office space under an operating lease that expires in July 2005 and includes no provisions for extension. The lease includes lease payment escalation and provisions for other increases to rental payments should certain costs of the landlord increase. The Company also pays monthly access fees to the buildings in which it provides its broadband services. Following is a summary of future annual lease payments at December 31, 2003:
OFFICE BUILDING YEAR ENDING LEASE ACCESS DECEMBER 31, PAYMENTS FEES TOTAL - ------------ --------- --------- --------- 2004 $ 93,496 $ 86,400 179,896 2005 54,539 86,400 140,939 2006 - _ 59,300 59,300 --------- --------- --------- Total $ 148,035 $ 232,100 $ 380,135 ========= ========= =========
Rent expense incurred under operating leases for years ended December 31, 2003 and 2002 was $95,416 and $93,496, respectively. 10. RELATED PARTY TRANSACTIONS ---------------------------- During the years ended December 31, 2003 and 2002, the Company engaged in various related party transactions as follows: - During 2003, 2002 and 2001 the Company entered into a note payable agreements with various, officers, employees, directors and/or founding stockholders. These notes are described in Note 5. - During 2002, the Company entered into a factoring arrangement on its accounts receivable with Manfred Sternberg. The amount due under this factoring arrangement was $34,265 at December 31, 2002 and the factoring agreement was fully repaid in 2003 (See Note 5). - During 2001, the company entered into a $150,000 line of credit agreement with Manfred Sternberg and Robert Davis. The total amount due under this line of credit agreement at December 31, 2003 was $100,756 (See Note 5). - During the years ended December 31, 2003 and 2002, the Company incurred interest expenses on related party debt of approximately $35,000 and $163,000, respectively. Continued F-19 CRESCENT COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED __________ 11. SUBSEQUENT EVENT ----------------- On April 7, 2003 the Company entered into a letter of intent to sell substantially all of its broadband internet service related assets, including (but not limited to) all cash, receivables (including written off receivables), inventory, network and other equipment, property, customer lists, network relationships, billing arrangements, intangible assets and all other assets, required or useful for operating its internet service provider business but specifically excluding its Bluegate assets. The proposed sales price is $1,150,000 in the form of (a) $900,000 cash at Closing and (b) $250,000 in the form of a one-year, 6% secured promissory note. The transaction is subject to due diligence procedures and the Company can make no prediction as to the result of those procedures or its ability to ultimately close the transaction. F-20 EX-14.1 3 doc2.txt EXHIBIT 14.1 - CRESCENT COMMUNICATIONS, INC. CODE OF ETHICS FOR PRINCIPAL EXECUTIVE AND SENIOR FINANCIAL OFFICERS I. INTRODUCTION AND PURPOSE This Code of Ethics for Principal Executive and Senior Financial Officers (hereinafter referred to as the "Code") helps maintain Crescent Communications, Inc.'s (hereinafter referred to as the "Company") standards of business conduct and ensures compliance with legal requirements, specifically, but not limited to, Section 406 of the Sarbanes-Oxley Act of 2002 and SEC rules promulgated thereunder. In addition to securing compliance with legal requirements, the purpose of the Code is to deter wrongdoing and promote ethical conduct, and full, fair, accurate, timely, and understandable disclosure of 31 financial information in the periodic reports of the Company. The matters covered in this Code are of the utmost importance to the Company, our stockholders and our business partners, and are essential to our ability to conduct our business in accordance with our stated values. Financial executives hold an important and elevated role in corporate governance and are uniquely capable and empowered to ensure that stockholders' interests are appropriately balanced, protected and preserved. Accordingly, this Code provides principles to which financial executives are expected to adhere and advocate. This Code embodies rules regarding individual and peer responsibilities, as well as responsibilities to the company, the public and others. II. APPLICATION This Code is applicable to the following persons (hereinafter referred to as the "Officers"): 1. The Company's principal executive officers; 2. The Company's principal financial officers; 3. The Company's principal accounting officer or controller; and 4. Persons performing similar functions. III. CODE OF ETHICS: Each Officer shall adhere to and advocate the following principles and responsibilities governing professional and ethical conduct: 1. Act with honesty and integrity, avoiding actual or apparent conflicts of interest in personal and professional relationships. 2. Provide information that is full, fair, accurate, complete, objective, relevant, timely, and understandable to the Company's Board of Directors, the Securities and Exchange Commission, the Company's stockholders, and the public. 3. Comply with applicable governmental laws, rules, and regulations. 4. Act in good faith, responsibly, with due care, competence and diligence, without misrepresenting material facts or allowing your independent judgment to be subordinated. 5. Take all reasonable measures to protect the confidentiality of non-public information about the Company acquired in the course of your work except when authorized or otherwise legally obligated to disclose such information and to not use such confidential information for personal advantage. 6. Assure responsible use of and control over all assets and resources employed or entrusted to you. 7. Promptly report to the Chairman of the Board of Directors: a. any information you may have regarding any violation of this Code; b. any actual or apparent conflict of interest between personal and/or professional relationships involving management or any other employee with a role in financial reporting disclosures or internal controls; c. any information you might have concerning evidence of a material violation of the securities or other laws, rules or regulations applicable to the Company and its operations; 28 d. significant deficiencies in the design or operation of internal controls that could adversely affect the Company's ability to record, process, summarize or report financial data; or e. any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's financial reporting, disclosures or internal controls. IV. REPORTING PROCEDURE, PROCESS AND ACCOUNTABILITY As discussed above, Officers shall promptly report any violation of this Code to the Chairman of the Board of Directors. Reports of violations under this Code received by the Chairman of the Board of Directors shall be investigated by the entire Board of Directors. In the event of a finding that a violation of this Code has occurred, appropriate action shall be taken that is reasonably designed to deter wrongdoing and to promote accountability for adherence to this Code, and may include written notices to the individual involved of the determination that there has been a violation, censure by the Board, demotion or re-assignment of the individual involved, suspension with or without pay or benefits, and up to and including, if appropriate, termination of the individual's employment. In determining what action is appropriate in a particular case, the Board of Directors (or the independent directors of the Board as the case may be) shall take into account all relevant information, including the nature and severity of the violation, whether the violation was a single occurrence or repeated occurrences, whether the violation appears to have been intentional or inadvertent, whether the individuals in question had been advised prior to the violation as to the proper course of action and whether or not the individual in question had committed other violations in the past. V. ANONYMOUS REPORTING Any violation of this Code and any violation by the Company or its directors or officers of the securities laws, rules, or regulations, or other laws, rules, or regulations applicable to the Company may be reported to the Chairman of the Board of Directors anonymously. VI. NO RETALIATION It is against the Company's policy to retaliate in any way against an Officer for good faith reporting of violations of this Code. VII. WAIVER AND AMENDMENT The Company is committed to continuously reviewing and updating its policies and procedures. Therefore, this Code is subject to modification. Any amendment or waiver of any provision of this Code must be approved in writing by the Company's Board of Directors and promptly disclosed pursuant to applicable laws and regulations. VIII. ACKNOWLEDGMENT OF RECEIPT OF CODE OF ETHICS FOR PRINCIPAL EXECUTIVE AND SENIOR FINANCIAL OFFICERS I have received and read the Company's Code of Ethics for Principal Executive and Senior Financial Officers (the "Code"). I understand the standards and policies contained in the Code and understand that there may be additional policies or laws applicable to my job. I agree to comply with the Code in all respects. If I have questions concerning the meaning or application of the Code, any Company policies, or the legal and regulatory requirements applicable to my job, I know that I can consult with the Chairman of the Board of Directors, knowing that my questions or reports will remain confidential to the fullest extent possible. 29 I understand that my agreement to comply with this Code does not constitute a contract of employment. ___________________________ Officer Name ___________________________ Signature ___________________________ Date EX-31.1 4 doc3.txt EXHIBIT 31.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER CRESCENT COMMUNICATIONS, INC. REQUIRED BY RULE 13A - 14(1) OR RULE 15D - 14(A) OF THE SECURITIES EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002. I, Manfred Sternberg, certify that: 1. I have reviewed this annual report on Form 10-KSB of Crescent Communications, Inc; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: April 14, 2004 /s/ Manfred Sternberg ----------------------- Chief Executive Officer EX-31.2 5 doc4.txt EXHIBIT 31.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER OF CRESCENT COMMUNICATIONS, INC. REQUIRED BY RULE 13A - 14(1) OR RULE 15D - 14(A) OF THE SECURITIES EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002. I, Mike McDonald, certify that: 1. I have reviewed this annual report on Form 10-KSB of Crescent Communications, Inc; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: d) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; e) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and f) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): c) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and d) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: April 14, 2004 /s/ Mike McDonald -------------------- Chief Financial Officer EX-32.1 6 doc5.txt EXHIBIT 32.1 -- CERTIFICATION OF CHIEF EXECUTIVE OFFICER OF CRESCENT COMMUNICATIONS, INC., PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 AND SECTION 1350 OF 18 U.S.C. 63. I, Manfred Sternberg, the Chief Executive Officer of Crescent Communications, Inc. hereby certify that Crescent Communications, Inc.'s periodic report on Form10KSB and the financial statements contained therein fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d) and that information contained in the periodic report on Form 10KSB and the financial statements contained therein fairly represents, in all material respects, the financial condition and results of the operations of Crescent Communications, Inc Date: April 14, 2004 /s/ Manfred Sternberg ------------------------- Chief Executive Officer of Crescent Communications, Inc. EX-32.2 7 doc6.txt EXHIBIT 32.2 -- CERTIFICATION OF CHIEF FINANCIAL OFFICER OF CRESCENT COMMUNICATIONS, INC., PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 AND SECTION 1350 OF 18 U.S.C. 63. I, Mike McDonald, the Chief Financial Officer of Crescent Communications, Inc. hereby certify that Crescent Communications, Inc.'s periodic report on Form 10KSB and the financial statements contained therein fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d) and that information contained in the periodic report on Form 10KSB and the financial statements contained therein fairly represents, in all material respects, the financial condition and results of the operations of Crescent Communications, Inc Date: April 14, 2004 /s/ Mike McDonald --------------------- Chief Financial Officer of Crescent Communications, Inc. -----END PRIVACY-ENHANCED MESSAGE-----