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 March 31, 2005
--------------
|_| 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 May 1, 2005
----- --------------------------
Common stock - par value $.00001 10,790,915 shares
-------------------------------- -----------------
PART I
FINANCIAL INFORMATION
Item l. Financial Statements.
1
CNE GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
March 31, December 31,
2005 2004
------------ ------------
(Unaudited)
ASSETS
Current:
Cash and cash equivalents $ 71,195 $ 84,408
Accounts receivable, net of allowance for doubtful accounts 386,872 172,010
of $61,000 in 2005 and $51,000 in 2004
Inventory 283,174 260,487
Other 10,293 8,273
------------ ------------
Total current assets 751,534 525,178
Fixed assets, net 373,713 394,509
Intellectual property rights, net 1,333,648 1,361,948
Goodwill 7,285,894 7,285,894
Prepaid expenses and other assets 16,962 21,265
------------ ------------
Total assets $ 9,761,751 $ 9,588,794
============ ============
LIABILITIES
Current:
Accounts payable and accrued expenses $ 1,790,990 $ 1,476,124
Interest payable 187,477 128,050
Short-term credit arrangements 131,314 191,395
Line of credit 12,917 19,199
Current portion of notes payable 12,148 17,243
Notes and debenture payable 860,000 850,000
10% subordinated notes payable 991,673 966,710
Other notes payable 27,217 23,330
------------ ------------
Total current liabilities 4,013,736 3,672,051
Notes payable, net of current portion 18,677 22,059
Deferred grant revenue 300,000 300,000
------------ ------------
Total liabilities 4,332,413 3,994,110
------------ ------------
Commitments and contingencies
STOCKHOLDERS' EQUITY
Preferred stock 134 134
Common stock 121 121
Paid-in surplus 29,919,185 29,919,185
Accumulated deficit (21,617,002) (21,451,656)
------------ ------------
8,302,438 8,467,784
Less treasury stock, at cost - 1,238,656 shares (2,873,100) (2,873,100)
------------ ------------
Total stockholders' equity 5,429,338 5,594,684
------------ ------------
Total liabilities and stockholders' equity $ 9,761,751 $ 9,588,794
============ ============
See Notes to Consolidated Financial Statements.
2
CNE GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Three Months
Ended March 31,
----------------------------
2005 2004
------------ ------------
(Unaudited) (Unaudited)
Revenues:
Product sales $ 380,125 $ 631,438
Service fee income 200,184 320,135
Internet related income 46,462 31,369
------------ ------------
626,771 982,962
Costs of goods sold 177,529 503,699
------------ ------------
Gross profit 449,242 479,263
Other expenses:
Advertising 17,808 24,720
Compensation and related costs 211,601 368,562
General and administrative 241,166 300,216
Product development -- 6,241
Depreciation and amortization 49,205 47,499
------------ ------------
519,780 747,238
------------ ------------
Loss before other income (expenses) (70,538) (267,975)
Other income (expenses):
Amortization of debt discount (24,963) (124,821)
Interest expense (69,873) (81,182)
Interest income 28 144
------------ ------------
Loss before provision for income taxes (473,834) (473,834)
Provision for income tax provision -- --
------------ ------------
Net loss $ (165,346) $ (473,834)
============ ============
Loss per common share - basic and diluted: $ (.02) $ (.05)
============ ============
Weighted average number of common
shares outstanding - basic and diluted: 10,790,915 10,057,582
============ ============
See Notes to Consolidated Financial Statements.
3
CNE GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Three Months Ended March 31,
----------------------------
2005 2004
----------- -----------
(Unaudited) (Unaudited)
Cash flows from operating activities:
Net loss $ (165,346) $ (473,834)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 49,205 47,499
Provision for doubtful accounts 10,000 7,000
Amortization of debt discount 24,963 124,821
Changes in:
Accounts receivable (224,862) (429,577)
Inventory (22,687) (46,563)
Prepaid expenses and other assets 2,283 (18,650)
Accrued expenses and other liabilities 265,500 66,715
----------- -----------
Net cash used in operating activities (60,944) (722,589)
----------- -----------
Cash flows from investing activities:
Purchase of furniture and equipment (1,191)
----------- -----------
Net cash used in investing activities (109) (1,191)
----------- -----------
Cash flows from financing activities:
Net proceeds from issuance of 1,750,000 shares of Common Stock 571,000
Proceeds from notes payable 10,000
Principal repayments on notes payable, lines of credit
and short-term credit arrangements (70,953) (114,851)
----------- -----------
Net cash provided by financing activities (60,953) 456,149
----------- -----------
Decrease in cash and cash equivalents (122,006) (267,631)
Cash and cash equivalents at beginning of period 193,201 460,832
----------- -----------
Cash and cash equivalents at end of period $ 71,195 $ 193,201
=========== ===========
Supplemental disclosures of cash flow information related to
continuing operations:
Cash paid during the period for:
Interest $ 13,974 $ 77,776
Income taxes $ -- $ --
Non-cash financing activities relating to forgiveness of
interest indebtedness to an officer and an employee of the Company:
Interest payable 20,000
Paid in surplus (20,000)
See Notes to Consolidated Financial Statements.
4
CNE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - THE COMPANY
The following consolidated financial statements of CNE Group, Inc. and
subsidiaries (collectively referred to as the "Company or "CNE," 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, 2004, which was filed with the Securities and Exchange
Commission.
The results of operations for the three months ended March 31, 2005 are not
necessarily indicative of the results to be expected for the entire fiscal year.
Business
--------
CNE Group, Inc. is a holding company whose primary operating subsidiaries are
SRC Technologies, Inc. ("SRC") and U.S. Commlink, Ltd. ("USCL"). SRC, also a
holding company, is the parent of Connectivity, Inc. ("Connectivity") and
Econo-Comm, Inc. (d/b/a Mobile Communications) ("ECI"). Connectivity, ECI and
USCL market, manufacture, repair and maintain remote radio and cellular-based
emergency response products to a variety of federal, state and local government
institutions, and other vertical markets throughout the United States. The
Company has intellectual property rights to certain key elements of these
products - specifically, certain communication, data entry and telemetry
devices.
The Company also generates revenue from its subsidiary, CareerEngine, Inc.,
which is engaged in the business of e-recruiting. This segment is not
significant to the operations of the Company.
Going Concern
-------------
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has incurred substantial
losses, sustained substantial operating cash outflows and has a working capital
deficit at both March 31, 2005 and December 31, 2004. The above factors raise
substantial doubt about the Company's ability to continue as a going concern.
The Company's continued existence depends on its ability to obtain additional
equity and/or debt financing to fund its operations and ultimately to achieve
profitable operations. The Company is attempting to raise additional financing
and has initiated a cost reduction strategy. At March 31, 2005 management
believes that the working capital deficit, losses and negative cash flow will
ultimately be improved by (i) cost reduction strategies initiated in January and
June 2004 and (ii) additional equity and debt financing activities in addition
to those set forth in these financial statements. The Company has been notified
that, subject to the procedural requirements of the American Stock Exchange, its
stock could be delisted (see "American Stock Exchange Listing" below). There is
no assurance that the Company can obtain additional financing or achieve
profitable operations or generate positive cash flow. The 2005 and 2004
financial statements do not include any adjustments relating to the
recoverability or classification of recorded asset amounts or the amount and
classification of liabilities that might be necessary as a result of this going
concern uncertainty.
5
CNE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - THE COMPANY (CONTINUED)
Private Financings
------------------
1. On or about April 1, 2005, two individuals, both of whom are adult
children of the Company's Chief Executive Officer, purchased 545,000
shares of the Company's Series G Preferred Stock at a price of $0.20
per share. The Series G Preferred Stock is non voting, has no
liquidating preference over the Common Stock and each share is
automatically convertible into two shares of Common Stock when such
conversion has been approved by the Company's Common Stockholders.
2. On or about April 12, 2005, four individuals, three of whom are
adult children or related thereto of the Company's Chief Executive
Officer, purchased 500,000 shares of the Company's Series G
Preferred Stock at a price of $0.20 per share.
3. On or about March 15, 2005, the Company borrowed $25,000 from a
lender evidenced by a secured convertible subordinated note due on
September 15, 2005 and bearing interest at the annual rate of 20%
payable at maturity. The note is (i) secured by approximately
$42,000 in one of the Company's bank accounts; (ii) convertible into
the Company's Common Stock at the rate of $0.24 per share, subject
to certain anti-dilution provisions; and (iii) subordinated to the
Company's Senior Indebtedness as that term is defined therein. At
May 15, 2005 the outstanding principal balance of the note was
$10,000. In addition, on or about April 11, 2005, the Company sold
to this lender, for an aggregate purchase price of $100,000, 333,333
shares of restricted Common Stock and three-year warrants to
purchase an aggregate of 100,000 shares of Common Stock at $0.50 per
share, subject to appropriate anti-dilution provisions.
American Stock Exchange Listing
-------------------------------
On May 5, 2005, the Company received notice from the American Stock Exchange
("AMEX") Staff indicating that at December 31, 2004 it did not meet certain of
AMEX's continuing listing standards, specifically its (i) Stockholders' Equity
being less than $6,000,000 (Section 1003(a)(iii) of the AMEX Company Guide) and
(ii) financial condition has become so impaired that it appears questionable
that it will be able to continue operations and/or meet its obligations as they
mature (Section 1003(a)(iv) of the AMEX Company Guide).
AMEX has requested the Company to submit a plan, by June 6, 2005, that will
demonstrate to AMEX the Company's ability to regain compliance (the "Plan"),
which the Company intends to do. The Plan is subject to the approval and to
periodic monitoring by AMEX. Assuming the Company achieves its scheduled
financial milestones as determined by AMEX, the Company will have until November
5, 2005 to regain compliance with the continuing listing requirements. If the
Company it does not achieve its scheduled financial milestones as determined by
AMEX, the Company will lose its AMEX listing.
At March 31, 2005, the Company's Stockholders' Equity was approximately
$5,429,000, its current assets were $752,000, and its current liabilities were
$4,014,000 of which primarily included notes payable ($1,602,000 due April 30,
2005 and $150,000 due June 30, 2005) and related interest payable amounting to
approximately $2,039,000. No event of default has been declared by any holder
thereof as of the date hereof. Management and the noteholders, who include
directors, officers and an employee of the Company who is also a director, are
currently renegotiating the terms of these notes.
6
CNE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE B - SIGNIFICANT ACCOUNTING POLICIES
[1] Inventory:
Inventory is stated at the lower of cost (determined by first-in,
first-out method) or market. The Company's inventory consists of the
following:
March 31, December 31,
2005 2004
--------- ------------
Raw materials $ 256,447 $ 242,061
Work in progress 24,227 15,926
Finished goods 2,500, 2,500
--------- ---------
Total $ 283,174 $ 260,487
========= =========
[2] Income (loss) per share:
Basic and diluted earnings (loss) per common share have been computed in
accordance with SFAS No. 128, "Earnings Per Share." Basic earnings per
share ("BEPS") is computed by dividing net income (loss) by the
weighted-average number of common shares outstanding during the three
month periods ended March 31, 2005 and 2004. Common Stock equivalents to
purchase Common Stock of the Company that were outstanding at March 31,
2005 and 2004 were not included in the computation of diluted net loss per
share as their effect would have been anti-dilutive.
[3] 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, 2005 and December 31, 2004, the Company had a stock-based
employee compensation plan - the 2003 Plan.
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
7
CNE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE B - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 Month Period Ended March 31,
----------------------------------
2005 2004
---------- ----------
Net loss, as reported $ (165,346) $ (473,834)
Less, Total stock-based employee compensation
expense determined under fair value-based method
for all awards, net of related tax effects -- (168,280)
---------- ----------
Pro forma net loss $ (165,346) $ (642,114)
========== ==========
Net loss per share - basic and diluted:
As reported $ (0.02) $ (0.05)
========== ==========
Pro forma $ (0.02) $ (0.06)
========== ==========
On May 10, 2005, pursuant to a litigation Settlement Agreement dated
January 10, 2005, the Company tendered an aggregate of 850,000 shares of
the Company's Common Stock to Larry M. Reid, Michael J. Gutowski and Carol
L. Gutowski in exchange for all of their (i) incentive stock options
(1,550,000), (ii) Series AA Preferred Stock (1,000,000), (iii) Series A
Preferred Stock (305,336) and related Class A Warrants (305,336), and (iv)
Series C Preferred Stock (4,867,937) and related Class C Warrants
(4,867,937). These tendered securities will be delivered to Messrs. Reid
and Gutowski and Ms. Gutowski when the securities for which they are being
exchanged are delivered to the Company.
[4] Recent accounting pronouncements:
In January 2003, the FASB issued FIN 46, Consolidation of Variable
Interest Entities (VIE's), and a revision to FIN 46 in December 2003
(together, "FIN 46"), which requires identification of the Company's
participation in VIE's. VIE's are defined as entities with a level of
invested equity that is not sufficient to fund future activities to permit
them to operate on a stand-alone basis, or whose equity holders lack
certain characteristics of a controlling financial interest. For entities
identified as VIE's, FIN 46 sets forth a model to evaluate potential
consolidation based on the assessment of which party to a VIE, if any,
bears a majority of the risk of the VIE's expected losses, or stands to
gain from a majority of the VIE's expected returns. FIN 46 also sets forth
certain disclosures regarding interest in VIE's that are deemed
significant, even if consolidation is not required. FIN 46 is effective
for all VIE's created after January 31, 2003. The Company adopted FIN 46
during 2003 and the adoption of this interpretation did not have an impact
on the Company's consolidated financial statements in 2005 or 2004.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity.
SFAS No. 150 establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both
liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances). Many of those instruments were previously classified as
equity. SFAS No. 150 is effective for financial instruments entered into
8
CNE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE B - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
or modified after May 31, 2003. The Company adopted this standard during
2003 and the adoption did not have an impact on the Company's consolidated
financial statements in 2004 or 2003.During December 2004, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 153, Exchanges of
Nonmonetary Assets -- An Amendment of APB Opinion No. 29. APB Opinion No.
29, Accounting for Nonmonetary Transactions ("APB 29") required that
nonmonetary exchanges be accounted for at fair value, subject to certain
exceptions. SFAS 153 has removed the exception for nonmonetary exchanges
of similar productive assets, and replaced it with an exception for
exchanges that lack commercial substance. The provisions of SFAS 153 are
effective prospectively for all nonmonetary asset exchanges in fiscal
periods beginning after June 15, 2004. The adoption of this standard did
not have an impact on the Company's consolidated financial statements in
2005 and 2004.
During December 2004, FASB issued SFAS No. 123 (Revised 2004), Share-Based
Payment ("SFAS 123R"). SFAS 123R replaces SFAS No. 123, Accounting for
Stock-Based Compensation (SFAS 123), and supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees. SFAS 123R requires companies to
recognize the compensation cost related to share-based payment
transactions with employees in the financial statements. The compensation
cost is measured based upon the fair value of the instrument issued.
Share-based compensation transactions with employees covered within SFAS
123R include share options, restricted share plans, performance-based
awards, share appreciation rights, and employee share purchase plans. SFAS
123 included a fair-value-based method of accounting for share-based
payment transactions with employees, but allowed companies to continue to
apply the guidance in APB 25 provided that they disclose in the footnotes
to the financial statements the pro forma net income if the
fair-value-based method been applied. The Company is currently reporting
share-based payment transactions with employees in accordance with APB 25
and provides the required disclosures. SFAS 123R will be effective for the
Company beginning January 1, 2006.
In implementing SFAS 123R the Company will apply the modified prospective
application transition method. The modified prospective application
transition method requires the application of this standard to:
o All new awards issued after the effective date;
o All modifications, repurchased or cancellations of existing
awards after the effective date; and
o Unvested awards at the effective date.
For unvested awards, the compensation cost related to the remaining
"requisite service' that has not been rendered at the effective date will
be determined by the compensation cost calculated currently for either
recognition or pro forma disclosures under SFAS 123. The Company will be
adopting the modified prospective application of SFAS 123R.
9
CNE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE C - RESTRUCTURING OF CERTAIN NOTES PAYABLE
As of April 30, 2005, the Company's (i) 10% Subordinated Notes amounting to
$1,000,000, (ii) 18% Promissory Note amounting to $300,000, (iii) 10% Secured
Note amounting to $150,000, and (iv) 24% Secured Notes amounting to $150,000,
were all due and payable. Unpaid interest relating to these notes amounting to
approximately $165,000 is also due and payable. As of the date hereof, no event
of default has been declared by any holder thereof. Management and the
noteholders, which includes directors, officers and an employee of the Company
who is also a director, are currently renegotiating the terms of these notes.
NOTE D - LITIGATION
[1] The Company is a party to various vendor related litigations. Based on the
opinion of legal counsel, the Company has accrued a liability of
approximately $100,000 and, accordingly, this liability has been reflected
in accounts payable and accrued expenses.
[2] On August 19, 2004, two of the Company's then officers, Michael J.
Gutowski and Larry M. Reid, who were then also directors, informed the
Company that their employment contracts may have been breached. On August
27, 2004, these officers filed suit against the Company in the United
States District Court, Southern District of Florida, alleging that (i)
their employment contracts had been breached and (ii) certain future
compensation relating thereto to be paid to them amounting up to an
aggregate of $1,003,000 had been accelerated. On October 5, 2004, Carol L.
Gutowski, then an officer of one of the Company's subsidiaries and a
former director of the Company, instituted a suit against the subsidiary
in the Circuit Court, 17th Judicial Circuit, Broward County, Florida,
alleging (i) a breach of her employment agreement with the subsidiary and
(ii) that certain future compensation relating thereto to be paid to her
from the subsidiary amounting up to an aggregate of $274,000 had been
accelerated.
The Company reported that it did not believe that it had committed any
breach of these agreements and, accordingly, had not incurred the claims
that these officers alleged. In addition, the Company reported that it
believed that these officers had committed violations of their employment
agreements and had taken other actions that had damaged the Company.
Accordingly, the Company filed a defense to these actions and asserted
appropriate counterclaims.
On January 10, 2005, both of the aforementioned actions were settled. In
accordance therewith, the parties agreed, among other things, as follows:
1. Each party will release the other from any and all claims
except for any obligations set forth in the settlement
agreement and the legal actions between the parties, including
both the Federal Court and Florida Circuit Court actions, will
be dismissed with prejudice;
2. The parties shall bear their own fees and expenses relating to
the litigation;
3. Messrs. Reid and Gutowski and Ms. Gutowski shall be released
from the non-competition provisions of their respective
employment contracts;
4. Messrs. Reid and Gutowski agreed to resign as directors of the
Company; and
10
CNE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE D - LITIGATION (CONTINUED)
5. Messrs. Reid and Gutowski and Ms. Gutowski shall exchange, in
the aggregate, (i) all of their Class AA (1,000,000 shares),
Class A (305,336 shares), and Class C (4,867,937 shares)
Preferred Stock of the Company, and (ii) all issued incentive
stock options of the Company, aggregating 1,550,000 in the
aggregate, for 850,000 shares of our Common Stock if the
exchange is made on or prior to May 10, 2005, 950,000 shares
if the exchange is made on or prior to June 9, 2005, or
1,050,000 shares if the exchange is made on or prior to July
9, 2005 subject to certain restrictions relating to the sale
thereof.
The settlement agreement has been being filed with the United States
District Court Southern District of Florida, Case No:
04-61125-Civ-Cooke/McAliley, Michael J. Gutowski and Larry M. Reid,
Plaintiffs, v. CNE Group, Inc., Defendant/Counter-Plaintiff, v. Michael J.
Gutowski, Larry M. Reid and Carol L. Gutowski, Counter-Defendants.
NOTE E - SUBSEQUENT EVENTS
[1] As of January 1, 2005, certain holders of the Company's 10% subordinated
notes agreed to defer $18,750 of interest due on such date and further
defer the interest that was due and deferred on July 1, 2004 ($13,750) and
October 1, 2004 ($18,750) to April 1, 2005 in consideration for the
Company issuing to them 384,375 of its Class B Warrants, each to give the
holder thereof the right to purchase one share of Common Stock at $0.40
per share. On April 1, 2005, the holders of the Company's 10% subordinated
notes were asked to agree to defer $25,000 of interest due on such date
and further defer the interest that was due and deferred on July 1, 2004
($13,750), October 1, 2004 ($18,750) and January 1, 2005 ($187,50) to
April 30, 2005 in consideration for the Company issuing to them 254,167 of
its Class B Warrants, each to give the holder thereof the right to
purchase one share of Common Stock at $0.30 per share. The noteholders
include two officers of the Company. The Company is currently awaiting a
response to this proposal.
[2] On January 1, 2005, the holders of the Company's 24% Secured Notes agreed
to defer $9,200 of interest due on such date and further defer the
interest that was due and deferred on October 1, 2004 ($5,867) to April
30, 2005 in consideration of the Company issuing to them 113,000 Class H
Warrants of the Company, each to give the holder thereof the right to
purchase a share of Common Stock at $0.30 per share. On April 1, 2005, the
holders of the Company's 24% Secured Notes were asked to agree defer
$9,200 of interest due on such date and further defer the interest that
was due and deferred on October 1, 2004 ($5,867) and January 1, 2005
($92,00) to April 30, 2005 in consideration for the Company issuing to
them 80,222 of its Class H Warrants, each to give the holder thereof the
right to purchase one share of Common Stock at $0.30 per share. The
Company is currently awaiting a response to this proposal.
[3] On or about April 1, 2005, two individuals, both of whom are adult
children of the Company's Chief Executive Officer, purchased 545,000
shares of the Company's Series G Preferred Stock at a price of $0.20 per
share. The Series G Preferred Stock is non voting, has no liquidating
preference over the Common Stock and each share is automatically
convertible into two shares of Common Stock when such conversion has been
approved by the Company's common stockholders. The Company used the funds
obtained from this financing primarily for working capital purposes.
11
CNE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE E - SUBSEQUENT EVENTS (CONTINUED)
[4] On or about April 12, 2005, four individuals, three of whom are adult
children or related thereto of the Company's Chief Executive Officer,
purchased 500,000 shares of the Company's Series G Preferred Stock at a
price of $0.20 per share. The Company used the funds obtained from this
financing primarily for working capital purposes.
[5] On or about March 15, 2005, the Company borrowed $25,000 from a lender
evidenced by a secured convertible subordinated note due on September 15,
2005 and bearing interest at the annual rate of 20% payable at maturity.
The note is (i) secured by approximately $42,000 in one of the Company's
bank accounts; (ii) convertible into the Company's Common Stock at the
rate of $0.24 per share, subject to certain anti-dilution provisions; and
(iii) subordinated to the Company's Senior Indebtedness as that term is
defined therein. At May 15, 2005 the outstanding principal balance of the
note was $10,000. In addition, on or about April 11, 2005, the Company
sold to this lender, for an aggregate purchase price of $100,000, 333,333
shares of restricted Common Stock and three-year warrants to purchase an
aggregate of 100,000 shares at $0.50 per share, subject to appropriate
anti-dilution provisions. The Company used the funds obtained from this
financing primarily for working capital purposes.
12
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
General
-------
We are a holding company whose primary operating subsidiaries are SRC and
US Commlink. SRC, also a holding company, is the parent of Connectivity
and ECI. These companies, which we acquired on April 23, 2003, market,
manufacture, repair and maintain remote radio and cellular-based emergency
response products to a variety of federal, state and local government
agencies as well as other vertical markets located throughout the United
States. In addition, we engage in the business of e-recruiting through our
subsidiary, CareerEngine, Inc. The e-recruiting business does not generate
a significant part of our revenue, and is not significant to the
operations of the Company.
Catastrophe of September 11, 2001
---------------------------------
In 2001, our headquarters were located at Suite 2112 of Two World Trade
Center in New York City. In April and September 2002, and August 2003, we
received governmental assistance grants related to the catastrophe
aggregating $300,000. The grants have a restriction that could require
their repayment, specifically if we were to relocate a substantial portion
our operations outside of New York City before May 1, 2005. Until such
time as this restriction no longer applies, we will classify the grants as
a liability of the Company. We will remove the liability and record grant
income on our financial statements when these restrictions lapse or are
satisfied or, alternatively, repay such grants if the above condition is
not satisfied.
Critical Accounting Policies and Estimates
------------------------------------------
The preparation of financial statements in accordance with U.S. generally
accepted accounting principles requires us to make estimates and
assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of net
revenue and expenses during the reporting period. On an ongoing basis, we
evaluate our estimates, including those related to our allowance for
doubtful accounts, inventory reserves, goodwill and purchased intangible
asset valuations, and asset impairments. We base our estimates on
historical experience and on various other assumptions that we believe to
be reasonable under the circumstances, the results of which form the basis
for making judgments about the carrying values of assets and liabilities.
Actual results may differ from these estimates under different assumptions
or conditions.
We believe the following critical accounting policies, among others,
affect the significant judgments and estimates we use in the preparation
of our consolidated financial statements:
Allowance for Doubtful Accounts, Revenue Recognition
----------------------------------------------------
13
We evaluate the collectibility of our accounts receivable based on a
combination of factors. In circumstances where we are aware of a specific
customer's inability to meet its financial obligations to us, we record a
specific allowance to reduce the net receivable to the amount we
reasonably believe will be collected. For all other customers, we record
allowances for doubtful accounts based on the length of time the
receivables are past due, the prevailing business environment and our
historical experience. If the financial condition of our customers were to
deteriorate or if economic conditions were to worsen, additional
allowances may be required in the future.
We recognize product revenue when persuasive evidence of an arrangement
exists, the sales price is fixed, the service is performed or products are
shipped to customers, which is when title and risk of loss transfers to
the customers, and collectibility is reasonably assured.
At March 31, 2005, our allowance for doubtful accounts was $61,000 or
13.6% of gross receivables, compared to $51,000 or 22.9% of gross
receivables as of December 31, 2004. The decrease in the reserve as a
percentage of gross receivables at March 31, 2005 as compared to December
31, 2004 is the result of an increase in accounts receivable from December
31, 2004 to March 31, 2005 and a lessor requirement for an allowance for
doubtful accounts at March 31, 2005 than at December 31, 2004.
Inventory Valuation
-------------------
At each balance sheet date, we evaluate our ending inventories for excess
quantities and obsolescence. This evaluation includes analyses of sales
levels by product and projections of future demand. If inventories on hand
are in excess of forecasted demand, we provide appropriate reserves for
such excess inventory. If we have previously recorded the value of such
inventory determined to be in excess of projected demand, or if we
determine that inventory is obsolete, we write off these inventories in
the period the determination is made. Remaining inventory balances are
adjusted to approximate the lower of our cost or market value. If future
demand or market conditions are less favorable than our projects,
additional inventory write-downs may be required, and would be reflected
in cost of revenues in the period the revision is made.
Valuation of Goodwill. Purchased Intangible Assets and Long-Lived
-----------------------------------------------------------------
Assets
------
We perform goodwill impairment tests on an annual basis and on an interim
basis if an event or circumstance indicates that it is more likely than
not that impairment has occurred. We assess the impairment of other
amortizable intangible assets and long-lived assets whenever events or
changes in circumstances indicate that the carrying value may not be
recoverable. Factors we consider important that could trigger an
impairment review include significant underperformance to historical or
projected operating results, substantial changes
14
in our business strategy and significant negative industry or economic
trends. If such indicators are present, we evaluate the fair value of the
goodwill. For other intangible assets and long-lived assets we determine
whether the sum of the estimated undiscounted cash flows attributable to
the assets in question is less than their caring value. If less, we
recognize an impairment loss based on the excess of the carrying amount of
the assets over their respective fair values. Fair value of goodwill is
determined by using a valuation model based on market capitalization. Fair
value of other intangible assets and long-lived assets is determined by
future cash flows, appraisals or other methods. If the long-lived asset
determined to be impaired is to be held and used, we recognize an
impairment charge to the extent the anticipated net cash flows
attributable to the asset are less than the asset's carrying value. The
fair value of the long-lived asset then becomes the asset's new carrying
value, which we depreciate over the remaining estimated useful life of the
asset.
Recent Accounting Pronouncements
--------------------------------
In January 2003, the FASB issued FIN 46, Consolidation of Variable
Interest Entities (VIE's), and a revision to FIN 46 in December 2003
(together, "FIN 46"), which requires identification of our participation
in VIE's. VIE's are defined as entities with a level of invested equity
that is not sufficient to fund future activities to permit them to operate
on a stand-alone basis, or whose equity holders lack certain
characteristics of a controlling financial interest. For entities
identified as VIE's, FIN 46 sets forth a model to evaluate potential
consolidation based on the assessment of which party to a VIE, if any,
bears a majority of the risk of the VIE's expected losses, or stands to
gain from a majority of the VIE's expected returns. FIN 46 also sets forth
certain disclosures regarding interest in VIE's that are deemed
significant, even if consolidation is not required. FIN 46 is effective
for all VIE's created after January 31, 2003. We adopted FIN 46 during
2003 and the adoption of this interpretation did not have an impact on our
consolidated financial statements in 2005 or 2004.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity.
SFAS No. 150 establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both
liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances). Many of those instruments were previously classified as
equity. SFAS No. 150 is effective for financial instruments entered into
or modified after May 31, 2003. We adopted this standard during 2003 and
the adoption did not have an impact on our consolidated financial
statements in 2005 or 2004.
During December 2004, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 153, Exchanges of Nonmonetary Assets -- An Amendment of
APB Opinion No. 29. APB Opinion No. 29, Accounting for Nonmonetary
Transactions ("APB 29") required that nonmonetary exchanges be accounted
for at fair value, subject to certain exceptions. SFAS 153 has removed the
exception
15
for nonmonetary exchanges of similar productive assets, and replaced it
with an exception for exchanges that lack commercial substance. The
provisions of SFAS 153 are effective prospectively for all nonmonetary
asset exchanges in fiscal periods beginning after June 15, 2004. The
adoption of this standard did not have an impact on our consolidated
financial statements in 2005 or 2004.
During December 2004, FASB issued SFAS No. 123 (Revised 2004), Share-Based
Payment ("SFAS 123R"). SFAS 123R replaces SFAS No. 123, Accounting for
Stock-Based Compensation (SFAS 123), and supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees. SFAS 123R requires companies to
recognize the compensation cost related to share-based payment
transactions with employees in the financial statements. The compensation
cost is measured based upon the fair value of the instrument issued.
Share-based compensation transactions with employees covered within SFAS
123R include share options, restricted share plans, performance-based
awards, share appreciation rights, and employee share purchase plans. SFAS
123 included a fair-value-based method of accounting for share-based
payment transactions with employees, but allowed companies to continue to
apply the guidance in APB 25 provided that they disclose in the footnotes
to the financial statements the pro forma net income if the
fair-value-based method been applied. We are currently reporting
share-based payment transactions with employees in accordance with APB 25
and provides the required disclosures. SFAS 123R will be effective for us
beginning January 1, 2006.
In implementing SFAS 123R we will apply the modified prospective
application transition method. The modified prospective application
transition method requires the application of this standard to:
o All new awards issued after the effective date;
o All modifications, repurchased or cancellations of existing
awards after the effective date; and
o Unvested awards at the effective date.
For unvested awards, the compensation cost related to the remaining
"requisite service' that has not been rendered at the effective date will
be determined by the compensation cost calculated currently for either
recognition or pro forma disclosures under SFAS 123. We will be adopting
the modified prospective application of SFAS 123R.
A. Results of Operations:
----------------------
Three-Month Period Ended March 31, 2005 Compared to the Three-Month Period
--------------------------------------------------------------------------
Ended March 31, 2004
--------------------
Revenues
16
Total revenues decreased to $626,771 for the three-month period ended
March 31, 2005 from $982,962 for the three-month period ended March 31,
2004 due to a decrease in the dollar amount of the awarded contracts to
USCL.
Product sales income decreased to $380,125 for the three-month period
ended March 31, 2005 from $631,438 for the three-month period ended March
31, 2004 due to a decrease in the dollar amount of the awarded contracts
to USCL.
Service fee income decreased to $200,184 for the three-month period ended
March 31, 2005 from $320,135 for the three-month period ended March 31,
2004 due to the loss of certain maintenance contracts by ECI.
Internet related income increased to $46,463 for the three-month period
ended March 31, 2005 from $31,369 for the three-month period ended March
31, 2004 as the operations of our subsidiary, CareerEngine, Inc. have
stabilized, although we have relatively small operations within the
e-recruiting industry.
Cost of Goods Sold
Costs of goods sold, which relates to product sales and related service
fee income, decreased to $177,529 for the three-month period ended March
31, 2005 from $503,699 for the three-month period ended March 31, 2004 due
to the decrease in related revenues.
Other Expenses
Total other expenses decreased to $519,780 for the three-month period
ended March 31, 2005 from $747,238 for the three-month period ended March
31, 2004 as the effect of certain cost reduction initiatives, including
the reduction of our executive personnel, were in effect during the
three-month period ended March 31, 2005 that were not in effect during in
the three month period ended March 31, 2004.
Advertising expenses decreased to $17,808 for the three-month period ended
March 31, 2005 from $24,720 for the three-month period ended March 31,
2004 as we decreased our attendance at industry trade shows. These
expenditures relate to the acquired operations of USCL and SRC and its
subsidiaries.
Compensation and related costs decreased to $211,601 for the three-month
period ended March 31, 2005 from $368,562 for the three-month period ended
March 31, 2004 as we instituted certain payroll reduction initiatives in
2004, including the reduction of our executive personnel.
General and administrative expenses decreased to $241,166 for the
three-month period ended March 31, 2005 from $300,216 for the three-month
period ended March 31, 2004 due to the decreased cost and use of
professional services in the operations of the Company.
17
Product development expenses decreased to nil for the three-month period
ended March 31, 2005 from $6,241 for the three-month period ended March
31, 2004 due to the cessation of certain initiatives commenced by USCL to
develop products to meet our customers' future requirements.
Depreciation and amortization expenses modestly increased to $49,205 for
the three-month period ended March 31, 2005 from $47,499 for the
three-month period ended March 31, 2004.
Other Items
Amortization of debt discount decreased to $24,963 for the three-month
period ended March 31, 2005 from $124,821 for the three-month period ended
March 31, 2004 due to the change in the monthly rate of amortization of
the debt discount ($699,000) related to the 10% subordinated notes issued
on April 23, 2003 from $58,250 to $8,321. The change in the amortization
rate was caused by the extension of the maturity date of the notes from
April 30, 2004 to April 30, 2005.
Interest expense decreased to $69,873 for the three-month period ended
March 31, 2005 from $81,182 for the three-month period ended March 31,
2004 due primarily to a decrease in the use, by SRC and its subsidiaries,
of accounts receivable financing commonly referred to as factoring.
Factoring, when utilized, has an annual interest rate in excess of 36%.
Operating Loss
On a pre-tax basis, we had a loss from operations of $165,346 for the
three-month period ended March 31, 2005 compared with a loss from
operations of $473,834 for the three-month period ended March 31, 2004.
Our loss from operations for the three-month period ended March 31, 2005
was $165,346 compared with a loss from continuing operations of $473,834
for the three-month period ended March 31, 2004. For the three-month
period ended March 31, 2005, loss per common share from continuing
operations, basic and diluted, was $.02 per share. For the three-month
period ended March 31, 2004, income per common share from continuing
operations, basic and diluted, was $.05 per share.
Our net loss for the three-month period ended March 31, 2005 was $165,346
compared with net loss of $473,834 for the three-month period ended March
31, 2004. For the three-month period ended March 31, 2005, net loss per
common share, basic and diluted, was $.02 per share. For the three-month
period ended March 31, 2004, net loss per common share, basic and diluted,
was $.05 per share.
B. Liquidity and Capital Resources
-------------------------------
18
We have incurred substantial losses, sustained substantial cash outflows
from operating activities and had a working capital deficit at March 31,
2005 and December 31, 2004. The above factors raise substantial doubt
about our ability to continue as a going concern. Our continued existence
depends on our ability to obtain additional equity and/or debt financing
to fund our operations, financial obligations as they become due, and
ultimately to achieve profitable operations. We are continuously in the
process of raising additional financing and have initiated a cost
reduction strategy. At March 31, 2005 and December 31, 2004 management
believes that the working capital deficit, losses and negative cash flow
will ultimately be improved by (i) cost reduction strategies initiated in
January and June 2004 and (ii) additional equity and debt financing
activities in addition to those set forth in the financial statements. On
May 5, 2005, we received notice from the American Stock Exchange ("AMEX")
Staff indicating that at December 31, 2004 we did not meet certain of
AMEX's continuing listing standards, specifically our (i) Stockholders'
Equity being less than $6,000,000 (Section 1003(a)(iii) of the AMEX
Company Guide) and (ii) financial condition has become so impaired that it
appears questionable that we will be able to continue operations and/or
meet our obligations as they mature (Section 1003(a)(iv) of the AMEX
Company Guide). AMEX has requested us to submit a plan, by June 6, 2005,
that will demonstrate to AMEX our ability to regain compliance (the
"Plan"), which we intend to do. The Plan is subject to the approval and to
periodic monitoring by AMEX. Assuming we achieve our scheduled financial
milestones as determined by AMEX, we will have until November 5, 2005 to
regain compliance with the continuing listing requirements. If we do not
achieve our scheduled financial milestones as determined by AMEX, we will
lose our AMEX listing. At March 31, 2005, our Stockholders' Equity was
approximately $5,429,000, our current assets were $752,000, and our
current liabilities were $4,014,000 that primarily included notes payable
($1,602,000 due as of April 30, 2005 and $150,000 due June 30, 2005) and
related interest payable amounting to approximately $2,039,000. No event
of default has been declared by any holder thereof as of the date hereof.
Management and the noteholders, who include certain of our directors,
officers and an employee who is also a director, are currently
renegotiating the terms of these notes. There is no assurance that we can
obtain additional financing or achieve profitable operations or generate
possible cash flow or that we can retain our listing. Our 2005 and 2004
financial statements do not include any adjustments relating to the
recoverability or classification of recorded asset amounts or the amount
and classification of liabilities that might be necessary as a result of
this ongoing concern uncertainty
Off-Balance Sheet Arrangements
------------------------------
At March 31, 2005 and December 31, 2004, we had no off-balance sheet
arrangements.
Operating Activities
--------------------
19
We utilized $60,944 of cash in operating activities during the three-month
period ended March 31, 2005. We had a net loss of $165,346 during this
period, which included an aggregate of $84,168 of non-cash items,
including depreciation and amortization, amortization of debt discount and
an allowance for doubtful accounts. In addition to the impact of non-cash
items, our operating activities for the three-month period ended March 31,
2005 also reflected an increase in inventory, accounts payable, accrued
expenses and other liabilities, and accounts receivable and a decrease in
other assets.
We utilized $722,589 of cash in operating activities during the
three-month period ended March 31, 2004. We had a net loss of $473,834
during this period, which included an aggregate of $179,320 of non-cash
items, including depreciation and amortization, amortization of debt
discount and allowance for doubtful accounts. In addition to the impact of
non-cash items, our operating activities for the three-month period ended
March 31, 2004 also reflected an increase in accounts receivable,
inventory, prepaid expenses and other assets, and accrued expenses and
other liabilities. Our significant increase in accounts receivable is
principally due to the completion of our contract with the Nevada
Department of Transportation.
On January 21, 2004, we took several initiatives to address our operating
cash deficiency, which included, but were not limited to, the reduction
and/or elimination of certain executive salaries, waiving of certain
interest payments due officers and/or directors, waiving of certain
accounts receivable due an officer and employee, and the reduction of
certain administrative costs. In addition, we raised gross proceeds of
$700,000 in February 2004 from the sale of our Common Stock (see
"Financing Activities" below), and restructured certain short-term credit
arrangements into a $300,000 note payable due in February 2005.
Furthermore, in July through December 2004 we restructured and issued
approximately $450,000 of our debt securities. We are currently attempting
to restructure the debt due April 30, 2005 amounting to $1,600,000 with
the holders thereof.
Financing Activities
--------------------
On April 23, 2003, we completed a private financing pursuant to which we
issued notes (the "Notes") in the aggregate principal amount of
$1,000,000, of which $650,000 was to certain of our officers, and
4,165,800 ten year cashless Class B Warrants, each to purchase one share
of our Common Stock at $0.50 per share. The Notes bear interest at the
annual rate of 10% payable quarterly and were due on April 30, 2004. The
aggregate number of shares for which the Warrants may be exercised equal
15% of our outstanding Common Stock on a fully-diluted basis. The Warrants
are anti-dilutive until the Notes have been repaid. The due date of the
Notes may be extended at our option for an additional year in
consideration for the issuance of 10-year warrants to purchase 4% of our
then outstanding Common Stock at $0.50 per share. These Warrants would
also be anti-dilutive until the Notes have been repaid. In addition, we
valued the Warrants, utilizing the Black-Scholes Pricing Model, at
$699,000, which is being
20
accounted for as debt discount and is being amortized ratably over the
one-year term of the Notes.
On March 12, 2004, we notified the Class B Warrant holders that, to
satisfy the 15% non-dilutive provisions of their Warrants, these Warrants
were then exercisable for an aggregate of 5,245,200 shares of our Common
Stock at approximately $0.40 per share. On this date, we also exercised
our option to extend the maturity date of the Notes to April 30, 2005 and
satisfied the requirement for the additional 4% non-dilutive interest in
the Company by issuing to the Noteholders Class B Warrants to purchase an
additional 1,708,900 shares of our Common Stock at $0.50 per share. The
non-dilutive provisions of the Warrants terminate when all of the Notes
have been paid in full. In May 2005, we will notify the Class B Warrant
holders that, to satisfy the now 19% non-dilutive provisions of their
Warrants, these Warrants will now be exercisable for an additional of
1,122,100 shares of our Common Stock at approximately $0.40 per share.
In addition, on September 17, 2003, we sold 1,250,000 shares of our Common
Stock at $0.40 per share to an existing noteholder and stockholder of the
Company.
On February 10, 2004, we sold 1,750,000 shares of our Common Stock at
$0.40 per share. The net proceeds of the transaction amounted to $571,000.
On June 24, 2004 we repaid, in full, one of our outstanding lines of
credit amounting to approximately $146,000. On the same date we issued a
secured note payable to an employee of one of our subsidiaries in the
amount of $150,000. This employee is also now one of our directors. The
note is secured by the furniture and equipment of the subsidiary. The note
bears interest at 10% per annum and the principal and all interest thereon
was due on September 24, 2004. In consideration for extending the maturity
date of the note to April 30, 2005 and deferring the payment of all
accrued interest for the period June 24, 2004 through April 30, 2005, we
issued the noteholder individual Warrants to purchase 101,000 shares of
our Common Stock at $0.28 per share. Management and the noteholder are
currently renegotiating the terms of these notes.
In July and August 2004, we issued $150,000 of our 24% Secured Notes due
April 30, 2005 to the wife of our Chief Executive Officer who is also the
holder of one of our 10% subordinated notes. Interest on the notes is
payable quarterly in arrears. The notes are secured by (i) all the stock
of SRC and USCL, and (ii) the pledge of Patent Nos. 6,060,979, 6,047,173
and 5,701,338 - all owned by us. On October 1, 2004, the holders of 100%
of our 24% Secured Notes agreed to defer $5,867 of interest due on such
date to January 1, 2005 in consideration for our issuing to them 53,333 of
our Class B Warrants, each to give the holder thereof the right to
purchase one share of our Common Stock at $0.33 per share. On January 1,
2005, the holders of 100% of our 24% Secured Notes agreed to
21
defer $9,200 of interest due on such date and further defer the interest
that was due and deferred on October 1, 2004 $5,867 to April 1, 2005 in
consideration for our issuing to them 113,000 of our Class B Warrants,
each to give the holder thereof the right to purchase one share of our
Common Stock at $0.40 per share. Management and the noteholders, which
includes directors, and an officer of the Company, are currently
renegotiating the terms of these notes.
In October 2004, we and USCL entered into a two-year Project Financing
Agreement with an institutional lender relating to USCL's anticipated
participation in the "Cellular Call Box Upgrade and Maintenance Service"
projects for numerous Service Authority for Freeway Emergencies ("SAFE")
programs within the state of California. We cannot assure you that we will
participate in these projects or, if we do, to what extent such
participation will be. This agreement provides us with finished goods and
accounts receivable financing of up to $2,000,000 relating to these
potential aforementioned projects. The effective interest rate is
approximately 3% per month on the outstanding balance of the amount
receivables financed. The finished goods and accounts receivable to be
financed, as well as all of our other assets not previously pledged, will
secure the borrowings under this agreement.
In October, November and December 2004, we issued (i) $150,000 of our 10%
Convertible Subordinated Notes due June 30, 2005 and (ii) 945,000 of our
Class C Cashless Warrants, each to give the holder thereof the right to
purchase one share of our Common Stock at $0.50 per share. The notes were
sold to the wife of our Chief Executive Officer and other accredited
investors and are convertible by the holder, at any time, into our Common
Stock at $0.50 per share. The warrants expire on April 30, 2013. Interest
on the notes is due at maturity.
On or about April 1, 2005, two individuals, both of whom are adult
children of our Chief Executive Officer, purchased 545,000 shares of our
Series G Preferred Stock at a price of $0.20 per share. The Series G
Preferred Stock is non voting, has no liquidating preference over our
Common Stock and each share is automatically convertible into two shares
of our Common Stock when such conversion has been approved by our Common
Stockholders.
On or about April 12, 2005, four individuals, three of whom are adult
children or related thereto of our Chief Executive Officer, purchased
500,000 shares of our Series G Preferred Stock at a price of $0.20 per
share.
On or about March 15, 2005, we borrowed $20,000 from a lender evidenced by
a secured convertible subordinated note due on September 15, 2005 and
bearing interest at the annual rate of 20% payable at maturity. The note
is (i) secured by approximately $42,000 in one of our bank accounts; (ii)
convertible into our Common Stock at the rate of $0.24 per share, subject
to certain anti-dilution provisions; and (iii) subordinated to our Senior
Indebtedness as that term is defined therein. At March 31, 2005 the
outstanding principal balance of the note was $10,000. In addition, on or
about April 11, 2005, we sold to this lender, for an aggregate purchase
price of $100,000, 333,333 shares of restricted Common
22
Stock and three-year warrants to purchase an aggregate of 100,000 shares
of our Common Stock at $0.50 per share, subject to appropriate
anti-dilution provisions.
We are using the funds obtained from these financings for working
capital. The financings were effected pursuant to the exemption from the
registration provisions of the Securities Act of 1993 provided by
Section 4(2) thereof.
We did not have any material commitments for capital expenditures as of
March 31, 2005.
C. Inflation
---------
Due to the nature of our business, inflation does not significantly
impact our operations.
Item 3. Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer have conducted
an evaluation of the effectiveness of disclosure controls and procedures
pursuant to Rule 13a-14 of the Exchange Act. Based on that evaluation,
they have concluded that our disclosure controls and procedures are
effective in ensuring that all material information required to be filed
in this 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.
23
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
We are a party to various vendor related litigations. Based on the
opinion of management and legal counsel, we have accrued an estimated
liability of approximately $100,000.
Item 5. Other Information.
None
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 B of the Notes to Consolidated Financial
Statements (Unaudited) in this Form 10-QSB.
(b) Reports on Form 8-K:
The Company filed a report on Form 8-K on January 14, 2005, a
report on Form 8-K on April 11, 2005, and a report on Form 8-K
on May 11, 2005.
24
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: May 23, 2005 George W. Benoit, Chairman of the Board
of Directors, and Chief Executive
Officer
/s/ Anthony S. Conigliaro
-----------------------------------------
Date: May 23, 2005 Anthony S. Conigliaro, Vice President and
Chief Financial Officer
25