U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
|X| Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 2003
|_| Transition report under Section 13 or 15(d) of the Exchange Act of 1934
For the transition period from __________ to __________
Commission file number 1-9224
CNE GROUP, INC.
(Exact Name of Small Business Issuer as Specified in Its Charter)
DELAWARE 56-2346563
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
200 West 57th Street, Suite 507, New York, NY 10019
(Address of Principal Executive Offices)
212-977-2200
(Issuer's Telephone Number, Including Area Code)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes |X| No |_|
The number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
Class Outstanding at July 31, 2003
Common stock - par value $.00001 6,490,920 shares
PART I
FINANCIAL INFORMATION
Item l. Financial Statements.
The following consolidated financial statements of CNE Group, Inc. and
subsidiaries (collectively referred to as the "Company," unless the
context requires otherwise) are prepared in accordance with the rules and
regulations of the Securities and Exchange Commission for Form 10-QSB and
reflect all adjustments (consisting of normal recurring accruals) and
disclosures which, in the opinion of management, are necessary for a fair
statement of results for the interim periods presented. It is suggested
that these financial statements be read in conjunction with the financial
statements and notes thereto included in the Company's Annual Report on
Form 10-KSB for the year ended December 31, 2002, which was filed with the
Securities and Exchange Commission.
The results of operations for the three and six months ended June 30, 2003
are not necessarily indicative of the results to be expected for the
entire fiscal year.
1
CNE Group, Inc. and Subsidiaries
Consolidated Balance Sheets
June 30, December 31,
2003 2002
----------------- -----------------
(Unaudited) (Audited)
ASSETS
Current:
Cash and cash equivalents $ 317,049 $ 183,200
Accounts receivable, net 258,377 35,144
Insurance claims receivable 63,912
Inventory 228,359
Other 26,901
----------------- -----------------
Total current assets 830,686 282,256
Fixed assets, net 450,462 33,250
Intellectual property rights 1,550,609
Intangibles 7,285,894
Other 45,550
----------------- -----------------
Total assets $ 10,163,201 $ 315,506
================= =================
LIABILITIES
Current:
Accounts payable and accrued expenses $ 452,902 $ 392,307
Interest payable (Note 13) 48,067 216,000
Lines of credit 164,324
Notes payable - other 160,000
10% Subordinated notes 417,500
Other 26,670
Tax assessment payable (Note 13) 913,461
Debentures payable (Note 13) 2,400,000
Excess of liabilities over assets of activities
to be disposed (Notes 8 and 13) 4,502,243
----------------- -----------------
Total current liabilities 5,771,706 3,921,768
Notes payable 30,033
8% Subordinated notes 2,000,000
Deferred grant revenue 291,827 291,827
----------------- -----------------
Total liabilities 8,093,566 4,213,595
----------------- -----------------
Commitments and contingencies (Note 4)
CAPITAL
Preferred stock (Notes 1 and 9) 119
Common stock (Notes 1 and 10) 77 682,960
Paid-in surplus 24,070,485 16,290,691
Accumulated deficit (19,127,946) (17,998,640)
----------------- -----------------
4,942,735 (1,024,989)
Less treasury stock, at cost - 1,238,656 shares (2,873,100) (2,873,100)
----------------- -----------------
Total capital 2,069,635 (3,898,089)
----------------- -----------------
Total liabilities and capital $ 10,163,201 $ 315,506
================= =================
See Notes to Consolidated Financial Statements
2
CNE Group, Inc. and Subsidiaries
Consolidated Statements of Operations
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenues:
Product sales $ 356,093 $ 356,093
Service fee income 168,519 168,519
Internet related income 34,819 $ 58,428 79,858 $ 133,116
----------- ----------- ----------- -----------
559,431 58,428 604,470 133,116
Costs of goods sold 278,353 278,353
----------- ----------- ----------- -----------
Gross profit 281,078 58,428 326,117 133,116
Other expenses:
Selling 17,091 17,091 10,000
Compensation and related costs 313,704 168,716 403,935 356,503
General and administrative 340,419 146,916 438,021 251,591
Depreciation and amortization 11,083 67,532 23,270 133,928
----------- ----------- ----------- -----------
682,297 383,164 882,317 752,022
----------- ----------- ----------- -----------
Loss from continuing operations before other
income and expenses (401,219) (324,736) (556,200) (618,906)
Amortization of debt discount (116,500) (7,442) (116,500) (14,884)
Interest expense (148,901) (87,136) (236,843) (173,851)
Gain on fixed assets (Note 1) 20,887 152,934
Reversal of Director fees accrual 55,000
----------- ----------- ----------- -----------
Loss from continuing operations before
income taxes (666,620) (398,427) (909,543) (599,707)
Income tax provision 5,250
----------- ----------- ----------- -----------
Loss from continuing operations (666,620) (398,427) (909,543) (604,957)
Discontinued operations:
Income from discontinued operations 3,712,884
----------- ----------- ----------- -----------
Net income (loss) $ (666,620) $ (398,427) $ (909,543) $ 3,107,927
=========== =========== =========== ===========
Per common share - basic and diluted:
Loss from continuing operations $ (.10) $ (.07) $ (.15) $ (.11)
Income from discontinued operations -- -- -- .67
----------- ----------- ----------- -----------
Net income (loss) per common share $ (.10) $ (.07) $ (.15) $ .56
=========== =========== =========== ===========
Weighted average number of common
shares outstanding - basic and diluted 6,490,920 5,590,944 6,040,932 5,580,944
=========== =========== =========== ===========
See Notes to Consolidated Financial Statements
3
CNE Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Six Months Ended
June 30,
---------------------------
2003 2002
----------- ---------
(Unaudited) (Unaudited)
Cash flows from operating activities:
Loss from continuing operations $ (909,543) $(604,957)
Adjustments to reconcile loss from continuing operations to net cash
provided by (used in) operating activities:
Depreciation and amortization 23,270 133,928
Issuance of common stock for services 81,250 31,500
Amortization of debt discount 116,500 14,884
Reversal of fees due to Directors (55,000)
Gain on fixed assets destroyed in catastrophe (152,934)
Changes in:
Accounts and insurance claims receivable 42,727 185,769
Inventory 8,600
Other assets (10,584) 32,274
Accrued expenses and other liabilities 8,642 258,807
Deferred grant revenue 116,740
----------- ---------
Cash used in continuing operations (639,138) (38,989)
Cash provided by discontinued operations 200,000
----------- ---------
Net cash provided by (used in) operating activities (639,138) 161,011
----------- ---------
Cash flows from investing activities:
Purchase of furniture and equipment (17,013)
----------- ---------
Net cash used in investing activities (17,013)
----------- ---------
Cash flows from financing activities:
Proceeds from issuance of 10% notes payable 1,000,000
Principal repayments on notes payable - other (110,000)
Payment of accounts receivable due Sellers of Econo-Comm, Inc. (100,000)
----------- ---------
Net cash provided by financing activities 790,000
----------- ---------
Increase in cash and cash equivalents 133,849 161,011
Cash and cash equivalents at beginning of period 183,200 200,782
----------- ---------
Cash and cash equivalents at end of period $ 317,049 $ 361,793
=========== =========
See Notes to Consolidated Financial Statements
4
CNE Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows, continued
Six Months Ended
June 30,
---------------------------
2003 2002
----------- -----------
(Unaudited) (Unaudited)
Supplemental disclosures of cash flow information related to
continuing operations:
Cash paid during the period for:
Interest $ 12,615 $144,000
Income taxes $ -- $ 5,250
Non-cash investing and financing activities relating to the acquisition of
subsidiaries and certain intellectual property rights:
Accounts receivable $ 102,048
Inventory 236,959
Intellectual property rights 1,550,609
Intangibles 7,285,894
Other assets 518,586
Accrued expenses and other liabilities (1,622,015)
8% notes payable (2,000,000)
Issuance of preferred stock, at par (119)
Issuance of common stock, at par (9)
Paid in surplus (6,048,075)
See Notes to Consolidated Financial Statements
5
CNE Group, Inc. and Subsidiaries
Notes To Consolidated Financial Statements
(Unaudited)
1. General
Business
CNE Group, Inc. (the "Company" or "CNE") is a holding company whose
primary operating subsidiaries are SRC Technologies, Inc. ("SRC") and
Econo-Comm, Inc. (d/b/a Mobile Communications) ("ECI"). SRC, also a
holding company, is the parent of Connectivity, Inc. ("Connectivity") and
US. Commlink, Ltd. ("USCL"). Connectivity, USCL and ECI, the "SRC group of
companies," market, manufacture, repair and maintain remote radio and
cellular-based emergency response products to a variety of federal, state
and local government institutions, and other vertical markets throughout
the United States. SRC and the Company have intellectual property rights
to certain key elements of these products - specifically, certain
communication, data entry and telemetry devices.
The Company also generates revenue from its CareerEngine division that is
engaged in the business of e-recruiting.
The Company and CareerEngine are located at 200 West 57th Street, New
York, NY 10019 (212- 977-2200). SRC, Connectivity and ECI are located at
3733 NW 16th Street, Lauderhill, FL 33311 (954-587-1414). USCL is located
at 6244 Preston Avenue, Livermore, CA 94550 (925-960-0097).
Corporate Matters
On April 17, 2003, pursuant to the terms of Section 251(g) of the Delaware
General Corporation Law, CareerEngine Network, Inc. ("CareerEngine")
became a wholly-owned subsidiary of the Company. Pursuant to this
transaction, the Company acquired all of the assets of CareerEngine and
all former stockholders of CareerEngine became the stockholders of the
Company, which is the entity that is now publicly traded on the American
and Pacific Stock Exchanges under the symbol "CNE." As a successor entity
to CareerEngine, the Company's shares are deemed to be registered under
Section 12(g) of the Securities Exchange Act of 1934 and Rule 12g-3
promulgated thereunder. The shares were issued without registration in
reliance upon exemptions provided in Section 3(a)(9) of the Securities Act
of 1933 and Rule 145 promulgated thereunder.
In addition, the officers and directors of CareerEngine became the
officers and directors of the Company. On April 23, 2003, three directors
of the Company resigned (Kevin J. Benoit, Edward A. Martino and James J.
Murtha) and their replacements were appointed (Michael J. Gutowski, Larry
M. Reid and Carol L. Gutowski). Ms. Gutowski is the wife of Michael J.
Gutowski. Messrs. Gutowski and Reid were also appointed the President and
Chief Operating Officer and the Executive Vice President of the Company,
respectively. See "Acquisition of all of the outstanding stock of SRC and
ECI" below.
See Notes to Consolidated Financial Statements
6
In addition, on April 23, 2003, the Board of Directors and majority of the
stockholders of the Company approved an increase in the authorized number
of shares of common stock to 40,000,000 with a par value of $0.00001 per
share and approved an increase in the authorized number of shares of
preferred stock to 25,000,000 with a par value of $0.00001 per share. The
preferred stock may be issued in one or more series at the discretion of
the Board of Directors.
Acquisition of all of the outstanding stock of SRC and ECI
SRC
On April 23, 2003, the Company issued to Mr. and Mrs. Gutowski, the former
principal common stockholders of SRC, an aggregate of 4,867,937 shares of
its non-voting Series C Preferred Stock and a like number of ten year
Class C Warrants, each to purchase one share of its Common Stock at $1.00
per share. The Class C Warrants are not exercisable and are not detachable
from the C Preferred Stock prior to 66 months after their issuance. See
Note 9 - Preferred Stock.
The Company issued to the other former common stockholders of SRC,
including Larry M. Reid, an aggregate of 899,976 shares of its Common
Stock, 1,697,961 shares of its non-voting Series A Preferred Stock and a
like number of ten year non-detachable Class A Warrants, each to purchase
one share of its Common Stock at $1.00 per share. The Class A Warrants are
not exercisable and are not detachable from the Series A Preferred Stock
prior to 66 months after their issuance. See Note 9 - Preferred Stock.
The Company issued an aggregate of 440,000 shares of its Series B
Preferred Stock to the former holders of the SRC Series B Preferred Stock.
See Note 9 - Preferred Stock.
The Series A Preferred Stock has an aggregate liquidating preference over
all other CNE equity of $1,697,961 and the Series B Preferred Stock has an
aggregate liquidating preference over all other CNE equity except the
Series A Preferred Stock of $440,000. The Series C Preferred Stock has no
liquidating preference.
ECI
On April 23, 2003, the Company issued to Gary Eichsteadt and Thomas
Sullivan, the former stockholders of ECI, an aggregate of 4,867,938 shares
of its Series C Preferred Stock and a like number of Class C Warrants. In
addition, Messrs. Eichsteadt and Sullivan retained certain of ECI's trade
receivables aggregating approximately $100,000. The Company also acquired
a patent related to the operation of ECI's business from Mr. Eichsteadt
for notes in the aggregate principal amount of $2,000,000, bearing
interest at the annual rate of 8%, payable quarterly, and due on October
31, 2008. Messrs. Eichsteadt and Sullivan remained executive officers ECI.
There were no relationships between the Company or any of its affiliates
and any of the sellers of the assets acquired by the Company prior to the
acquisition transactions.
See Notes to Consolidated Financial Statements
7
Private Financing
On April 23, 2003, the Company also effected a private financing pursuant
to which it issued notes (the "Notes") in the aggregate principal amount
of $1,000,000, of which $650,000 was to the officers of the Company, and
3,124,350 ten year Class B Warrants, each to purchase one share of its
Common Stock at $0.50 per share. The Notes bear interest at the annual
rate of 10% payable quarterly and are due on April 30, 2004. The Warrants
are anti-dilutive until the Notes have been repaid. The due date of the
Notes may be extended at the Company's option for an additional year in
consideration for the issuance of 10-year warrants to purchase 5% of the
Company's then outstanding common stock at $0.50 per share. These Warrants
would also be anti-dilutive until the Notes have been repaid. In addition,
the Company valued the warrants, utilizing the Black-Scholes Pricing
Model, at $699,000 which is being accounted for as debt discount and is
being amortized ratably over the one-year term of the Notes.
The Company is using the funds obtained from this financing to pay certain
ECI notes payable and for working capital. The financing was effected
pursuant to the exemption from the registration provisions of the
Securities Act of 1993 provided by Section 4(2) thereof.
2003 Stock Incentive Plan
On April 30, 2003 a majority of the stockholders and the Board of
Directors of the Company approved the 2003 Stock Incentive Plan (the "2003
Plan"), which provides, among other matters, for incentive and
non-qualified stock options to purchase 3,500,000 shares of Common Stock.
The purpose of the 2003 Plan is to provide incentives to officers, key
employees, directors, independent contractors and agents whose performance
will contribute to the long-term success and growth of the Company, to
strengthen the ability of the Company to attract and retain officers, key
employees, directors, independent contractors and agents of high
competence, to increase the identity of interests of such people with
those of the Company's stockholders and to help build loyalty to the
Company through recognition and the opportunity for stock ownership. The
2003 Plan is administered by the Incentive Compensation Committee of the
Board. On April 30, 2003, options to purchase 1,987,500 shares of the
Company's common stock, at a weighted average exercise price of $1.32,
were granted to five officers (1,800,000) and one employee (187,500) of
the Company. No options granted have been exercised. In addition, on April
30,2003, options to purchase 605,000 shares of the Company's common stock
were granted to independent contractors of the Company and the Company
recorded a charge of $81,250, relating to the 325,000 options that were
vested at June 30, 2003, on its Statement of Operations for the three and
six month ended June 30, 2003.
Catastrophe of September 11, 2001
The Company's headquarters were located at Suite 2112 of Two World Trade
Center in New York City. The catastrophe of September 11, 2001 involved no
injury to any of the Company's employees. However, with the complete
destruction of the building, all of the Company's leasehold improvements,
furniture and fixtures, and office and computer equipment located at this
site were also destroyed. Since the attack through the date of the
acquisitions and financing set forth above, the Company's management had
been preoccupied with the relocation and reestablishment of its
businesses, assessing and processing of insurance claims with the
assistance of a risk manager with its insurers, and
See Notes to Consolidated Financial Statements
8
seeking sources of financing. In 2002, the Company received insurance
proceeds in amounts that have exceeded the net carrying value of the
destroyed assets and, accordingly, recorded a $152,934 gain on assets
destroyed due to this catastrophe which was recorded in the six months
ended June 30, 2002. The Company also had insurance coverage for other
than assets destroyed. As of June 30, 2003 all outstanding insurance
claims relating to the catastrophe have been received.
In addition, the Company applied for governmental assistance grants
related to the catastrophe. In April and September 2002, the Company
received grants aggregating $291,827. The grants have a restriction that
could require their repayment, specifically if the Company were to
relocate a substantial portion its operations outside of New York City
before May 1, 2005. Until such time as this restriction shall no longer
apply, the grants will be classified as a liability of the Company. Upon
the satisfaction or lapse of the restrictions, the Company will remove the
liability and record grant income on its financial statements or,
alternatively, have to repay such grants if the above condition is not
satisfied.
2. Significant Accounting Policies
The accounting policies followed by the Company are set forth in Note B to
the Company's financial statements included in its Form 10-KSB, for the
year ended December 31, 2002, which was filed with the Securities and
Exchange Commission.
In the opinion of management, the unaudited consolidated financial
statements include all adjustments necessary for a fair presentation of
the Company's financial position as of June 30, 2003 and the results of
its operations and its cash flows for the three-month and six-month
periods ended June 30, 2003 and 2002. The financial statements as of June
30, 2003 and for the three and six months then ended are not necessarily
indicative of the results that may be expected for the year ending
December 31, 2003.
The Company has incurred substantial losses from continuing operations,
sustained substantial operating cash outflows and has a working capital
deficit. The above factors raise substantial doubt about the Company's
ability to continue as a going concern. The Company's continued existence
is dependent on its ability to obtain additional equity and/or debt
financing to fund its operations and ultimately to achieve profitable
operations. However, there is no assurance that the Company will achieve
profitable operations or cash flow.
Management believes that such working capital deficit, losses and negative
operating cash flows will ultimately be positively addressed by (i) the
acquisitions and related financing disclosed within these financial
statements as of June 30, 2003 and 2002 and the three month periods then
ended and (ii) the expected results of our current fund raising
activities.
Revenue Recognition
The Company's operations relating to manufacturing, marketing and
servicing its remote and cellular-based emergency response products
recognizes revenue from the sale of a product upon installation or
delivery to the customer, depending on the terms of the underlying sales
agreement
See Notes to Consolidated Financial Statements
9
Fees from E-recruiting are earned on the placement of job placement and
sponsorship advertisements on the Company's web site and are recognized
over the period during which the advertisements are exhibited. Revenues
derived from co-branding arrangements with content providers are of a
similar nature and are recognized over the period during which the
advertisements are exhibited. Website construction fees are recognized
ratably over the construction period. Monthly hosting and maintenance fees
for such sites are recognized ratably over the period of the underlying
contract.
Trade Receivables
The Company evaluates collectability of trade receivables based on the
creditworthiness of each customer. An allowance for doubtful accounts is
established, if necessary, based on the results of management's
assessment.
Concentration of Credit Risk
The Company is exposed to credit risks in the event of default by
financial institutions in which balances are maintained in excess of
insured limits. At June 30, 2003 such exposure aggregated $140,392.
The Company's sales are primarily provided to customers throughout the
United States. Historically, there have been no material concentration,
and credit losses have not been significant.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
Inventory
Inventory consists primarily of electronic parts and cellular phones.
Inventory is stated at the lower of cost (first-in, first-out) or market.
Startup Activities
Costs associated with the organization and start-up activities of the
Company were expensed as incurred.
Income (Loss) Per Share
Basic income (loss) per share is based on the weighted average number of
common shares outstanding. Employee incentive stock options and
outstanding warrants did not have an effect on the computation of diluted
earnings per share since they were anti-dilutive.
See Notes to Consolidated Financial Statements
10
Stock-Based Compensation
As permitted under SFAS No. 123, Accounting for Stock-based Compensation
(SFAS No. 123), the Company has elected to continue to follow the guidance
of APB Opinion No. 25, Accounting for Stock Issued to Employees (APB No.
25), and Financial Accounting Standards Board Interpretation No. 44,
Accounting for Certain Transactions Involving Stock Compensation--an
Interpretation of APB Opinion No. 25 (FIN No. 44), in accounting for its
stock-based employee compensation arrangements. Accordingly, no
compensation cost is recognized for any of the Company's fixed stock
options granted to employees when the exercise price of each option equals
or exceeds the fair value of the underlying common stock as of the grant
date for each stock option. Changes in the terms of stock option grants,
such as extensions of the vesting period or changes in the exercise price,
result in variable accounting in accordance with APB Opinion No. 25.
Accordingly, compensation expense is measured in accordance with APB No.
25 and recognized over the vesting period. If the modified grant is fully
vested, any additional compensation costs is recognized immediately. The
Company accounts for equity instruments issued to non-employees in
accordance with the provisions of SFAS No. 123.
At June 30, 2003, the Company and two of its subsidiaries each had
separate stock-based employee compensation plans. On March 14, 2003 all
recipients of options granted to them under the plans of the subsidiaries
rescinded their interests. As permitted under SFAS No. 148, Accounting for
Stock-Based Compensation--Transition and Disclosure, which amended SFAS
No. 123, the Company has elected to continue to follow the intrinsic value
method in accounting for its stock-based employee compensation
arrangements as defined by APB No. 25 and related interpretations
including FIN No. 44. The following table illustrates the effect on net
loss and loss per share if the Company had applied the fair value
recognition provisions of SFAS No. 123 to stock-based employee
compensation for options granted under its plan.
Six Months Ended
June 30,
--------------------------
2003 2002
--------- ----------
Net (loss) income, as reported $(909,543) $3,107,927
Less, Total stock-based employee compensation expense
determined under fair value-based method for all awards,
net of related tax effects 0 0
--------- ----------
Pro forma net (loss) income $(909,543) $3,107,927
========= ==========
Net (loss) income per share:
Basic and diluted - as reported $ (0.15) $ 0.56
========= ==========
Basic and diluted - pro forma $ (0.15) $ 0.56
========= ==========
On April 30, 2003, options to purchase 1,987,500 shares were granted to
five officers (1,800,000) and one employee (187,500) of the Company at
exercise prices equal to the market price of the Company's common stock on
the date of the grant. No options granted have been exercised. In
addition, on April 30, 2003, options to purchase 605,000 shares were
granted to independent contractors of the Company. See Note 1 - General:
2003 Stock Incentive Plan.
See Notes to Consolidated Financial Statements
11
Impairment of Long-Lived Assets
Impairment losses are recognized for long-lived assets used in operations
when indicators of impairment are present and the undiscounted cash flows
estimated to be generated by those assets are not sufficient to recover
the assets' carrying amount. The impairment loss is measured by comparing
the fair value of the asset to its carrying amount. No write-down of
assets for impairment losses were required during the three and six month
periods ended June 30, 2003 and the year ended December 31, 2002.
3. Discontinued Operations
In 1997, the Company entered into a triple net, credit type lease with
Carmike Cinemas, Inc. ("Carmike"), pursuant to which the Company leased to
Carmike six parcels of land and the improvements thereon. Concurrently,
the Company issued $72,750,000 principal amount of its adjustable rate
tender securities due November 1, 2015 (the "Bonds"). The Bonds were
secured by irrevocable letters of credit issued by a group of banks. In
connection therewith the Company entered into a Reimbursement Agreement
with Wachovia, as agent for the banks, under which the Company was
obligated to remit all rent received under the lease to Wachovia to
reimburse the banks for the Bond payments made by draws on their letters
of credit.
On August 8, 2000, Carmike filed a petition under Chapter 11 of the United
States Bankruptcy Code. As a result of that filing and Carmike's
subsequent failure to pay rent to date under the lease, the Company failed
to make required payments to Wachovia under the Reimbursement Agreement.
Accordingly, Wachovia declared a default under the Reimbursement Agreement
and accelerated all amounts due by the Company thereunder. Wachovia also
directed the Trustee under the related Indenture to redeem the Bonds. Such
amounts were paid entirely through draws on the related letters of credit
and were not paid with funds of the Company. However, as the Bonds are no
longer outstanding, all unamortized financing costs (amounting to
$804,667) relating thereto were expensed. In addition, Carmike has not
disaffirmed the lease and continues to occupy the six theaters.
Interest and fees which have been accrued on the reimbursement obligations
through December 2001 have been recorded with a corresponding amount of
accrued rent receivable from Carmike.
On January 31, 2002 title to the six theaters was transferred to the banks
in payment of the non-recourse debt under the Reimbursement Agreement and
the Company recognized a gain of $3,512,884, representing the excess of
the liabilities over the carrying value of the assets relating to the real
estate leased to Carmike. In addition, the Company received $294,755 in
connection with the sale of its common membership interest in Movieplex
relating to the transfer of title of the movie theaters to Wachovia.
See Notes to Consolidated Financial Statements
12
Income from discontinued operations for the three and six month periods
ended June 30, 2003 and 2002 are as follows:
Three Months Six Months
Ended Ended
June 30, June 30,
-------------------------------- -------------------------------
2003 2002 2003 2002
--------------- --------------- -------------- ---------------
Revenues:
Rental income $ -- $ -- $ -- $ 1,249,710
Gain on extinguishment
of debt 3,512,884
Common membership
interest transfer fee 294,755
--------------- --------------- -------------- ---------------
5,057,349
--------------- --------------- -------------- ---------------
Expenses:
Interest 1,249,710
Other 94,755
--------------- --------------- -------------- ---------------
1,344,465
--------------- --------------- -------------- ---------------
$ -- $ -- $ -- $ 3,712,884
=============== =============== ============== ===============
4. Litigation
The Company is a party to various vendor related litigation. Based on the
advise of legal counsel, the Company has accrued a liability of
approximately $100,000.
5. Debentures Payable
In 2000, the CareerEngine privately placed 48 units of its securities.
Each unit consisted of a $50,000 subordinated convertible debenture,
12,500 Class A Common Stock Warrants and 12,500 Class B Common Stock
Warrants. Each $50,000 debenture is convertible into 25,000 shares of
common stock. The Class A and B Warrants are exercisable at $4 and $6,
respectively. The debentures bear interest at 12%, payable quarterly,
commencing October 1, 2000 and mature March 31, 2010. The Class A Warrants
expired on March 31, 2003 and the Class B Warrants are exercisable at any
time until March 31, 2005. In the private placement, officers,
stockholders and directors of the Company acquired 10.5 units for
$525,000.
At June 30, 2003, the aggregate number of shares issuable upon the
exercise of all the outstanding warrants and the conversion of all the
debentures is 1,800,000.
CareerEngine incurred an interest charge of $246,875 due to the beneficial
conversion feature of the debentures. In addition, CareerEngine valued the
warrants at $740,000 which was
being accounted for as debt discount and was being amortized through the
period the debentures were callable. The amounts ascribed to the
beneficial conversion feature and the warrants aggregating $986,875 were
credited to paid-in-surplus.
See Notes to Consolidated Financial Statements
13
CareerEngine paid the placement agent cash of $375,025 and granted the
agent a warrant exercisable through June 2005 (valued at $200,000) to
purchase 5 units at $60,000 per unit. Of the total consideration, $426,658
was accounted for as deferred financing costs which was being amortized
over the life of the debentures and $148,367 deemed attributable to the
warrant portion of the unit, was charged to paid-in surplus.
Interest accrued on debentures payable, relating to the period from April
1, 2002 through June 30, 2003, aggregating $360,000 has not been paid
through July 1, 2003. Accordingly, since the CareerEngine had not paid the
interest due on July 1, 2002 by July 16, 2002 (the "grace period"),
CareerEngine's obligation is considered callable by the debenture holders.
However, for the debentures to be in default, the holders of no less then
51% in principal amount of the debentures must notify the Company that an
event of default has occurred and may thereafter declare all debentures
and related interest immediately due and payable. As of August 18, 2003,
no such demand had been made by any debenture holder.
As a result of the nonpayment of interest as set forth above and the
reclassification of the debentures as a current obligation, the remaining
(i) unamortized debt discount on the debentures ($661,980) was recognized
as interest expense and (ii) unamortized deferred financing costs
associated with the debentures ($320,350) was recognized as expense, in
2002.
See Note 13 "Subsequent Events: Conversion of Debentures Payable."
6. Income Taxes
Commencing in August 2000, pursuant to an understanding with the IRS, the
Company began paying $30,000 per month until the assessed tax deficiency
relating to the years 1985 through 1989 and interest thereon is fully
satisfied. However, after a technical review by special tax counsel of the
tax deficiency and related interest, management of the Company believed
that there may be a basis for its reduction. Pending the ultimate
resolution of this matter with the IRS, in September 2001 the Company
temporarily suspended making monthly payments. At June 30, 2003, the
outstanding balance of the liability amounted to approximately $946,000
including related interest.
See Note 13 "Subsequent Events: Settlement of Tax Assessment Payable."
7. Director Fees
At June 30, 2003, the Company's five outside directors have similarly
agreed to forego previously accrued and unpaid directors' fees earned
through December 31, 2001 and agreed to forgo future compensation until
further notice. The reversal of previously accrued fees has been reflected
in the Company's Consolidated Statement of Operations for the three and
six-month period ended June 30, 2002. Due to the nature of the Company's
operations prior to the acquisitions and related financing in April, 2003,
appropriate director compensation was deemed to be a nominal amount by the
Company.
See Notes to Consolidated Financial Statements
14
8. Excess of Liabilities over Assets of Activities to be Disposed
Two subsidiaries of the Company have remaining liabilities of $4,605,447
that are substantially in excess of their remaining assets of $103,204.
Each of these subsidiaries created a trust for the benefit of their
creditors. The assets of each trust consists of the remaining assets of
the subsidiary (or if the assets were not transferred to the trust, their
cash value determined by independent appraisals obtained for the trusts).
The Trustees of each of the trusts are required to utilize such remaining
assets to satisfy the remaining liabilities of such subsidiaries. The
creditors who are subject to such trust arrangements have not approved or
been asked to approve the extinguishment of these obligations. Company's
counsel has opined that the creditors of the two subsidiaries cannot reach
the assets of the Company or any of its other subsidiaries to satisfy the
obligations of these two subsidiaries to such creditors. The Company
expects that the creditors of these two subsidiaries will look directly to
the Trustees and the remaining assets of the trusts for the satisfaction
of their claims and that the Company will be freed from dealing with these
issues.
Excess of liabilities over assets of activities to be disposed consists of
the following at June 30, 2003
June 30, 2003
-------------
Transferred liabilities:
Accounts payable and accrued expenses $ 444,910
Interest payable 360,000
Debentures payable 2,400,000
Tax assessments payable 1,373,948
Other 26,589
-----------
4,605,447
Transferred assets: (103,204)
-----------
Excess of liabilities over assets
of activities to be disposed $ 4,502,243
===========
See Note 13 "Subsequent Events: Settlement of Tax Assessment Payable,
Conversion of Debentures Payable, and Sale of Subsidiary."
9. Preferred Stock
Preferred Stock consists of the following at June 30, 2003 and December
31, 2002:
June 30, December 31,
2003 2002
---------- ------------
Par value per share: $ .00001 $ .10000
Authorized number of shares 25,000,000 1,000,000
Issued and outstanding number of shares:
Series A 1,697,961 --
Series B 440,000 --
Series C 9,735,875 --
Series E -- --
---------- ------------
Total 11,873,836 --
========== ============
See Notes to Consolidated Financial Statements
15
10. Common Stock
Common Stock consists of the following at June 30, 2003 and December 31,
2002:
June 30, December 31,
2003 2002
---------- ------------
Par value per share: $ .00001 $ .10000
Authorized number of shares 40,000,000 10,000,000
Issued and outstanding number of shares 7,729,576 6,829,600
11. Acquisitions and related Unaudited Pro forma Financial Information
The purchase price of the acquisition of SRC and ECI was allocated to the
Company's assets and liabilities, tangible and intangible (as determined
by an independent appraiser), with the excess of the purchase price over
the fair value of the net assets acquired of $7,285,894 being recorded as
Intangibles. The value of the intellectual property rights, amounting to
$1,550,609, acquired in the related financing was also determined by an
independent appraiser. SRC and its subsidiaries Connectivity and USCL, and
ECI, collectively market, manufacture, repair and maintain remote radio
and cellular-based emergency response products to a variety of federal,
state and local government institutions, and other vertical markets
throughout the United States. Due to these acquisitions and related
financing, the Company has acquired intellectual property rights to
certain key elements of these products - specifically, certain
communication, data entry and telemetry devices.
The Company's consolidated financial statements include the results of
operations of SRC and ECI from their respective acquisition dates. The
following unaudited pro forma information presents a summary of our
consolidated results of operations as if the SRC and ECI acquisitions and
the related financing had taken place on January 1, 2002 for the three and
six month periods ended June 30, 2002 and on January 1, 2003 for the three
and six month periods ended June 30, 2003. The SRC and ECI acquisitions
have been recorded in accordance with SFAS No. 141; therefore, no
amortization of goodwill or intangible assets without determinable lives
related to SRC and ECI is reflected in the prior year amounts. These pro
forma results have been prepared for comparative purposes only and do not
purport to be indicative of the results of operations which actually would
have resulted had the acquisitions occurred on January 1, 2002 or January
1, 2003, as the case may be, or which may result in the future.
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Revenues $ 673,251 $ 794,399 $ 1,201,933 $ 1,949,196
Expenses 1,522,113 1,565,223 2,694,324 3,253,931
----------- ----------- ----------- -----------
Loss from continuing
operations $ (848,862) $ (770,824) $(1,492,391) $(1,304,735)
=========== =========== =========== ===========
Loss from continuing
operations per share:
Basic and diluted $ (0.13) $ (0.14) $ (0.15) $ (0.23)
=========== =========== =========== ===========
See Notes to Consolidated Financial Statements
16
12. American Stock Exchange Listing
The Company has sustained losses from continuing operations for five of
its most recent fiscal years and, accordingly, pursuant to certain
requirements of the American Stock Exchange the Company must have
Stockholders' Equity or Capital in excess of $6,000,000 to meet the
Exchange's continuing listing requirements.
At June 30, 2003 the Company's Capital was $2,069,635. The subsequent
events set forth in Note 13 below increases its Capital to $6,142,757 as
follows:
Capital at June 30, 2003 $2,069,635
Effect of settlement of tax assessment payable 895,622
Effect of debentures payable conversion 2,587,500
Effect of sale of subsidiary 590,000
----------
Capital at June 30, 2003, as adjusted by the
Subsequent Events as per Note 13 $6,142,757
==========
The Company is actively seeking additional equity and/or debt financing
for its business operations.
13. Subsequent Events
Settlement of Tax Assessment Payable
On July 16, 2003, the Internal Revenue Service accepted an Offer in
Compromise submitted on April 24, 2003 by a subsidiary of the Company to
settle its Tax Assessment Payable amounting to approximately $946,000,
including related interest, at June 30, 2003. The accepted Offer in
Compromise provides for payment of $50,000 cash, payable on or before
October 14, 2003. The subsidiary paid $30,000 of the settlement in July
2003 with the balance to be paid prior to October 14, 2003.
The Company will recognized an adjustment to income in the amount of
approximately $895,000 relating to this transaction when the settlement is
paid in full.
Conversion of Debentures Payable
In August 2003, 93.75% of the holders of the Debentures Payable issued by
a subsidiary of the Company elected to (i) convert the entire outstanding
principal balance of the debentures amounting to approximately $2,250,000,
(ii) return (562,500) of the related outstanding B Warrants of the
Company, and (iii) waive all accrued and unpaid interest relating thereto
($337,500), in consideration of (i) 1,125,000 shares of the common stock
of the Company and (ii) 1,125,000 five-year common stock warrants
exercisable at $3.00 per share. One half of these warrants are exercisable
immediately with the balance exercisable commencing January 1, 2004. The
conversion of the Debentures Payable will increase the Company's Common
Stock, par value $.00001, by $11.00, and increased Paid-in-surplus by
$2,587,489.
See Notes to Consolidated Financial Statements
17
Sale of Subsidiary
On August 15, 2003 the Company, for a nominal amount, sold all the stock
of one of the subsidiaries whose remaining assets and liabilities were
transferred to a trust for the benefit of its creditors and will recognize
a gain amounting to approximately $590,000.
See Notes to Consolidated Financial Statements
18
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Special Note Regarding Forward Looking Statements
Certain statements in this Quarterly Report on Form 10-QSB constitute
"forward-looking statements" relating to the Company within the meaning of
the Private Securities Litigation Reform Act of 1995. All statements
regarding future events, our financial performance and operating results,
our business strategy and our financing plans are forward-looking
statements. In some cases you can identify forward-looking statements by
terminology, such as "may," "will," "would," "should," "could," "expect,"
"intend," "plan," "anticipate," "believe," "estimate," "predict,"
"potential," or "continue," the negative of such terms or other comparable
terminology. These statements are only predictions. Known and unknown
risks, uncertainties and other factors could cause actual results to
differ materially from those contemplated by the statements. In evaluating
these statements, you should specifically consider various factors that
may cause our actual results to differ materially from any forward-looking
statements.
General
CNE Group, Inc. (the "Company" or "CNE") is a holding company whose
primary operating subsidiaries are SRC Technologies, Inc. ("SRC" and
Econo-Comm, Inc. (d/b/a Mobile Communications) ("ECI"). SRC, also a
holding company, is the parent of Connectivity, Inc. ("Connectivity") and
US. Commlink, Ltd. ("USCL"). Connectivity, USCL and ECI, the "SRC group of
companies," market, manufacture, repair and maintain remote radio and
cellular-based emergency response products to a variety of federal, state
and local government institutions, and other vertical markets throughout
the United States. SRC and the Company have intellectual property rights
to certain key elements of these products - specifically, certain
communication, data entry and telemetry devices.
The Company also generates revenue from its CareerEngine division that is
engaged in the business of e-recruiting.
2003 Stock Incentive Plan
On April 30, 2003 a majority of the stockholders and the Board of
Directors of the Company approved the 2003 Stock Incentive Plan (the "2003
Plan"), which provides, among other matters, for incentive and
non-qualified stock options to purchase 3,500,000 shares of Common Stock.
The purpose of the 2003 Plan is to provide incentives to officers, key
employees, directors, independent contractors and agents whose performance
will contribute to the long-term success and growth of the Company, to
strengthen the ability of the Company to attract and retain officers, key
employees, directors, independent contractors and agents of high
competence, to increase the identity of interests of such people with
those of the Company's stockholders and to help build loyalty to the
Company through recognition and the opportunity for stock ownership. The
2003 Plan is
See Notes to Consolidated Financial Statements
19
administered by the Incentive Compensation Committee of the Board. On
April 30, 2003, options to purchase 1,987,500 shares of common stock of
the Company, at a weighted average exercise price of $1.32, were granted
to five officers (1,800,000) and one employee (187,500) of the Company. No
options granted have been exercised. In addition, on April 30, 2003,
options to purchase 605,000 shares of common stock of the Company were
granted to independent contractors of the Company and the Company recorded
a charge of $81,250 relating to the 325,000 options that were vested at
June 30, 2003 on its Statement of Operations for the three and six month
periods ended June 30, 2003.
Catastrophe of September 11, 2001
The Company's headquarters were located at Suite 2112 of Two World Trade
Center in New York City. The catastrophe of September 11, 2001 involved no
injury to any of the Company's employees. However, with the complete
destruction of the building, all of the Company's leasehold improvements,
furniture and fixtures, and office and computer equipment located at this
site were also destroyed. Since the attack through the date of the
acquisitions and financing set forth above, the Company's management had
been preoccupied with the relocation and reestablishment of its
businesses, assessing and processing of insurance claims with the
assistance of a risk manager with its insurers, and seeking sources of
financing. In 2002, the Company received insurance proceeds in amounts
that have exceeded the net carrying value of the destroyed assets and,
accordingly, recorded a $152,934 gain on assets destroyed due to this
catastrophe which was recorded in the six months ended June
30, 2002. The Company also had insurance coverage for other than assets
destroyed. As of June 30, 2003 all outstanding insurance claims relating
to the catastrophe have been received.
In addition, the Company applied for governmental assistance grants
related to the catastrophe. In April and September 2002, the Company
received grants aggregating $291,827. The grants have a restriction that
could require their repayment, specifically if the Company were to
relocate a substantial portion its operations outside of New York City
before May 1, 2005. Until such time as this restriction shall no longer
apply, the grants will be classified as a liability of the Company. Upon
the satisfaction or lapse of the restrictions, the Company will remove the
liability and record grant income on its financial statements or,
alternatively, have to repay such grants if the above condition is not
satisfied.
Critical Accounting Policies
The Company's consolidated financial statements have been prepared in
accordance with the accounting principles generally accepted in the United
States of America. Certain accounting policies have a significant impact
on amounts reported in the financial statements. A summary of those
significant accounting policies can be found in Note B to the Company's
financial statements included in its Annual Report on Form 10-KSB for the
year ended December 31, 2002. The Company has not adopted any significant
new accounting policies during the six-month period ended June 30, 2003.
A significant judgment made by management in the preparation of the
Company's financial statements is the determination of the allowance for
doubtful accounts. This determination is made periodically in the ordinary
course of business.
See Notes to Consolidated Financial Statements
20
A. Results of Operations:
Three-Month Period Ended June 30, 2003 Compared to the Three-Month Period
Ended June 30, 2002
Revenues
Total revenues from continuing operations increased to $559,431 for the
three-month period ended June 30, 2003 from $58,428 for the three-month
period ended June 30, 2002.
Product sales income increased to $356,093 for the three-month period
ended June 30, 2003 from nil for the three-month period ended June 30,
2002 due to the acquired operations, in April 2003, of SRC Technologies,
Inc. and its subsidiaries and Econo-Comm, Inc.
Service fee income increased to $168,519 for the three-month period ended
June 30, 2003 from nil for the three-month period ended June 30, 2002 due
to the acquired operations, in April 2003, of SRC Technologies, Inc. and
its subsidiaries and Econo-Comm, Inc.
Internet related income decreased to $34,819 for the three-month period
ended June 30, 2003 from $58,428 for the three-month period ended June 30,
2002 as the operations of our subsidiary, CareerEngine, Inc. have been
significantly reduced since January 2001.
In July 2003, (i) a subsidiary of the Company entered into a product
supply, license and distribution agreement for its wireless call box
products with the Commercial, Government and Industrial Solutions Sector
of Motorola, Inc. and (ii) another subsidiary of the Company was awarded a
$655,000 contract to replace outmoded motorist emergency call box stations
in the Posey/Webster Tubes located in Alameda, California.
Cost of Goods Sold
Costs of goods sold, which relates to product sales and related service
fee income increased to $278,353 for the three-month period ended June 30,
2003 from nil for the three-month period ended June 30, 2002 due to the
acquired operations, in April 2003, of SRC Technologies, Inc. and its
subsidiaries and Econo-Comm, Inc.
Other Expenses
Total other expenses from continuing operations increased to $682,297 for
the three-month period ended June 30, 2003 from $383,164 for the
three-month period ended June 30, 2002.
See Notes to Consolidated Financial Statements
21
Selling expenses increased to $17,091 for the three-month period ended
June 30, 2003 from nil for the three-month period ended June 30, 2002 due
to the acquired operations, in April 2003, of SRC Technologies, Inc. and
its subsidiaries and Econo-Comm, Inc.
Compensation and related costs increased to $313,704 for the three-month
period ended June 30, 2003 from $168,716 for the three-month period ended
June 30, 2002 due to the acquired operations and related increase in
personnel, in April 2003, of SRC Technologies, Inc. and its subsidiaries
and Econo-Comm, Inc.
General and administrative expenses increased to $340,419 for the
three-month period ended June 30, 2003 from $146,916 for the three-month
period ended June 30, 2002 due to the costs associated with the
acquisition and related operations of SRC Technologies, Inc. and its
subsidiaries and Econo-Comm, Inc., and the costs associated with the
private financing, both completed in April 2003.
Other Items
Amortization of debt discount increased to $116,500 for the three-month
period ended June 30, 2003 from $7,442 for the three-month period ended
June 30, 2002 due to cessation of amortization of the debt discount
related to debentures payable and the commencement of amortization of the
debt discount ($699,000) related to the 10% subordinated notes over a
period of one year.
Interest expense increased to $148,901 for the three-month period ended
June 30, 2003 from $87,136 for the three-month period ended June 30, 2002
due primarily to the issuance of the Company's 10% and 8% subordinated
notes in April 2003.
Gain on fixed assets destroyed in catastrophe decreased to nil for the
three-month period ended June 30, 2003 from $20,887 for the three-month
period ended June 30, 2002 due to the destruction of the World Trade
Center where the Company was headquartered.
Operating Loss
On a pre-tax basis, we had a loss of $666,620 for the three-month period
ended June 30, 2003 from continuing operations compared with a loss of
$398,427 for the three-month period ended June 30, 2002.
Our loss from continuing operations for the three-month period ended June
30, 2003 was $666,620 compared with a loss from continuing operations of
$398,427 for the three-month period ended June 30, 2002. For the
three-month period ended June 30, 2003, loss per common share from
continuing operations, basic and diluted, was $.10 per share. For the
three-month period ended June 30, 2002, loss per common share from
continuing operations, basic and diluted, was $.07 per share.
See Notes to Consolidated Financial Statements
22
Our net loss for the three-month period ended June 30, 2003 was $666,620
compared with a net loss of $398,427 for the three-month period ended June
30, 2002. For the three-month period ended June 30, 2003, net loss per
common share, basic and diluted, was $.10 per share. For the three-month
period ended June 30, 2002, net loss per common share, basic and diluted,
was $.07 per share.
Six-Month Period Ended June 30, 2003 Compared to the Six-Month Period
Ended June 30, 2002
Revenues
Total revenues from continuing operations increased to $604,470 for the
six-month period ended June 30, 2003 from $133,116 for the six-month
period ended June 30, 2002.
Product sales income increased to $356,093 for the six-month period ended
June 30, 2003 from nil for the six-month period ended June 30, 2002 due to
the acquired operations, in April 2003, of SRC Technologies, Inc. and its
subsidiaries and Econo-Comm, Inc.
Service fee income increased to $168,519 for the six-month period ended
June 30, 2003 from nil for the six-month period ended June 30, 2002 due to
the acquired operations, in April 2003, of SRC Technologies, Inc. and its
subsidiaries and Econo-Comm, Inc.
Internet related income decreased to $79,858 for the six-month period
ended June 30, 2003 from $133,116 for the six-month period ended June 30,
2002 as the operations of our subsidiary, CareerEngine, Inc. have been
significantly reduced since January 2001.
In July 2003, (i) a subsidiary of the Company entered into a product
supply, license and distribution agreement for its wireless call box
products with the Commercial, Government and Industrial Solutions Sector
of Motorola, Inc. and (ii) another subsidiary of the Company was awarded a
$655,000 contract to replace outmoded motorist emergency call box stations
in the Posey/Webster Tubes located in Alameda, California.
Cost of Goods Sold
Costs of goods sold, which relates to product sales and related service
fee income increased to $278,353 for the six-month period ended June 30,
2003 from nil for the six-month period ended June 30, 2002 due to the
acquired operations, in April 2003, of SRC Technologies, Inc. and its
subsidiaries and Econo-Comm, Inc.
Other Expenses
Total other expenses from continuing operations increased to $882,317 for
the six-month period ended June 30, 2003 from $752,0224 for the six-month
period ended June 30, 2002.
See Notes to Consolidated Financial Statements
23
Selling expenses increased to $17,091 for the six-month period ended June
30, 2003 from $10,000 for the six-month period ended June 30, 2002 due to
the acquired operations, in April 2003, of SRC Technologies, Inc. and its
subsidiaries and Econo-Comm, Inc.
Compensation and related costs increased to $403,935 for the six-month
period ended June 30, 2003 from $356,503 for the six-month period ended
June 30, 2002 due to the acquired operations and related increase in
personnel, in April 2003, of SRC Technologies, Inc. and its subsidiaries
and Econo-Comm, Inc.
General and administrative expenses increased to $438,021 for the
six-month period ended June 30, 2003 from $251,591 for the six-month
period ended June 30, 2002 due to the costs associated with the
acquisition and related operations of SRC Technologies, Inc. and its
subsidiaries and Econo-Comm, Inc., and the costs associated with the
private financing, both completed in April 2003.
Other Items
Amortization of debt discount increased to $116,500 for the six-month
period ended June 30, 2003 from $14,884 for the six-month period ended
June 30, 2002 due to cessation of amortization of the debt discount
related to debentures payable and the commencement of amortization of the
debt discount ($699,000) related to the 10% subordinated notes over a
period of one year.
Interest expense increased to $236,843 for the six-month period ended June
30, 2003 from $173,851 for the six-month period ended June 30, 2002 due
primarily to the issuance of the Company's 10% and 8% subordinated notes
in April 2003.
Gain on fixed assets destroyed in catastrophe decreased to nil for the
six-month period ended June 30, 2003 from $152,934 for the six-month
period ended June 30, 2002 due to the destruction of the World Trade
Center where the Company was headquartered.
Reversal of Directors fees decreased to $55,000 for the six-month period
ended June 30, 2003 from nil for the six-month period ended June 30, 2002.
This amount relates to the forgiveness of fees earned by the outside
Directors and their agreement to forego these fees until further notice.
Operating Loss
On a pre-tax basis, we had a loss of $909,543 for the six-month period
ended June 30, 2003 from continuing operations compared with a loss of
$599,707 for the six-month period ended June 30, 2002 from continuing
operations primarily due to start-up expenses associated with the
acquisition of SRC Technologies, Inc. and its subsidiaries and the related
private financing.
See Notes to Consolidated Financial Statements
24
Our loss from continuing operations for the six-month period ended June
30, 2003 was $909,543 compared with a loss from continuing operations of
$604,957 for the six-month period ended June 30, 2002. For the six-month
period ended June 30, 2003, loss per common share from continuing
operations, basic and diluted, was $.15 per share. For the six-month
period ended June 30, 2002, loss per common share from continuing
operations, basic and diluted, was $.11 per share.
Our income from discontinued operations for the six-month period ended
June 30, 2003 was nil compared with income from discontinued operations of
$3,712,884 for the six-month period ended June 30, 2002 due primarily to
the transfer of title to the six theaters leased to Carmike Cinemas, Inc.
by the Company to the banks in payment of the related non-recourse debt,
and the consequential recognition of the related gain representing the
excess of liabilities over the carrying value of the theaters. For the
six-month period ended June 30, 2003, income per common share from
discontinued operations, basic and diluted, was nil per share. For the
six-month period ended June 30, 2002, income per common share from
discontinued operations, basic and diluted, was $.67 per share.
Our net loss for the six-month period ended June 30, 2003 was $909,543
compared with net income of $3,107,927 for the six-month period ended June
30, 2002. For the six-month period ended June 30, 2003, net loss per
common share, basic and diluted, was $.15 per share. For the six-month
period ended June 30, 2002, net income per common share, basic and
diluted, was $.56 per share.
B. Liquidity and Capital Resources
The Company has incurred substantial losses from continuing operations,
sustained substantial operating cash outflows and has a working capital
deficit. The above factors raise substantial doubt about the Company's
ability to continue as a going concern. The Company's continued existence
is dependent on its ability to obtain additional equity and/or debt
financing to fund its operations and ultimately to achieve profitable
operations. However, there is no assurance that the Company will achieve
profitable operations or cash flow.
On April 23, 2003, the Company also effected a private financing pursuant
to which it issued notes (the "Notes") in the aggregate principal amount
of $1,000,000, of which $650,000 was from the officers of the Company, and
3,124,350 ten year Class B Warrants, each to purchase one share of its
Common Stock at $0.50 per share. The Notes bear interest at the annual
rate of 10% payable quarterly and are due on April 30, 2004. The Warrants
are non-dilutive until the Notes have been repaid. The due date of the
Notes may be extended at the Company's option for an additional year in
consideration for the issuance of 10-year warrants to purchase 5% of the
Company's then outstanding common stock at $0.50 per share. These Warrants
will also be non-dilutive until the Notes have been repaid. In addition,
the Company valued the warrants at $699,000 which is being accounted for
as debt discount and is being amortized ratably over the one-year term of
the Notes.
See Notes to Consolidated Financial Statements
25
The Company is using the funds obtained from this financing to pay certain
ECI notes payable and for working capital. The financing was effected
pursuant to the exemption from the registration provisions of the
Securities Act of 1993 provided by Section 4(2) thereof.
Management believes that such working capital deficit, losses and negative
operating cash flows will ultimately be positively addressed by (i) the
acquisitions and related financing disclosed within these financial
statements as of June 30, 2003 and 2002 and the three month periods then
ended and (ii) the expected results of our current fund raising
activities.
We do not have any material commitments for capital expenditures as of
June 30, 2003.
C. American Stock Exchange
The Company has sustained losses from continuing operations for five of
its most recent fiscal years and, accordingly, pursuant to certain
requirements of the American Stock Exchange the Company must have
Stockholders' Equity or Capital in excess of $6,000,000 to meet the
Exchange's continuing listing requirements. At June 30, 2003 the Company's
Capital was $2,069,635.
Capital at June 30, 2003 $ 2,069,635
Effect of settlement of tax assessment payable 895,622
Effect of debentures payable conversion 2,587,500
Effect of sale of subsidiary 590,000
---------------
Capital at June 30, 2003, as adjusted by the
Subsequent Events as per Note 13 of the financial
statements filed with this Form 10-QSB $ 6,142,757
===============
The Company is actively seeking additional equity and/or debt financing
for its business operations.
D. Inflation
The Company believes that inflation does not significantly impact its
current operations.
Item 3. Controls and Procedures
The Chief Executive Officer and Chief Financial Officer of the
Company have conducted an evaluation of the effectiveness of
disclosure controls and procedures pursuant to Exchange Act Rule
13a-14. Based on that evaluation, they have concluded that the
Company's disclosure controls and procedures are effective in
ensuring that all material information required to be filed in this
Quarterly Report on Form 10-QSB has been made known to them in a
timely fashion. There have been no significant changes in internal
controls, or in other factors that could significantly affect
internal controls, subsequent to the date they completed their
evaluation.
See Notes to Consolidated Financial Statements
26
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is a party to various vendor related litigations. Based on the
advise of legal counsel, the Company has accrued a liability of
approximately $100,000.
Item 2. Changes in Securities and Use of Proceeds.
During the three months ended June 30, 2003, the Company issued notes and
warrants in a private transaction pursuant to the exemption from
registration provided by Section 4(2) of the Securities Act of 1933. For
information on these issuances, see "Part I - Item 2: Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources." The Company issued preferred stock,
common stock, warrants and notes in connection with its acquisition of SRC
and ECI pursuant to the exemption from registration provided by Regulation
D promulgated under the Securities Act. For information on these
issuances, see "Part II - Item 5: Other Information."
Item 3. Defaults in Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
Corporate Matters
On April 17, 2003, pursuant to the terms of Section 251(g) of the Delaware
General Corporation Law, CareerEngine Network, Inc. ("CareerEngine")
became a wholly-owned subsidiary of the Company. Pursuant to this
transaction the Company acquired all of the assets of CareerEngine and all
former stockholders of CareerEngine became the stockholders of the
Company, which is the entity that is now publicly traded on the American
and Pacific Stock Exchanges under the symbol "CNE." As a successor entity
to CareerEngine, the Company's shares are deemed to be registered under
Section 12(g) of the Securities Exchange Act of 1934 and Rule 12g-3
promulgated thereunder. The shares were issued without registration in
reliance upon exemptions provided in Section 3(a)(9) of the Securities Act
of 1933 and Rule 145 promulgated thereunder.
In addition, the officers and directors of CareerEngine became the
officers and directors of the Company. On April 23, 2003, three directors
of the Company resigned (Kevin J. Benoit, Edward A. Martino and James J.
Murtha) and their replacements were appointed (Messrs. Michael J. Gutowski
and Larry M. Reid
See Notes to Consolidated Financial Statements
27
and Ms. Carol L. Gutowski). Ms. Gutowski is the wife of Mr. Gutowski.
Messrs. Gutowski and Reid were also appointed the President and Chief
Operating Officer and the Executive Vice President of the Company,
respectively. See "Acquisition of all of the outstanding stock of SRC and
ECI" below.
Acquisition of all of the outstanding stock of SRC and ECI
SRC
On April 23, 2003, the Company issued to Mr.. and Mrs.. Gutowski, the
former principal common stockholders of SRC, an aggregate of 4,867,937
shares of its non-voting Series C Preferred Stock and a like number of ten
year Class C Warrants, each to purchase one share of its Common Stock at
$1.00 per share. The Class C Warrants are not exercisable and are not
detachable from the C Preferred Stock prior to 66 months after their
issuance.
The Company issued to the other former common stockholders of SRC,
including Mr. Reid, an aggregate of 899,976 shares of its Common Stock,
1,697,961 shares of its non-voting Series A Preferred Stock and a like
number of ten year non-detachable Class A Warrants, each to purchase one
share of its Common Stock at $1.00 per share. The Class A Warrants are not
exercisable and are not detachable from the A Preferred Stock prior to 66
months after their issuance.
The Company issued an aggregate of 440,000 shares of its Series B
Preferred Stock to the former holders of the SRC Series B Preferred Stock.
The A Preferred Stock has an aggregate liquidating preference over all
other CNE equity of $1,697,961 and the B Preferred Stock has an aggregate
liquidating preference over all other CNE equity except the A Preferred
Stock of $440,000. The C Preferred Stock has no liquidating preference.
ECI
On April 23, 2003, the Company issued to Gary Eichsteadt and Thomas
Sullivan, the former stockholders of ECI, an aggregate of 4,867,938 shares
of its Series C Preferred Stock and a like number of Class C Warrants. In
addition, Messrs. Eichsteadt and Sullivan retained certain of ECI's trade
receivables aggregating approximately $100,000. The Company also acquired
a patent related to the operation of ECI's business from Mr. Eichsteadt
for the aggregate principal amount of $2,000,000, bearing interest at the
annual rate of 8%, payable quarterly, and due on October 31, 2008. Messrs.
Eichsteadt and Sullivan remained executive officers ECI.
There were no relationships between the Company or any of its affiliates
and any of the sellers of the assets acquired by the Company prior to the
acquisition transactions.
See Notes to Consolidated Financial Statements
28
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 from the Company's Chief Executive Officer
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 from the Company's Chief Financial Officer
32.1: Certification of the Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2: Certification of the Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
A statement regarding the computation of per share earnings is
omitted because the computation is described in Note 2 of the Notes
to Consolidated Financial Statements (Unaudited) in this Form
10-QSB.
(b) Reports on Form 8-K:
During the six months ended June 30, 2003 and the period July 1,
2003 to the date of this Form 10-QSB the Company filed reports on
Form 8K on May 6, 2003 as amended on Form 8-K/A on July 7, 2003, on
June 30, 2003 as amended on Form 8-K/A on July 7, 2003, and on July
28, 2003. These Form 8-K's and related Form-8K/A's and the Exhibits
attached thereto are incorporated herein by reference.
See Notes to Consolidated Financial Statements
29
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CNE GROUP, INC.
/s/ George W. Benoit
--------------------------------------------
Date: August 19, 2003 George W. Benoit, Chairman of the Board
of Directors, President, and Chief Executive
Officer
/s/ Anthony S. Conigliaro
--------------------------------------------
Date: August 19, 2003 Anthony S. Conigliaro, Vice President and
Chief Financial Officer
See Notes to Consolidated Financial Statements
30