U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
(Mark One)
|X| Quarterly report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 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, N.Y. 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 April 30, 2003
----- -----------------------------
Common stock - par value $.00001 5,590,944 shares
THIS FORM 10-QSB/A FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003 IS BEING FILED
TO AMEND, PRIMARILY, PART II - OTHER INFORMATION, ITEM 5 - OTHER INFORMATION:
PRELIMINARY UNAUDITED PRO-FORMA BALANCE SHEET INFORMATION, SO AS TO PROVIDE
CERTAIN ADDITIONAL INFORMATION PERTAINING THERETO.
PLEASE BE ADVISED THAT THE INFORMATION PRESENTED THEREIN MAY SIGNIFICANTLY
CHANGE UPON THE FILING OF THE RELATED FORM 8-K FINANCIAL INFORMATION DUE NO
LATER THAN JULY 6, 2003.
IN ADDITION, THE PRO-FORMA INFORMATION HAS NOT BEEN REVIEWED OR EXAMINED BY THE
COMPANY'S INDEPENDENT AUDITORS.
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/A 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-months ended March 31, 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
March 31, December 31,
2003 2002
------------ ------------
(Unaudited)
ASSETS
Current:
Cash and cash equivalents $ 96,747 $ 183,200
Accounts receivable, net 28,447 35,144
Insurance claims receivable 63,912
------------ ------------
Total current assets 125,194 282,256
Fixed assets, net 22,167 33,250
------------ ------------
Total assets $ 147,361 $315,5069
============ ============
LIABILITIES
Current:
Accounts payable and accrued expenses $ 379,141 $ 392,307
Interest payable 288,000 216,000
Tax assessment payable 929,403 913,461
Debentures payable 2,400,000 2,400,000
------------ ------------
Total current liabilities 3,996,544 3,921,768
Deferred grant revenue 291,827 291,827
------------ ------------
Total liabilities 4,288,371 4,213,595
------------ ------------
Commitments and contingencies
CAPITAL (DEFICIT)
Preferred stock - authorized 1,000,000 shares, par value $0.10;
none issued
Common stock - authorized 20,000,000 shares, par value $0.10;
6,829,600 shares issued as of March 31, 2003
and December 31, 2002 682,960 682,960
Paid-in surplus 16,290,691 16,290,691
Accumulated deficit (18,241,561) (17,998,640)
------------ ------------
(1,267,910) (1,024,989)
Less treasury stock, at cost -
1,238,656 shares (2,873,100) (2,873,100)
------------ ------------
Total deficit (4,141,010) (3,898,089)
------------ ------------
Total liabilities and deficit $ 147,361 $ 315,506
============ ============
See Notes to Consolidated Financial Statements
2
CNE Group, Inc. and Subsidiaries
Consolidated Statements of Operations
Three Months Ended
March 31,
-------------------------------
2003 2002
----------- -----------
(Unaudited) (Unaudited)
Revenues:
Service fee income $ 45,039 $ 74,688
Interest income 282 404
----------- -----------
45,321 75,092
----------- -----------
Costs and expenses:
Compensation and related costs 90,231 187,787
Advertising 10,000
General and administrative 110,071 171,475
Interest 87,942 94,157
----------- -----------
288,244 463,419
----------- -----------
Loss from continuing operations before items shown below (242,923) (388,327)
Gain on fixed assets destroyed in catastrophe 132,047
Reversal of Director fees accrual 55,000
----------- -----------
Loss from continuing operations before income taxes (242,923) (201,280)
Income tax provision 5,250
----------- -----------
Loss from continuing operations (242,923) (206,530)
Discontinued operations:
Income from discontinued operations 3,712,884
----------- -----------
Net (loss) income $ (242,923) $ 3,506,354
=========== ===========
Per common share - basic and diluted:
Loss from continuing operations $ (.04) $ (.04)
Income (loss) from discontinued operations -- .67
----------- -----------
Net (loss) income per common share $ (.04) $ .63
=========== ===========
Weighted average number of common
shares outstanding - basic and diluted 5,590,944 5,570,944
=========== ===========
See Notes to Consolidated Financial Statements
3
CNE Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Three Months Ended
March 31,
-----------------------------
2003 2002
----------- -----------
(Unaudited) (Unaudited)
Cash flows from operating activities:
Loss from continuing operations $(242,923) $(206,530)
Adjustments to reconcile loss from continuing operations to net cash
provided by (used in) operating activities:
Depreciation and amortization 11,083 66,396
Issuance of common stock for services 27,600
Amortization of debt discount 7,442
Reversal of fees due to Directors (55,000)
Gain on fixed assets destroyed in catastrophe (132,047)
Changes in:
Accounts and insurance claims receivable 70,609 (4,338)
Other assets 32,294
Accrued expenses and other liabilities 74,778 2,333
--------- ---------
Cash (used in) continuing operations (86,453) (261,850))
Cash provided by discontinued operations 200,000
--------- ---------
Net cash (used in) operating activities (86,453) (61,850)
--------- ---------
Decrease in cash and cash equivalents (86,453) (61,850)
Cash and cash equivalents at beginning of period 183,200 200,782
--------- ---------
Cash and cash equivalents at end of period $ 96,747 $ 138,932
========= =========
Supplemental disclosures of cash flow information related to
continuing operations:
Cash paid during the period for:
Interest $ -- $ 72,000
Income taxes $ -- $ 5,250
See Notes to Consolidated Financial Statements
4
CNE Group, Inc. and Subsidiaries
Notes To Consolidated Financial Statements
(Unaudited)
1. General
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 when the Company acquired all of the assets of CareerEngine,
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," and the officers and
directors of CareerEngine became the officers and directors of the
Company.
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 have been issued without
registration in reliance upon exemptions provided in Section 3(a)(9) of
the Securities Act of 1933 and Rule 145 promulgated thereunder.
CareerEngine has been subject to the reporting requirements of the
Exchange Act since 1986.
In addition, on April 23, 2003, the Board of Directors and majority of the
stockholders of the Company increased the authorized number of common
stock to 40,000,000 with a par value of $0.00001 per share and increased
the authorized number 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.
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, the Company's management has 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, has recorded a $152,934 gain on
assets destroyed due to this catastrophe of which $132,047 was recorded in
the three months ended March 31, 2002.
The Company also had insurance coverage for other than assets destroyed.
As of March 31, 2003 all outstanding insurance claims relating to the
catastrophe have been received.
In addition, the Company had 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.
5
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.
E-recruiting activities are derived from the operations of the two
divisions of our wholly-owned subsidiary, CareerEngine, Inc. These
divisions, CareerEngine Network and CareerEngine Solutions, provide on-
and off-line companies with products and services addressed to meeting
on-line recruiting problems.
2. Significant Accounting Policies
The accounting policies followed by the Company are set forth in the notes
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 March 31, 2003 and the results of
its operations and its cash flows for the three-month periods ended March
31, 2003 and 2002. The financial statements as of March 31, 2003 and for
the three 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, has a working capital
deficit and at March 31, 2003 has a capital deficiency. 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.
See Note 8 -Subsequent Events.
Revenue Recognition
E-recruiting fees 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.
Income (Loss) Per Share
Basic income (loss) per share is based on the weighted average number of
common shares outstanding. Employee stock options and outstanding warrants
did not have an effect on the computation of diluted earnings per share
since they were anti-dilutive.
6
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 March 31, 2003, the Company and one of its subsidiaries each had one
stock-based employee compensation plan. On March 14, 2003 all recipients
of options granted to them under these plans 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.
Three Months Ended
March 31,
---------------------------
2003 2002
---- ----
Net (loss) income, as reported $ (242,923) $3,506,354
Less, Total stock-based employee compensation expense
determined under fair value-based method for all awards,
net of related tax effects 0 0
---------- ----------
Proforma net (loss) income $ (242,923) $3,506,354
========== ==========
Net (loss) income per share:
Basic and diluted - as reported - $ (0.04) $ 0.63
========== ==========
Basic and diluted - Proformad $ (0.04) $ 0.63
========== ==========
The Company did not grant fixed stock options to acquire shares of its
common stock to its employees during the three-months ended March 31,
2003 and 2002.
3. Discontinued Operations
In 1997, the Company entered into a triple net, credit type lease with
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.
7
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-month period ended March
31, 2002 is as follows:
Three Months
Ended
March 31, 2002
--------------
Revenues:
Rental income $1,249,710
Gain on real estate leased 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
opinion of legal counsel, the Company has accrued a liability of
approximately $100,000.
5. Debentures Payable
In 2000, the Company 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 and B Warrants are exercisable
at any time until March 31, 2003 and March 31, 2005, respectively. In the
private placement, officers, stockholders and directors of the Company
acquired 10.5 units for $525,000.
The aggregate number of shares issuable upon the exercise of all the
warrants and the conversion of all the debentures is 2,400,000.
The Company incurred an interest charge of $246,875 due to the beneficial
conversion feature of the debentures. In addition, the Company valued the
warrants, utilizing the Black-Scholes Pricing Model, 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.
8
The Company 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 March 31 2003, aggregating $288,000 has not been paid
through April 1, 2003. Accordingly, since the Company had not paid the
interest due on April 1, 2002 by April 16, 2002 (the "grace period"), the
Company's obligation is considered callable by the debenture holders and
as a consequence the entire balance of the debentures with the related
unpaid interest is classified as a current obligation at March 31, 2003.
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 May 19, 2003, no
such demand has 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.
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 believes
that there may be a basis for its reduction. Management is actively
pursuing such a reduction at this time. Pending the ultimate resolution of
this matter with the IRS, in September 2001 the Company temporarily
suspended making monthly payments. At March 31, 2003, the outstanding
balance of the liability amounted to approximately $929,000 including
related additional state and local taxes and interest.
7. Director Fees
At March 31, 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-month
period ended March 31, 2002.
8. Subsequent Events
Acquisitions
On April 23, 2003, the Company acquired all of the outstanding stock of
SRC Technologies, Inc. ("SRC") and Econo-Comm, Inc. ("ECI") by merging
these companies into two new wholly-owned subsidiaries.
The Company issued to Michael and Carol Gutowski, the principal
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
9
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 common stockholders of SRC, including Larry Reid,
SRC's Chief Operating Officer, 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 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 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.
The Company issued to Gary Eichsteadt and Thomas Sullivan, the
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 four notes each in the principal amount of $500,000, bearing interest
at the annual rate of 8%, payable quarterly, and due on October 31, 2008.
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. Messrs. Gutowski and Reid and Ms. Gutowski
became directors and Mr. Gutowski became President and Mr. Reid became
Executive Vice President of the Company immediately subsequent to the
consummation of the acquisitions. Ms. Gutowski and Messrs. Eichsteadt and
Sullivan became executive officers, respectively, of the Company's
subsidiaries that merged with SRC and ECI.
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 $750,000, 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 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
will also be anti-dilutive until the Notes have been repaid.
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. In addition, on April 30, 2003, options to purchase 1,987,500
shares were granted to (5) officers (1,800,000) and one (1) employee
(187,500) of the Company. No options granted have been exercised.
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
General
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, the Company's management has 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, has recorded a $152,934 gain on
assets destroyed due to this catastrophe of which $132,047 was recorded in
the three months ended March 31, 2002.
The Company also had insurance coverage for other than assets destroyed.
As of March 31, 2003 all outstanding insurance claims relating to the
catastrophe have been received.
In addition, the Company had 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.
E-recruiting activities are derived from the operations of the two
divisions of our wholly-owned subsidiary, CareerEngine, Inc. These
divisions, CareerEngine Network and CareerEngine Solutions, provide on-
and off-line companies with products and services addressed to meeting
on-line recruiting problems.
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 three-month period ended March 31,
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.
11
Forward Looking Statements
Certain statements in this Quarterly Report on Form 10-QSB/A 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.
12
A. Results of Operations:
Three-Month Period Ended March 31, 2003 Compared to the Three-Month Period
Ended March 31, 2002
Revenues
Total revenues from continuing operations decreased to $45,321 for the
three-month period ended March 31, 2003 from $75,092 for the three-month
period ended March 31, 2002.
Service fee income decreased to $45,039 for the three-month period ended
March 31, 2003 from $74,688 for the three-month period ended March 31,
2002 as the operations of our subsidiary, CareerEngine, Inc. have
decreased since January 2002.
Costs and expenses
Total costs and expenses from continuing operations decreased to $288,244
for the three-month period ended March 31, 2003 from $463,419 for the
three-month period ended March 31, 2002.
Compensation and related costs decreased to $90,231 for the three-month
period ended March 31, 2003 from $187,787 for the three-month period ended
March 31, 2002. The decrease is due to the Company's cost reduction
strategy, consisting primarily of significant staff reductions, which
commenced in December 2000.
Advertising expense decreased to nil for the three-month period ended
March 31, 2003 from $10,000 for the three-month period ended March 31,
2002 as CareerEngine, Inc. continued its cost reduction program, focused
primarily on compensation and advertising related expenditures.
General and administrative expenses decreased to $110,071 for the
three-month period ended March 31, 2003 from $171,475 for the three-month
period ended March 31, 2002 due primarily to significantly reduced
operating costs associated with our subsidiary, CareerEngine, Inc. These
costs consisted principally of travel, telephone and legal expenses,
supplies, and website related expenditures.
Interest expense decreased to $87,942 for the three-month period ended
March 31, 2003 from $94,157 for the three-month period ended March 31,
2002 primarily due to the Company's recognition, as interest expense, of
all of the remaining unamortized debt discount relating to its debentures
payable in 2002.
13
Other Items
Gain on fixed assets destroyed in catastrophe of $132,047 for the
three-month period ended March 31, 2002 relates to the destruction of the
World Trade Center where the Company was headquartered.
Reversal of Directors fees of $55,000 for the three-month period ended
March 31, 2002 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 $242,923 for the three-month period
ended March 31, 2003 from continuing operations compared with a loss of
$201,280 for the three-month period ended March 31, 2002 from continuing
operations.
Our loss from continuing operations for the three-month period ended March
31, 2003 was $242,923 compared with a loss from continuing operations of
$206,530 for the three-month period ended March 31, 2002. For the
three-month periods ended March 31, 2003 and 2002, loss per common share
from continuing operations, basic and diluted, was $.04 per share.
Our income from discontinued operations for the three-month period ended
March 31, 2002 was 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 three-month period ended
March 31, 2002, income per common share from discontinued operations,
basic and diluted, was $.67 per share.
Our net loss for the three-month period ended March 31, 2003 was $242,923
compared with net income of $3,506,354 for the three-month period ended
March 31, 2002. For the three-month period ended March 31, 2003, net loss
per common share, basic and diluted, was $.04 per share. For the
three-month period ended March 31, 2002, net income per common share,
basic and diluted, was $.63 per share.
14
B. Liquidity and Capital Resources
The Company has incurred substantial losses from continuing operations,
sustained substantial operating cash outflows, has a working capital
deficit and at March 31, 2003 has a capital deficiency. 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 be addressed by the subsequent events and
proposed transactions set forth within this form 10-QSB/A.
Preliminary Unaudited Pro-forma Balance Sheet Information as of March 31.
2003, setting forth the effect of these subsequent transactions, is
presented in Part II - Other Information, Item 5: Other Information-
Preliminary Unaudited Pro-forma Balance Sheet Information, within this
Form 10Q-SB/A.
We do not have any material commitments for capital expenditures as of
March 31, 2003.
C. American Stock Exchange
The Company received a letter dated March 15, 2002 from the Exchange (the
"Letter") indicating that the Company is not in compliance with the
Exchange's continuing listing requirements in that the Company has
sustained losses from continuing operations and/or net losses in three of
its four most recent fiscal years and its Stockholders' Equity is less
than $4,000,000.
Management believes that the subsequent events disclosed within these
financial statements as of March 31, 2003 and 2002 and the three-month
periods then ended appropriately addresses the American Stock Exchange
continuing listing requirements. See B above.
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.
15
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is a party to various vendor related litigations. Based on the
opinion of legal counsel, the Company has accrued a liability of
approximately $100,000.
Item 5. Other Information.
Preliminary Unaudited Pro-forma Balance Sheet Information
Preliminary unaudited Pro-forma Balance Sheet information, as of March 31,
2003, relating to the acquisitions of SRC Technologies, Inc. and
Econo-Comm, Inc. In addition, the Pro-forma balance sheet as of March 31,
2003 reflects additional adjustments which relate to the proposed
transfer of assets and obligations to trusts for the benefit of
creditors. This Pro-forma information has not been reviewed or examined
by the Company's independent auditors.
CNE Group, Inc. and Subsidiaries
Pro-Forma Consolidated Balance Sheet
Unaudited
March 31, 2003
Historical March 31, 2003
--------------------------
CNE Group, Inc. SRC Technologies, Inc. Combined
and subsidiaries and subsidiaries Econo-Comm, Inc. Historical
Unaudited Unaudited Unaudited Unaudited
--------- --------- --------- ----------
Balance Sheet:
Assets:
Current assets:
Cash $ 96,747 $ 12,412 $ 73,228 $ 182,387
Accounts receivable, net 28,447 24,924 351,210 404,581
Investment in subsidiaries - - - -
Inventory - 90,953 143,167 234,120
Other - - 10,777 10,777
Fixed assets, net 22,167 82,599 250,000 354,766
Deferred financing costs, net - - - -
Patent - 390,000 - 390,000
Other assets - 20,707 11,207 31,914
Goodwill - 178,833 - 178,833
- - -
--------- --------- --------- -----------
$ 147,361 $ 800,428 $ 839,589 $ 1,787,378
========= ========= ========= ===========
Liabilities:
Current liabilities:
Accounts payable and accrued expenses $ 379,141 $ 230,012 $ 99,717 708,870
Interest payable 288,000 - - 288,000
Line of credit - 19,088 145,310 164,398
Notes payable - 12,922 189,561 202,483
Short-term financing arrangements - 454,064 - 454,064
12% Debentures payable 2,400,000 - - 2,400,000
Other - 2,396 2,500 4,896
Tax assessment payable 929,403 428,479 - 1,357,882
Notes payable - 34,152 - 34,152
10% Subordinated notes - - - -
8% Subordinated notes - - - -
Deferred grant revenue 291,827 - - 291,827
- - -
--------- ---------- --------- -----------
4,288,371 1,181,113 437,088 5,906,572
---------- ---------- -------- -----------
Stockholders' Equity:
Preferred Stock - - - -
Common Stock 68 36,992 100 37,160
Paid-in-surplus 16,973,583 515,911 33,978 17,523,472
Retained earnings (18,241,561) (933,588) 368,423 (18,806,726)
Treasury stock (2,873,100) - - (2,873,100)
- - -
--------- --------- -------- -----------
(4,141,010) (380,685) 402,501 (4,119,194)
---------- ---------- ------- -----------
$ 147,361 $ 800,428 $ 839,589 $ 1,787,378
========== ========== ======== ===========
- - -
Pro-forma
Adjustments as adjusted
----------- March 31, 2003
Debits Notes Credits Notes Unaudited
------ ----- ------- ----- --------------
Balance Sheet:
Assets:
Current assets:
Cash $ 182,387
Accounts receivable, net $ 351,210 c 53,371
Investment in subsidiaries $ 6,523,813 b 6,523,813 d -
Inventory 234,120
Other 10,777
Fixed assets, net 354,766
Deferred financing costs, net -
Patent 2,000,000 a 2,390,000
Other assets 31,914
Goodwill 6,501,997 d 6,680,830
----------
$ 9,938,165
==========
Liabilities:
Current liabilities:
Accounts payable and accrued expenses $ 708,870
Interest payable 288,000
Line of credit 164,398
Notes payable 202,483
Short-term financing arrangements 351,210 c 102,854
12% Debentures payable 2,400,000
Other 4,896
Tax assessment payable 1,357,882
Notes payable 34,152
10% Subordinated notes s -
8% Subordinated notes 2,000,000 a 2,000,000
Deferred grant revenue 291,827
----------
7,555,362
----------
Stockholders' Equity:
Preferred Stock 115 b 115
Common Stock 37,092 d 9 b 77
Paid-in-surplus 549,889 d 6,523,689 b 23,497,272
Retained earnings 565,165 d (18,241,561)
Treasury stock (2,873,100)
----------
- 2,382,803
---------- ---------- ----------
$15,964,001 $ 15,964,001 $ 9,938,165
========== ========== ==========
-
Additional Adjustments Adjusted
---------------------- Pro-forma
Debits Notes Credits Note March 31, 2003
------ ----- ------- ---- --------------
Balance Sheet: Unaudited
Assets:
Current assets:
Cash $ 692,000 1 $ 97,885 2 $ 776,502
Accounts receivable, net 28,447 2 24,924
Investment in subsidiaries -
Inventory 13,410 2 220,710
Other 10,777
Fixed assets, net 22,167 2 332,599
Deferred financing costs, net 58,000 1 58,000
Patent 2,390,000
Other assets 16,619 2 15,295
Goodwill 6,680,830
---------
$ 10,509,637
==========
Liabilities:
Current liabilities:
Accounts payable and accrued expenses 289,558 2 $ 419,312
Interest payable 288,000 2 -
Line of credit 164,398
Notes payable 202,483
Short-term financing arrangements 102,854
12% Debentures payable 2,400,000 2 -
Other 4,896
Tax assessment payable 1,357,882 2 -
Notes payable 34,152
10% Subordinated notes 227,000 1 227,000
8% Subordinated notes 2,000,000
Deferred grant revenue 291,827
---------
3,446,922
---------
Stockholders' Equity:
Preferred Stock 115
Common Stock 77
Paid-in-surplus 3,211,000 1,2 26,708,272
Retained earnings 1,468,912 2 (16,772,649)
Treasury stock (2,873,100)
----------
- 7,062,715
--------- --------- ----------
$ 5,085,440 $ 5,085,440 $ 10,509,637
========= ========== ==========
Notes:
Adjustments:
a. Purchase of patent in consideration of a $2,000,000 8% note payable.
b. Adjustments to record acquisition of SRC Technologies, Inc. and Econo
-Comm, Inc.:
i. Adjustment to record the acquisition of SRC Technologies, Inc. The
preliminary cost of the acquisition of approximately $4,122,640
consisted of the issuance of 1,697,961 shares of Class A Preferred
Stock and 1,697,961 Class A Warrants, 4,867,937 shares of Class C
Preferred Stock and 4,867,937 Class C Warrants, 440,000 shares of
Class D Preferred Stock, and 899,976 shares of Common Stock. The
value ascribed to the acquisition is tentative and subject to the
results of an appraisal being conducted by an independent
valuation consultant. Total consideration was allocated as follows:
Tangible assets acquired $ 231,595
Separately indentifiable intangible assets 568,833
Goodwill $ 4,152,115
---------------------
4,952,543
Obligations 829,903
---------------------
Total consideration $ 4,122,640
====================
ii. Adjustment to record the acquisition of Econo-Comm, Inc.. The
preliminary cost of the acquisition of approximately $2,401,173
consisted of the issuance of 4,867,938 shares of Class C Preferred
Stock and 4,867,938 Class C Warrants. The value ascribed to the
acquisition is tentative and subject to the results of an appraisal
being conducted by an independent valuation consultant. Total
consideration was allocated as follows:
Tangible assets acquired $ 488,379
Goodwill 2,349,882
---------------------
2,838,261
Obligations 437,088
---------------------
Total consideration $ 2,401,173
=====================
c. To eliminate intercompany accounts receivable and related accounts payable
amounting to $351,210.
d. Excess of purchase price over net assets acquired.
Additional Adjustments:
1. Proceeds from issuance of $750,000 10% notes payable in a private
placement less estimated related offering costs of $58,000. Related
attached warrants are valued at $523,000 and included in Paid-in-Surplus.
Debt discount of $523,000 to be amortized as additional interest expense
over a one-year period.
2. Treatment of net obligations transferred. Proposed creation of trusts
for the benefit of the creditors of two subsidiaries of the Company.
The assets of each of such trusts consists of the
value, determined by appraisals to be obtained for
the trusts, of all of the assets of the respective subsidiaries.
The Trustees of such trusts are required to utilize such
assets to satisfy the 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 assets of the trusts for the
satisfaction of their claims and that the Company will be freed from
dealing with these issues:
Obligations transferred:
Accounts payable and accrued expenses $ 289,558
Interest payable 288,000
Debentures payable 2,400,000
Tax assessments payable 1,357,882
---------------------
Total obligations transferred 4,335,440
Total assets transferred 178,528
---------------------
Net obligations transferred $ 4,156,912
=====================
For purposes of the pro-forma presentation certain assets transferred to
the trusts will be acquired by the Company for approximately $50,000.
This amount is tentative and subject to an appraisal for the trust being
conducted by an independent valuation consultant.
Please be advised that the information presented herein may significantly change
upon the filing of the related Form 8-K Financial Information due no later than
July 6, 2003.
16
Forward Looking Statements
Certain statements in this Quarterly Report on Form 10-QSB/A 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.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibit 99.1: Certification of the Chief Executive Officer pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Exhibit 99.2: 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/A.
(c) Reports on Form 8-K:
The Company filed a report on Form 8-K on May 6, 2003 and said
report and exhibits thereto are incorporated into this Form
10-QSB/A by reference.
17
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: June 16, 2003 George W. Benoit, Chairman of the Board
of Directors, and Chief Executive
Officer
/s/ Anthony S. Conigliaro
----------------------------------------
Date: June 16, 2003 Anthony S. Conigliaro, Vice President
and Chief Financial Officer
18
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of CareerEngine Network, Inc. (the
"Registrant") on Form 10-QSB/A for the quarterly period ending March 31, 2003 as
filed with the Securities and Exchange Commission on the date hereof (the
"Report"), I, George W. Benoit, Chairman of the Board of Directors and Chief
Executive Officer of the Registrant, certify, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
1. I have reviewed the Report of the Registrant;
2. To the best of my knowledge, the Report does not contain any untrue
statements of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the periods
covered by the Report;
3. To the best of my knowledge, the financial statements, and other financial
information included in the Report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the Registrant as of, and for, the periods presented in the Report;
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14(c) and 15d-14(c)) for the Registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the periods in which the Report
is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of the Report (the "Evaluation Date"); and
c) presented in the Report are our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as
of the Evaluation Date;
5. The Registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the Audit
Committee of Registrant's Board of Directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to
record, process, summarize and report financial data and have
identified for the Registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Registrant's
internal controls; and
6. The Registrant's other certifying officer and I have indicated in the
Report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
/s/ George W. Benoit
----------------------------------------
Date: June 16, 2003 George W. Benoit, Chairman of the Board
of Directors and Chief Executive
Officer
19
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of CareerEngine Network, Inc. (the
"Registrant") on Form 10-QSB/A for the quarterly period ending March 31, 2003 as
filed with the Securities and Exchange Commission on the date hereof (the
"Report"), I, Anthony S. Conigliaro, Vice President and Chief Financial Officer
of the Registrant, certify, pursuant to Section. 906 of the Sarbanes-Oxley Act
of 2002, that:
1. I have reviewed the Report of the Registrant;
2. To the best of my knowledge, the Report does not contain any untrue
statements of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the periods
covered by the Report;
3. To the best of my knowledge, the financial statements, and other financial
information included in the Report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the Registrant as of, and for, the periods presented in the Report;
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14(c) and 15d-14(c)) for the Registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the periods in which the Report
is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of the Report (the "Evaluation Date"); and
c) presented in the Report are our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as
of the Evaluation Date;
5. The Registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the Audit
Committee of Registrant's Board of Directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to
record, process, summarize and report financial data and have
identified for the Registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Registrant's
internal controls; and
6. The Registrant's other certifying officer and I have indicated in the
Report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
/s/ Anthony S. Conigliaro
----------------------------------------
Date: June 16, 2003 Anthony S. Conigliaro, Vice President
and Chief Financial Officer
20