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 September 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 November 14, 2003
----- --------------------------------
Common stock - par value $.00001 8,890,920 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 nine months ended September
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
September 30, December 31,
2003 2002
----------------- -----------------
(Unaudited) (Audited)
ASSETS
Current:
Cash and cash equivalents $ 122,734 $ 183,200
Accounts receivable, net 250,508 35,144
Subscription receivable (Note 1) 500,000
Insurance claims receivable 63,912
Inventory 274,724
Other 7,981
----------------- -----------------
Total current assets 1,155,947 282,256
Fixed assets, net 462,078 33,250
Intellectual property rights, net 1,520,609
Goodwill 7,285,894
Other 87,636
----------------- -----------------
Total assets $ 10,512,164 $ 315,506
================= =================
LIABILITIES
Current:
Accounts payable and accrued expenses $ 632,186 $ 392,307
Interest payable (Notes 5 and 8) 77,215 216,000
Lines of credit 464,291
Notes payable - other 160,000
10% Subordinated notes 592,250
Other 16,075
Tax assessment payable (Note 6) 913,461
Debentures payable (Notes 5 and 8) 2,400,000
Excess of liabilities over assets of
activities to be disposed (Notes 5 and 8) 341,220
----------------- -----------------
Total current liabilities 2,283,237 3,921,768
Notes payable 28,137
8% Subordinated notes 1,000,000
Deferred grant revenue 300,000 291,827
----------------- -----------------
Total liabilities 3,611,374 4,213,595
----------------- -----------------
Commitments and contingencies (Note 4)
STOCKHOLDERS' EQUITY
Preferred stock (Notes 1 and 9) 124
Common stock (Notes 1 and 10) 101 682,960
Paid-in surplus 28,230,455 16,290,691
Accumulated deficit (18,456,790) (17,998,640)
----------------- -----------------
9,773,890 (1,024,989)
Less, treasury stock, at cost - 1,238,656 shares (2,873,100) (2,873,100)
----------------- -----------------
Total stockholders' equity 6,900,790 (3,898,089)
----------------- -----------------
Total liabilities and stockholders' equity $ 10,512,164 $ 315,506
================= =================
See Notes to Consolidated Financial Statements
2
CNE Group, Inc. and Subsidiaries
Consolidated Statements of Operations
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------- -------------------------------
2003 2002 2003 2002
-------------- -------------- -------------- --------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenues:
Product sales $ 268,591 $ 624,684
Service fee income 244,413 412,932
Internet related income 39,592 $ 58,702 119,450 $ 191,118
-------------- -------------- -------------- --------------
552,596 58,702 1,157,066 191,118
Costs of goods sold 294,863 573,216
-------------- -------------- -------------- --------------
Gross profit 257,733 58,702 583,850 191,118
Other expenses:
Selling 6,591 23,682 10,000
Compensation and related costs 387,467 134,256 791,402 490,759
General and administrative 341,657 20,373 779,678 256,380
Depreciation and amortization 70,193 57,890 93,463 191,818
-------------- -------------- -------------- --------------
805,908 212,519 1,688,225 948,957
-------------- -------------- -------------- --------------
Loss from continuing operations before other
income and expenses (548,175) (153,817) (1,104,375) (757,839)
Amortization of debt discount (175,750) (7,442) (292,250) (22,326)
Interest expense (82,320) (94,841) (319,163) (283,576)
Tax settlement adjustment (Note 6) 895,622 895,622
Gain on fixed assets destroyed in
catastrophe (Note 1) 152,934
Reversal of Director fees accrual 55,000
-------------- -------------- -------------- --------------
Income (loss) from continuing operations
before income taxes 89,377 (256,100) (820,166) (855,807)
Income tax provision 5,250
-------------- -------------- -------------- --------------
Income (loss) from continuing operations 89,377 (256,100) (820,166) (861,057)
Discontinued operations:
Income from discontinued
operations (Note 3) 533,634 533,634 3,712,884
-------------- -------------- -------------- --------------
Net income (loss) $ 623,011 $ (256,100) $ (286,532) $ 2,851,827
============== ============== ============== ==============
See Notes to Consolidated Financial Statements
3
CNE Group, Inc. and Subsidiaries
Consolidated Statements of Operations, continued
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------- ---------------------------------
2003 2002 2003 2002
------------- ------------- ------------- -------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Income (loss) per common share:
Basic:
Income (loss) from continuing operations $ .01 $ (.05) $ (.12) $ (.15)
Income from discontinued operations .07 -- .08 .66
------------- ------------- ------------- -------------
Net income (loss) $ .08 $ (.05) $ (.04) $ .51
============= ============= ============= =============
Diluted:
Income (loss) from continuing operations $ .01 $ (.05) $ (.12) $ (.15)
Income from discontinued operations .07 -- .08 .66
------------- ------------- ------------- -------------
Net income (loss) $ .08 $ (.05) $ (.04) $ .51
============= ============= ============= =============
Weighted average number of common
shares outstanding:
Basic 7,674,253 5,590,944 6,585,372 5,584,278
============= ============= ============= =============
Diluted 7,970,808 5,590,944 6,741,610 5,584,278
============= ============= ============= =============
See Notes to Consolidated Financial Statements
4
CNE Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Nine Months Ended
September 30,
---------------------------------
2003 2002
------------- ------------
(Unaudited) (Unaudited)
Cash flows from operating activities:
Loss from continuing operations $ (820,166) $ (861,057)
Adjustments to reconcile loss from continuing operations to net cash
provided by (used in) operating activities:
Depreciation and amortization 93,463 191,818
Issuance of common stock for services 96,250 31,500
Amortization of debt discount 292,250 22,326
Reversal of fees due to Directors (55,000)
Gain on fixed assets destroyed in catastrophe (152,934)
Changes in:
Accounts and insurance claims receivable (149,404) 485,610
Inventory (37,765)
Other assets (33,750) 49,315
Accounts payable and accrued expenses, and other liabilities (563,945) (44,970)
Deferred grant revenue 8,173 291,827
------------- ------------
Cash used in continuing operations (1,114,894) (41,565)
Cash provided by discontinued operations 200,000
------------- ------------
Net cash provided by (used in) operating activities (1,114,894) 158,435
------------- ------------
Cash flows from investing activities:
Purchase of furniture and equipment (35,572)
------------- ------------
Net cash used in investing activities (35,572)
------------- ------------
Cash flows from financing activities:
Proceeds from issuance of 10% notes payable 1,000,000
Proceeds from short-term credit arrangements 300,000
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 1,090,000
------------- ------------
Increase (decrease) in cash and cash equivalents (60,466) 158,435
Cash and cash equivalents at beginning of period 183,200 200,782
------------- ------------
Cash and cash equivalents at end of period $ 122,734 $ 359,213
============= ============
See Notes to Consolidated Financial Statements
5
CNE Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows, continued
Nine Months Ended
September 30,
-------------------------------
2003 2002
------------- -----------
(Unaudited) (Unaudited)
Supplemental disclosures of cash flow information related to
continuing operations:
Cash paid during the period for:
Interest $ 58,882 $ 72,000
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 230,886
Intellectual property rights 1,550,609
Goodwill 7,285,894
Other assets 524,659
Accrued expenses and other liabilities (1,645,893)
8% notes payable (2,000,000)
Issuance of preferred stock (119)
Issuance of common stock (9)
Paid in surplus (6,048,075)
Non-cash investing and financing activities relating to the conversion of
certain notes and debentures, and the sale of common stock:
8% notes payable 1,000,000
Debentures payable and related interest payable 2,645,000
Subscription receivable 500,000
Issuance of preferred stock (10)
Issuance of common stock (24)
Paid in surplus (4,144,966)
See Notes to Consolidated Financial Statements
6
CNE Group, Inc. and Subsidiaries
Notes To Consolidated Financial Statements
(Unaudited)
1. Nature of Business and Operations
Business
CNE Group, Inc. (the "Company" or "CNE") is a holding company whose
primary operating subsidiary is SRC Technologies, Inc. ("SRC"). SRC, also
a holding company, is the parent of Connectivity, Inc. ("Connectivity"),
Econo-Comm, Inc. (d/b/a Mobile Communications ("ECI"), and U.S. Commlink,
Ltd. ("USCL"). Connectivity, ECI and USCL, 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 has intellectual property rights to certain key elements of
these products - specifically, certain communication, data entry and
telemetry devices.
The Company also generates revenue from its 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.
7
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 shares 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 shareswith a par value of $0.00001
per share. The preferred stock may be issued in one or more series at the
discretion of the Board of Directors.
Acquisition of all of the outstanding stock of SRC and ECI
On April 23, 2003 the Company issued (i) 899,976 shares of its common
stock, (ii) 1,697,961 shares of its non-voting Series A Preferred Stock
and a like number of ten year non-detachable Class A Warrants, (iii) 4,400
shares of its Series B Preferred Stock, and (iv) 9,735,875 shares of its
non-voting Series C Preferred Stock and a like number of ten year Class C
Warrants, for 100% ownership of SRC and ECI. In addition, ECI's sellers
retained certain of ECI's trade receivables aggregating approximately
$100,000. The Company also acquired a patent related to the operation of
ECI's business in exchange for notes aggregating $2,000,000 bearing 8%
interest. The details of such transactions are set forth below.
SRC
On April 23, 2003, the Company issued to Mr. and Mrs. Gutowski, the former
principal common stockholders of SRC, an aggregate of 4,867,937 shares of
its non-voting Series C Preferred Stock and 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 Series 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 4,400 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.
8
Eichsteadt for notes in the aggregate principal amount of $2,000,000,
bearing interest at the annual rate of 8%, payable quarterly, and due on
October 31, 2008. Mr. Sullivan remained an executive officer ECI. On July
31, 2003, the Company transferred all the stock of ECI to SRC and ECI
became a wholly-owned subsidiary of SRC. In addition, the Company
transferred its title to the aforementioned patent to SRC.
On May 19, 2003, Mr. Eichsteadt assigned $1,500,000 of the aforementioned
8% notes equally to Mr. Sullivan, Mr. Gutowski and Mrs. Gutowski. Further
on August 31, 2003, Mr. and Mrs. Gutowski converted their notes
aggregating $1,000,000 into 1,000,000 shares of the Company's Series AA
Preferred Stock.
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.
Private Financings:
1. On April 23, 2003, the Company also completed a private financing
pursuant to which it issued notes (the "Notes") in the aggregate
principal amount of $1,000,000, of which $650,000 was to the
officers of the Company, and 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.
2. On September 17, 2003, the Company sold 1,250,000 shares of its
Common Stock at $0.40 per share to an existing noteholder and
shareholder of the Company. At September 30, 2003 a subscription
receivable related to this sale of common stock, in the amount of
$500,000, was recorded. The funds were received by the Company on
October 10, 2003.
The Company is using the funds obtained from these financings 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 the Board of Directors of the Company approved the 2003
Stock Incentive Plan, which provided, among other matters, for incentive
and non-qualified stock options to purchase 3,500,000 shares of Common
Stock. On November 4, 2003, the 2003 Stock Incentive Plan was amended by
the Board of Directors of the Company to increase the number of incentive
and non-qualified stock options that may be granted from 3,500,00 to
5,000,000 shares of Common Stock. The purpose of the 2003 Stock Incentive
Plan, as amended (the "2003 Plan") is to provide incentives to officers,
key employees, directors, independent contractors and agents whose
performance will
9
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, incentive stock options to purchase 1,987,500 shares of
the Company's common stock were granted by the Incentive Compensation
Committee of the Board of Directors to five officers (1,800,000) and one
employee (187,500) of the Company at a weighted average exercise price of
$1.32 per share. On November 4, 2003, incentive stock options to purchase
950,000 shares of the Company's common stock were granted by the Incentive
Compensation Committee of the Board of Directors to three officers of the
Company at a weighted average exercise price of $1.09 per share. On April
30, 2003 (605,000) and November 4, 2003 (220,000), non-qualified stock
options to purchase an aggregate 825,000 shares of the Company's common
stock were granted by the Board of Directors of the Company to certain
independent contractors of the Company. The Company recorded a charge of
$96,250 in general and administrative expense, relating to the 385,000
options that were vested at September 30, 2003, on its Statement of
Operations for the nine months ended September 30, 2003. No options
granted have been exercised.
The aforementioned actions of the Board of Directors and the Incentive
Compensation Committee of the Board of Directors is subject to the
ratification of the 2003 Plan by a majority of the stockholders of the
Company at the Company's next Annual Meeting of Stockholders which will be
on December 18, 2003 pursuant to a Notice of Annual Meeting of
Stockholders to be mailed on or about November 18, 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 nine months ended September 30,
2002. The Company also had insurance coverage for other than assets
destroyed. As of September 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, and August 2003,
the Company received grants aggregating $300,000. The grants have a
restriction that could require their repayment, specifically if the
Company were to relocate a substantial portion its operations outside of
New York City before May 1, 2005. Until such time as this restriction
shall no longer apply, the grants will be classified as a liability of the
10
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. The Company has no intention of relocating
outside of New York City.
Going Concern
The Company has incurred substantial losses from continuing operations,
sustained substantial operating cash outflows and has a working capital
deficit at both September 30, 2003 and December 31, 2002. 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
positive cash flow.
Management believes that such working capital deficit, losses and negative
operating cash flows will ultimately be addressed by (i) the acquisitions
and related financing disclosed within these financial statements as of
September 30, 2003 and 2002 and the three month periods then ended and
(ii) the expected results of our continuing capital raising activities.
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 September 30, 2003 and the results
of its operations and its cash flows for the three-month and nine-month
periods ended September 30, 2003 and 2002. The financial statements as of
September 30, 2003 and for the three and nine months then ended are not
necessarily indicative of the results that may be expected for the year
ending December 31, 2003.
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.
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.
11
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 September 30, 2003 the Company maintained balances
below such limits.
The Company's sales are primarily provided to customers throughout the
United States. There have been no concentrations of ten percent (10%) or
more 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 is stated at the lower of cost (first-in, first-out) or market.
At September 30, 2003 the Company's inventory consisted of the following:
Raw materials $ 185,723
Work in progress 69,731
Finished goods 19,270
---------
$ 274,724
=========
Startup Activities
Costs associated with the organization and start-up activities of the
Company were expensed as incurred.
Income (Loss) Per Share
Basic and diluted net income (loss) per common share have been computed in
accordance with SFAS No. 128, "Earnings Per Share." Basic earnings per
share (basic EPS) is computed by dividing net income (loss) by the
weighted-average number of common shares outstanding during the year.
Diluted earnings per share (diluted EPS) is computed by dividing net
income (loss) used in determining basic EPS by the weighted average number
of commons hares outstanding during the period, plus the incremental
shares, if any, that would have been outstanding upon the assumed exercise
of dilutive stock options.
12
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 September 30, 2003, the Company has a stock-based employee compensation
plan - the 2003 Plan. Two of Company's subsidiaries each had separate
stock-based employee compensation plans. These plans were contractually
terminated by the Company upon the acquisition of SRC and ECI on April 23,
2003. Furthermore, on March 14, 2003 all recipients of options granted
pursuant to these plans rescinded all 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.
Nine Months Ended
September 30,
-------------------------------
2003 2002
------------- -------------
Net (loss) income, as reported $ (286,532) $ 2,851,827
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 $ (286,532) $ 2,851,827
============= =============
Net (loss) income per share:
As reported:
Basic $ (0.04) $ 0.51
============= =============
Diluted $ (0.04) $ 0.51
============= =============
Pro forma:
Basic $ (0.04) $ 0.51
============= =============
Diluted $ (0.04) $ 0.51
============= =============
13
On April 30, 2003, incentive stock options to purchase 1,987,500 shares of
the Company's common stock were granted by the Incentive Compensation
Committee of the Board of Directors to five officers (1,800,000) and one
employee (187,500) of the Company at a weighted average exercise price of
$1.32 per share. On November 4, 2003, incentive stock options to purchase
950,000 shares of the Company's common stock were granted by the Incentive
Compensation Committee of the Board of Directors to three officers of the
Company at a weighted average exercise price of $1.09 per share. On April
30, 2003 (605,000) and November 4, 2003 (220,000), non-qualified stock
options to purchase an aggregate 825,000 shares of the Company's common
stock were granted by the Board of Directors of the Company to certain
independent contractors of the Company. The Company recorded a charge of
$96,250, relating to the 385,000 options that were vested at September 30,
2003, on its Statement of Operations for the nine months ended September
30, 2003. See Note 1 - Nature of Business and Operations: 2003 Stock
Incentive Plan. No options granted have been exercised.
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 nine month
periods ended September 30, 2003 and the year ended December 31, 2002.
3. Discontinued Operations
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 recognized a
gain amounting to approximately $533,634.
Gain of Extinguishment of Debt
In 1997, the Company entered into a triple net, credit type lease with
Carmike Cinemas, Inc. ("Carmike"), pursuant to which the Company leased to
Carmike six parcels of land and the improvements thereon. Concurrently,
the Company issued $72,750,000 principal amount of its adjustable rate
tender securities due November 1, 2015 (the "Bonds"). The Bonds were
secured by irrevocable letters of credit issued by a group of banks. In
connection therewith the Company entered into a 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
14
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.
Income from discontinued operations for the three and nine month periods
ended September 30, 2003 and 2002 are as follows:
Three Months Nine Months
Ended Ended
September 30, September 30,
------------------------------ -------------------------------
2003 2002 2003 2002
--------------- ------------ ------------- -------------
Revenues:
Rental income $ -- $ 1,249,710
Gain on sale of subsidiary $ 533,634 $ 533,634
Gain on extinguishment
of debt 3,512,884
Common membership
interest transfer fee 294,755
--------------- ------------ ------------- -------------
533,634 533,634 5,057,349
--------------- ------------ ------------- -------------
Expenses:
Interest 1,249,710
Other 94,755
--------------- ------------ ------------- -------------
1,344,465
--------------- ------------ ------------- -------------
$ 533,634 $ -- $ 533,634 $ 3,712,884
=============== ============ ============= =============
4. Litigation
Two of the Company's subsidiaries (see Footnote 8: Excess of Liabilities
over Assets of Activities to be Disposed) are parties to various vendor
related litigation of which the related liabilities have been recorded
within these consolidated financial statements at September 30, 2003.
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.
5. Conversion of Debentures Payable
In August and September 2003, 95.83% of the holders of the $2,400,000
Debentures Payable issued by a subsidiary of the Company elected to (i)
convert the entire outstanding principal balance of the debentures
amounting to $2,300,000, (ii) return 575,500 of the related 600,000
outstanding B Warrants of the Company, and (iii) waive
15
all accrued and unpaid interest relating thereto ($345,000), in
consideration of (i) 1,150,000 shares of the common stock of the Company
and (ii) 1,150,000 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 increased the Company's Common Stock, par value
$.00001, by $12.00, and increased Paid-in-surplus by $2,644,988.
6. 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 provided for payment of $50,000 cash on or before October 14,
2003. The $50,000 cash was paid in July and September 2003. The Company
recognized an adjustment to income in the amount of $895,622 relating to
this transaction in the three and nine month periods ended September 30,
2003.
7. Director Fees
At September 30, 2003, the Company's outside directors agreed to forego
any previously accrued and unpaid directors'fees earned through December
31,2001 and agreed to forgo compensation through September 30, 2003. The
reversal of previously accrued fees has been reflected in the Company's
Consolidated Statement of Operations for the nine-month period ended
September 30, 2002. Due to the nature of the Company's operations prior
to the acquisitions and related financing in April, 2003, appropriate
compensation was deemed to be a nominal amount by the Company. Commencing
director October 1, 2003, the Company will pay each of its three outside
directors a fee of $2,000 per month.
8. Excess of Liabilities over Assets of Activities to be Disposed
A subsidiary of the Company has remaining liabilities of $370,541
that are substantially in excess of its remaining assets of $29,321.
The subsidiary created a trust for the benefit of its
creditors. The assets of the 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 Trustee of the trust is required to utilize such remaining
assets to satisfy the remaining liabilities of the subsidiary. 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 subsidiary cannot reach
the assets of the Company or any of its other subsidiaries to satisfy the
obligations of this subsidiary to such creditors. The Company
expects that the creditors of this subsidiary will look directly to
the Trustee and the remaining assets of the trust for the satisfaction
of their claims and that the Company will be freed from dealing with these
issues.
16
Excess of liabilities over assets of activities to be disposed consists of
the following at September 30, 2003
September 30,
2003
---------
Transferred liabilities:
Accounts payable and accrued expenses $ 255,541
Interest payable 15,000
Debentures payable 100,000
---------
370,541
Transferred assets: (29,321)
---------
Excess of liabilities over assets
of activities to be disposed $ 341,220
=========
9. Preferred Stock
Preferred Stock consists of the following at September 30, 2003 and
December 31, 2002:
September 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 AA 1,000,000 --
Series A 1,697,961 --
Series B 4,400 --
Series C 9,735,875 --
Series E -- --
---------------- ----------------
Total 12,438,236 --
================ ================
10. Common Stock
Common Stock consists of the following at September 30, 2003 and December
31, 2002:
September 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 10,129,567 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
Goodwill. The value of the intellectual property rights, amounting to
$1,550,609, acquired in the related financing was also determined by an
independent appraiser. SRC and its subsidiaries Connectivity, ECI and
USCL, 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
17
acquisitions and related financing, SRC has acquired intellectual property
rights to certain key elements of these products - specifically, certain
communication, data entry and telemetry devices.
The Company's consolidated financial statements include the results of
operations of SRC from its respective acquisition dates. The following
unaudited pro forma information presents a summary of 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 nine month
periods ended September 30, 2002 and on January 1, 2003 for the three and
nine month periods ended September 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 Nine Months Ended
September 30, September 30,
------------------------------- -------------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Revenues $ 552,596 $ 794,399 $ 1,754,529 $ 2,743,595
Expenses 1,358,841 1,565,223 4,053,165 4,819,154
----------- ----------- ----------- -----------
Loss from continuing
operations $ (806,245) $ (770,824) $(2,298,636) $(2,075,559)
=========== =========== =========== ===========
Loss from continuing operations per share:
Basic $ (0.11) $ (0.14) $ (0.35) $ (0.37)
=========== =========== =========== ===========
Diluted $ (0.11) $ (0.14) $ (0.35) $ (0.37)
=========== =========== =========== ===========
12. American Stock Exchange Listing
Pursuant to certain requirements of the American Stock Exchange the
Company must (i) continuously maintain its Stockholders' Equity in excess
of $6,000,000, and (ii) hold, annually, a meeting of its stockholders, to
meet the Exchange's continuing listing requirements. At June 30, 2003, the
Company's Stockholders' Equity was $2,069,635 however, at September 30,
2003 the Company's Stockholders' Equity was $6,900,790 and, accordingly,
the Company believes it is currently in compliance with this requirement.
The Company's last annual meeting of its stockholders was June 1, 2000,
however, pursuant to a Preliminary Proxy Statement filed with the
Securities and Exchange Commission on November 7, 2003, the Company
anticipates its 2003 Annual Meeting of Stockholders will be held on
December 18, 2003 so that it will also comply with this other requirement.
During 2004, the Company will be periodically reviewed by the Exchange to
insure its continuing compliance with its requirements.
13. Conversion of 8% Promissory Notes
On August 31, 2003, the holders who are also directors and officers of the
Company, converted $1,000,000 of the Company's 8% Promissory Notes into
1,000,000 shares of the Company's Series AA Preferred Stock, par value
$.00001 per share. The Series AA Preferred Stock has a liquidating
preference to all other equity securities of the Company. It also has an
8% cumulative dividend, payable in common stock or cash.
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 subsidiary is SRC Technologies, Inc. ("SRC"). SRC, also
a holding company, is the parent of Connectivity, Inc. ("Connectivity"),
Econo-Comm, Inc. (d/b/a Mobile Communications ("ECI"), and U.S. Commlink,
Ltd. ("USCL"). Connectivity, ECI and USCL, 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 has intellectual property rights to certain key elements of
these products - specifically, certain communication, data entry and
telemetry devices.
The Company also generates revenue from its CareerEngine division that is
engaged in the business of e-recruiting.
2003 Stock Incentive Plan
On April 30, 2003 the Board of Directors of the Company approved the 2003
Stock Incentive Plan, which provided, among other matters, for incentive
and non-qualified stock options to purchase 3,500,000 shares of Common
Stock. On November 4, 2003, the 2003 Stock Incentive Plan was amended by
the Board of Directors of the Company to increase the number of incentive
and non-qualified stock options that may be granted from 3,500,00 to
5,000,000 shares of Common Stock. The purpose of the 2003 Stock Incentive
Plan, as amended (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
19
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, incentive stock options to purchase 1,987,500 shares of
the Company's common stock were granted by the Incentive Compensation
Committee of the Board of Directors to five officers (1,800,000) and one
employee (187,500) of the Company at a weighted average exercise price of
$1.32 per share. On November 4, 2003, incentive stock options to purchase
950,000 shares of the Company's common stock were granted by the Incentive
Compensation Committee of the Board of Directors to three officers of the
Company at a weighted average exercise price of $1.09 per share. On April
30, 2003 (605,000) and November 4, 2003 (220,000), non-qualified stock
options to purchase an aggregate 825,000 shares of the Company's common
stock were granted by the Board of Directors of the Company to certain
independent contractors of the Company. The Company recorded a charge of
$96,250, relating to the 385,000 options that were vested at September 30,
2003, on its Statement of Operations for the nine months ended September
30, 2003. No options granted have been exercised.
The aforementioned actions of the Board of Directors and the Incentive
Compensation Committee of the Board of Directors is subject to the
ratification of the 2003 Plan by a majority of the shareholders of the
Company at the Company's next Annual Meeting of Stockholders which will be
on December 18, 2003 pursuant to a Notice of Annual Meeting of
Stockholders to be mailed approximately November 18, 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 nine months ended September 30,
2002. The Company also had insurance coverage for other than assets
destroyed. As of September 30, 2003, all outstanding insurance claims
relating to the catastrophe have been received.
20
In addition, the Company applied for governmental assistance grants
related to the catastrophe. In April and September 2002, and August 2003,
the Company received grants aggregating $300,000. The grants have a
restriction that could require their repayment, specifically if the
Company were to relocate a substantial portion its operations outside of
New York City before May 1, 2005. Until such time as this restriction
shall no longer apply, the grants will be classified as a liability of the
Company. Upon the satisfaction or lapse of the restrictions, the Company
will remove the liability and record grant income on its financial
statements or, alternatively, 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 nine-month period ended September 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.
In addition, a significant judgment made by management in the preparation
of the Company's financial statements is the determination of impairment
losses relating to 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. This determination is made
annually.
In accordance with SAB Topic 4, Item E, the Company is presenting the
Subscription Receivable as an asset as payment was received prior to the
issuance of these financial statements.
A. Results of Operations:
Three-Month Period Ended September 30, 2003 Compared to the Three-Month
Period Ended September 30, 2002
Revenues
Total revenues from continuing operations increased to $552,596 for the
three-month period ended September 30, 2003 from $58,702 for the
three-month period ended September 30, 2002, as a result of the Company's
acquisitions of SRC and its subsidiaries in April 2003.
21
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. In
October 2003, a subsidiary of the Company received a "Notice to Proceed"
from the Nevada Department of Transportation relating to a $488,000
contract for the installation of wireless emergency callboxes and video
poles on Interstate-15 from the California state border to the Las Vegas
city limits. These two aforementioned contracts will significantly
increase the Company's revenues in the three-month period ending December
31, 2003.
Product sales income increased to $268,591 for the three-month period
ended September 30, 2003 from nil for the three-month period ended
September 30, 2002 due to the acquired operations, in April 2003, of SRC
Technologies, Inc. and its subsidiaries.
Service fee income increased to $244,413 for the three-month period ended
September 30, 2003 from nil for the three-month period ended September 30,
2002 due to the acquired operations, in April 2003, of SRC Technologies,
Inc. and its subsidiaries.
Internet related income decreased to $39,592 for the three-month period
ended September 30, 2003 from $58,702 for the three-month period ended
September 30, 2002 as the operations of our subsidiary, CareerEngine,
Inc., have continued to decline.
Cost of Goods Sold
Costs of goods sold, which relates to product sales and related service
fee income increased to $294,863 for the three-month period ended
September 30, 2003 from nil for the three-month period ended September 30,
2002 due to the acquired operations, in April 2003, of SRC Technologies,
Inc. and its subsidiaries.
Other Expenses
Total other expenses from continuing operations increased to $805,908 for
the three-month period ended September 30, 2003 from $212,519 for the
three-month period ended September 30, 2002.
Selling expenses increased to $6,591 for the three-month period ended
September 30, 2003 from nil for the three-month period ended September 30,
2002 due to the acquired operations, in April 2003, of SRC Technologies,
Inc. and its subsidiaries.
Compensation and related costs increased to $387,467 for the three-month
period ended September 30, 2003 from $134,256 for the three-month period
ended
22
September 30, 2002 due to the acquired operations and related increase in
personnel, in April 2003, of SRC Technologies, Inc. and its subsidiaries.
General and administrative expenses increased to $341,657 for the
three-month period ended September 30, 2003 from $20,373 for the
three-month period ended September 30, 2002 due to the costs associated
with the acquisition and related operations of SRC Technologies, Inc. and
its subsidiaries, and the costs associated with the two private
financings, primarily completed in April and September 2003.
Depreciation and amortization expenses increased to $70,193 for the three
month period ended September 30, 2003 from $57,890 for the three month
period ended September 30, 2002, due to the increase in depreciation and
amortization expense relating to the fixed assets and patents associated
with the acquisition of SRC Technologies, Inc. and its subsidiaries.
Other Items
Amortization of debt discount increased to $175,750 for the three-month
period ended September 30, 2003 from $7,442 for the three-month period
ended September 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 decreased to $82,320 for the three-month period ended
September 30, 2003 from $94,841 for the three-month period ended September
30, 2002 due primarily to the issuance of the Company's 10% and 8%
subordinated notes in April 2003 and the cessation of interest expense on
a subsidiary's 12% Debentures Payable and Tax Assessment Payable.
Tax Settlement adjustment of $895,622 relates to the accepted and paid
Offer in Compromise with the Internal Revenue Service ($50,000) pertaining
to a $945,000 tax liability of a subsidiary of the Company.
Operating Loss
On a pre-tax basis, we had income from continuing operations of $89,377
for the three-month period ended September 30, 2003 compared with a loss
from continuing operations of $256,100 for the three-month period ended
September 30, 2002 primarily due to the effect of (i) the tax settlement
adjustment and (ii) start-up expenses associated with the acquisition of
SRC Technologies, Inc. and its subsidiaries and the related private
financings.
Our income from continuing operations for the three-month period ended
September 30, 2003 was $89,377 compared with a loss from continuing
operations of $256,100 for the three-month period ended September 30, 2002
primarily due to the effect of (i) the tax settlement adjustment and (ii)
start-up expenses associated with the acquisition of SRC Technologies,
Inc. and its subsidiaries and the related private financings. For the
three-month period ended September 30, 2003, income per common share from
continuing operations,
23
basic and diluted, was $.01 per share. For the three-month period ended
September 30, 2002, loss per common share from continuing operations,
basic and diluted, was $.05 per share.
Our income from discontinued operations for the three-month period ended
September 30, 2003 was $533,634 compared with nil from discontinued
operations for the three-month period ended September 30, 2002 due to a
gain on the sale of a subsidiary of the Company. For the three-month
period ended September 30, 2003, income per common share from discontinued
operations, basic and diluted, was $.07 per share. For the three-month
period ended September 30, 2002, income per common share from discontinued
operations, basic and diluted, was nil per share.
Our net income for the three-month period ended September 30, 2003 was
$623,011 compared with a net loss of $256,100 for the three-month period
ended September 30, 2002. For the three-month period ended September 30,
2003, net income per common share, basic and diluted, was $.08 per share.
For the three-month period ended September 30, 2002, net loss per common
share, basic and diluted, was $.05 per share.
Nine-Month Period Ended September 30, 2003 Compared to the Nine-Month
Period Ended September 30, 2002
Revenues
Total revenues from continuing operations increased to $1,157,066 for the
nine-month period ended September 30, 2003 from $191,118 for the
nine-month period ended September 30, 2002.
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. In
October 2003, a subsidiary of the Company received a "Notice to Proceed"
from the Nevada Department of Transportation relating to a $488,000
contract for the installation of wireless emergency callboxes and video
poles on Interstate-15 from the California state border to the Las Vegas
city limits. These two aforementioned contracts will significantly
increase the Company's revenues in the three-month period ending December
31, 2003.
Product sales income increased to $624,684 for the nine-month period ended
September 30, 2003 from nil for the nine-month period ended September 30,
2002 due to the acquired operations, in April 2003, of SRC Technologies,
Inc. and its subsidiaries.
Service fee income increased to $412,932 for the nine-month period ended
September 30, 2003 from nil for the nine-month period ended September 30,
2002 due to the acquired operations, in April 2003, of SRC Technologies,
Inc. and its subsidiaries.
24
Internet related income decreased to $119,450 for the nine-month period
ended September 30, 2003 and $191,118 for the nine-month period ended
September 30, 2002 as the operations of our subsidiary, CareerEngine, Inc.
have continued to decline.
25
Cost of Goods Sold
Costs of goods sold, which relates to product sales and related service
fee income increased to $573,216 for the nine-month period ended September
30, 2003 from nil for the nine-month period ended September 30, 2002 due
to the acquired operations, in April 2003, of SRC Technologies, Inc. and
its subsidiaries.
Other Expenses
Total other expenses from continuing operations increased to $1,688,225
for the nine-month period ended September 30, 2003 from $948,957 for the
nine-month period ended September 30, 2002.
Selling expenses increased to $23,682 for the nine-month period ended
September 30, 2003 from $10,000 for the nine-month period ended September
30, 2002 due to the acquired operations, in April 2003, of SRC
Technologies, Inc. and its subsidiaries.
Compensation and related costs increased to $791,402 for the nine-month
period ended September 30, 2003 from $490,759 for the nine-month period
ended September 30, 2002 due to the acquired operations and related
increase in personnel, in April 2003, of SRC Technologies, Inc. and its
subsidiaries.
General and administrative expenses increased to $779,678 for the
nine-month period ended September 30, 2003 from $256,380 for the
nine-month period ended September 30, 2002 due to the costs associated
with the acquisition and related operations of SRC Technologies, Inc. and
its subsidiaries, and the costs associated with the private financings,
primarily completed in April and September 2003.
Depreciation and amortization expenses decreased to $93,463 for the
nine-month period ended September 30, 2003 from $191,818 for the
nine-month period ended September 30, 2002, due to the increase in
depreciation and amortization expense relating to the fixed assets and
patents associated with the acquisition of SRC Technologies, Inc. and its
subsidiaries, and the decrease in depreciation due to certain assets of
the Company becoming fully depreciated.
Other Items
Amortization of debt discount increased to $292,250 for the nine-month
period ended September 30, 2003 from $22,326 for the nine-month period
ended September 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 $319,163 for the nine-month period ended
September 30, 2003 from $283,576 for the nine-month period ended September
30, 2002 due primarily to the issuance of the Company's 10% and 8%
subordinated notes in April 2003 and the cessation of interest expense on
a
26
subsidiary's 12% Debentures Payable and Tax Assessment Payable in July and
August 2003.
Tax Settlement adjustment of $895,622 relates to the accepted and paid
Offer in Compromise with the Internal Revenue Service ($50,000) pertaining
to a $945,000 tax liability of a subsidiary of the Company.
Gain on fixed assets destroyed in catastrophe decreased to nil for the
nine-month period ended September 30, 2003 from $152,934 for the
nine-month period ended September 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 nine-month period
ended September 30, 2003 from nil for the nine-month period ended
September 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. The Company will compensate its outside Directors,
commencing October 1, 2003, at a monthly rate of $2,000 per Director.
Operating Loss
On a pre-tax basis, we had a loss from continuing operations of $820,166
for the nine-month period ended September 30, 2003 compared with a loss
from continuing operations of $855,807 for the nine-month period ended
September 30, 2002.
Our loss from continuing operations for the nine-month period ended
September 30, 2003 was $820,166 compared with a loss from continuing
operations of $861,057 for the nine-month period ended September 30, 2002.
For the nine-month period ended September 30, 2003, loss per common share
from continuing operations, basic and diluted, was $.12 per share. For the
nine-month period ended September 30, 2002, loss per common share from
continuing operations, basic and diluted, was $.15 per share.
Our income from discontinued operations for the nine-month period ended
September 30, 2003 was $533,634 compared with income from discontinued
operations of $3,712,884 for the nine-month period ended September 30,
2002 due to a gain on the sale of a subsidiary of the Company in 2003 and
primarily a gain on the extinguishment of debt in 2002. For the
three-month period ended September 30, 2003, income per common share from
discontinued operations, basic and diluted, was $.08 per share. For the
three-month period ended September 30, 2002, income per common share from
discontinued operations, basic and diluted, was $.66 per share.
Our net loss for the nine-month period ended September 30, 2003 was
$286,532 compared with net income of $2,851,827 for the nine-month period
ended September 30, 2002. For the nine-month period ended September 30,
2003, net loss per common share, basic and diluted, was $.048 per share.
For the nine-month period ended September 30, 2002, net income per common
share, basic and diluted, was $.51 per share.
27
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 completed a private financing
pursuant to which it issued notes (the "Notes") in the aggregate
principal amount of $1,000,000, of which $650,000 was 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.
In addition, on September 17, 2003, the Company sold 1,250,000
shares of its Common Stock at $0.40 per share to an existing
noteholder and shareholder of the Company. At September 30, 2003 a
subscription receivable related to this sale of common stock, in the
amount of $500,000, was recorded. The funds were received by the
Company on October 10, 2003.
The Company is using the funds obtained from this financing to pay
certain ECI notes payable and for working capital. The financings
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 addressed by (i)
the acquisitions and related financing disclosed within these
financial statements as of September 30, 2003 and 2002 and the three
month periods then ended and (ii) the expected results of our
continuing fund raising activities.
We do not have any material commitments for capital expenditures as
of September 30, 2003.
C. New Accounting Standards
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148 (SFAS 148), "Accounting for Stock-Based
Compensation - Transition and Disclosure." SFAS 148 amends SFAS 123,
"Accounting for Stock-Based Compensation," to provide alternative
methods of transition for an entity that voluntarily changes to the
fair value based method of accounting for
28
stock-based employee compensation. The adoption of this
pronouncement did not have a material effect on the consolidated
financial statements as the Company continues to apply the intrinsic
value method in accordance with APB No. 25.
D. American Stock Exchange
Pursuant to certain requirements of the American Stock Exchange the
Company must (i) continuously maintain its Stockholders' Equity in
excess of $6,000,000, and (ii) hold, annually, a meeting of its
stockholders, to meet the Exchange's continuing listing requirements.
At June 30, 2003, the Company's Stockholders' Equity was $2,069,635
however, at September 30, 2003 the Company's Stockholders' Equity was
$6,900,790 and, accordingly, the Company believes it is currently in
compliance with this requirement. The Company's last annual meeting of
its stockholders was June 1, 2000, however, pursuant to a Preliminary
Proxy Statement filed with the Securities and Exchange Commission on
November 7, 2003, the Company anticipates its 2003 Annual Meeting of
Stockholders will be held on December 18, 2003 so that it will also
comply with this other requirement. During 2004, the Company will be
periodically reviewed by the Exchange to insure its continuing
compliance with its requirements.
E. 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.
29
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
None
Item 2. Changes in Securities and Use of Proceeds.
During the three months ended September 30, 2003, the Company issued
common stock, notes and warrants in private transactions pursuant to the
exemption from registration provided by Section 4(2) of the Securities Act
of 1933. For information on these issuances, see "Part 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
30
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 nine months ended September 30, 2003 and the period
October 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,
on July 28, 2003, September 18, 2003 and September 29, 2003. These
Form 8-K's and related Form-8K/A's and the Exhibits attached thereto
are incorporated herein by reference.
31
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: November 14, 2003 George W. Benoit, Chairman of the Board
of Directors, President, and Chief Executive
Officer
/s/ Anthony S. Conigliaro
--------------------------------------------
Date: November 14, 2003 Anthony S. Conigliaro, Vice President and
Chief Financial Officer
32