U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
|X| Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 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.)
255 West 36th Street, Suite 800, New York, N.Y. 10018
-----------------------------------------------------
(Address of Principal Executive Offices)
212-300-2112
------------
(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 August 1, 2005
----- -----------------------------
Common stock - par value $.00001 11,424,248 shares
-------------------------------- -----------------
PART I
FINANCIAL INFORMATION
Item l. Financial Statements.
1
CNE GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
June 30, December 31,
2005 2004
------------ ------------
(Unaudited)
ASSETS
Current:
Cash and cash equivalents $ 101,391 $ 84,408
Accounts receivable, net of allowance for doubtful accounts 172,887 172,010
of $66,000 in 2005 and $51,000 in 2004
Inventory 313,322 260,487
Other 8,964 8,273
------------ ------------
Total current assets 596,564 525,178
Fixed assets, net 333,243 394,509
Intellectual property rights, net 1,305,349 1,361,948
Goodwill 7,285,894 7,285,894
Prepaid expenses and other assets 7,661 21,265
------------ ------------
Total assets $ 9,528,711 $ 9,588,794
============ ============
LIABILITIES
Current:
Accounts payable and accrued expenses $ 1,627,724 $ 1,476,124
Interest payable 246,904 128,050
Short-term credit arrangements 96,859 191,395
Line of credit 3,524 19,199
Current portion of notes payable -- 17,243
Notes and debenture payable 850,000 850,000
10% subordinated notes payable 1,000,000 966,710
Other notes payable 42,690 23,330
------------ ------------
Total current liabilities 3,867,701 3,672,051
Notes payable, net of current portion -- 22,059
Deferred grant revenue -- 300,000
------------ ------------
Total liabilities 3,867,701 3,994,110
------------ ------------
Commitments and contingencies
STOCKHOLDERS' EQUITY
Preferred stock 145 134
Common stock 127 121
Paid-in surplus 30,243,169 29,919,185
Accumulated deficit (21,709,331) (21,451,656)
------------ ------------
8,534,110 8,467,784
Less treasury stock, at cost - 1,238,656 shares (2,873,100) (2,873,100)
------------ ------------
Total stockholders' equity 5,661,010 5,594,684
------------ ------------
Total liabilities and stockholders' equity $ 9,528,711 $ 9,588,794
============ ============
See Notes to Consolidated Financial Statements.
2
CNE GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Three Months Six Months
Ended June 30, Ended June 30,
---------------------------- ----------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenues:
Product sales $ 132,836 $ 261,962 $ 512,961 $ 893,400
Service fee income 152,230 262,518 352,414 582,653
Internet related income 18,491 25,838 64,953 57,207
------------ ------------ ------------ ------------
303,557 550,318 930,328 1,533,260
Cost of goods sold 150,340 281,616 327,869 785,315
------------ ------------ ------------ ------------
Gross profit 153,217 268,702 602,459 747,945
------------ ------------ ------------ ------------
Other expenses:
Advertising 16,477 12,208 34,285 36,928
Compensation and related costs 189,686 453,030 401,287 821,592
General and administrative 218,526 363,083 459,692 663,299
Product development -- 31,368 -- 37,609
Depreciation and amortization 48,342 48,857 97,547 96,356
------------ ------------ ------------ ------------
473,031 908,546 992,811 1,655,784
------------ ------------ ------------ ------------
Loss before other income (expenses) (319,814) (639,844) (390,352) (907,839)
Other income (expenses):
Amortization of debt discount (8,327) (24,963) (33,290) (149,784)
Grant income 300,000 -- 300,000 --
Interest expense (64,252) (86,460) (134,125) (167,342)
Interest income 63 155 91 299
------------ ------------ ------------ ------------
Loss before provision for income taxes (92,330) (751,112) (257,676) (1,224,666)
Provision for income taxes -- -- -- --
------------ ------------ ------------ ------------
Net loss $ (92,330) $ (751,112) $ (257,676) $ (1,224,666)
============ ============ ============ ============
Loss per common share - basic and diluted: $ (.01) $ (.07) $ (.02) $ (.12)
============ ============ ============ ============
Weighted average number of common
shares outstanding - basic and diluted: 11,324,248 10,640,915 11,057,582 10,349,248
============ ============ ============ ============
See Notes to Consolidated Financial Statements.
3
CNE GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Six Months Ended June 30,
2005 2004
------------ ------------
(Unaudited) (Unaudited)
Cash flows from operating activities:
Net loss $ (257,676) $ (1,224,666)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 97,547 96,356
Provision for doubtful accounts 15,000 13,207
Issuance of common stock for services 54,000 --
Amortization of debt discount 33,290 149,784
Changes in:
Accounts receivable (15,877) (85,014)
Inventory (72,756) (68,413)
Prepaid expenses and other assets 12,913 17,381
Accounts payable, accrued expenses and deferred grant revenue (2,953) 247,404
------------ ------------
Net cash used in operating activities (136,512) (853,961)
------------ ------------
Cash flows from investing activities:
Purchase of furniture and equipment (20,318) (30,764)
------------ ------------
Net cash used in investing activities (20,318) (30,764)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance Series G Preferred Stock 220,000 --
Proceeds from sale of 333,333 shares of restricted common stock 50,000
Net proceeds from issuance of 1,750,000 shares of common stock 571,000
Proceeds from notes payable 20,000
Principal repayments on notes payable - other (150,153) (245,515)
------------ ------------
Net cash provided by financing activities 139,847 475,485
------------ ------------
Increase (decrease) in cash and cash equivalents (16,983) (409,240)
Cash and cash equivalents at beginning of period 84,408 460,832
------------ ------------
Cash and cash equivalents at end of period $ 101,391 $ 51,592
============ ============
Supplemental disclosures of cash flow information related to
continuing operations:
Cash paid during the period for:
Interest $ 16,666 $ 137,861
Income taxes $ -- $ --
Non-cash investing and financing activities relating to conversion of debt
to preferred stock, and forgiveness of interest indebtedness to an officer
and an employee of the Company:
Interest payable -- $ 40,000
8% notes payable -- 1,000,000
Issuance of preferred stock, at par -- (10)
Paid in surplus -- (1,039,990)
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 June 30, 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 June 30, 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 June 30, 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, (ii) additional equity and debt financing activities, and (iii) a
merger/acquisition transaction or a transaction of a similar nature in addition
to those set forth in the 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.
For information relating to a merger transaction entered into by the Company see
Note F - Subsequent Event.
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 April 20, 2005, an individual purchased 100,000 shares
of the Company's Series G Preferred Stock at a price of $0.20 per
share.
4. 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 was (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. On
June 10, 2005 the company repaid this note in full. In addition, on
or about April 15, 2005, the Company sold to this lender, for an
aggregate purchase price of $50,000, 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 requested the Company to submit a plan that would demonstrate to AMEX the
Company's ability to regain compliance (the "Plan"). On June 6, 2005 the Company
submitted the Plan. On June 13, 2005, the Staff notified the Company that it had
determined that the Plan did not make a reasonable demonstration of the
Company's ability to regain compliance with the continued listing standards, as
required by Section 1009 of the Company Guide and, as provided by Section
1009(d) thereof, the Staff has determined to proceed with the filing of an
application with the Securities and Exchange Commission to strike the Company's
common stock from listing and registration on AMEX.
6
CNE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - THE COMPANY (CONTINUED)
In accordance with Sections 1203 and 1009(d) of the Company Guide the Company
had a limited right to appeal the Staff's determination at an oral hearing or
one based on a written submission before a Listing Qualifications Panel. The
Company requested, and was subsequently granted, an oral hearing on August 8,
2005 to appeal the Staff's determination. The Company is awaiting the decision
of the Listings Qualifications Panel. The Company can give no assurance that its
appeal will be successful.
If the appeal is successful 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 may 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 June 30, 2005, our Stockholders' Equity was approximately $5,661,000, our
current assets were $597,000, and our current liabilities were $3,868,000 that
primarily included notes payable ($1,850,000 due as of June 30, 2005) and
related interest payable amounting to approximately $2,097,000. 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.
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:
June 30, December 31,
2005 2004
------------ ------------
Raw materials $295,166 $242,061
Work in progress 15,656 15,926
Finished goods 2,500 2,500
-------- --------
Total $313,322 $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 June 30,
2005 and 2004 were not included in the computation of diluted net loss per
share as their effect would have been anti-dilutive.
7
CNE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE B - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[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 June 30, 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
defined by APB No. 25 and related interpretations including FIN No. 44.
The following table illustrates the effect on net loss and loss per share
if the Company had applied the fair value recognition provisions of SFAS
No. 123 to stock-based employee compensation for options granted under its
plan.
Six Month Period Ended June 30,
-------------------------------
2005 2004
------------ ------------
Net loss, as reported $(257,676) $(1,224,666)
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 $(257,676) $(1,392,946)
========= ===========
Net loss per share - basic and diluted:
As reported $(0.02) $(0.12)
========= ===========
Pro forma $(0.02) $(0.13)
========= ===========
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
8
CNE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE B - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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).
On May 9, 2005, the Company tendered 850,000 shares of its common stock in
accordance with the applicable provisions of the settlement agreement. On
or about July 9, 2005, Mr. and Mrs. Gutowski and Mr. Reid delivered to the
Company those securities required to be delivered by the settlement
agreement. The Company subsequently retired these securities.
[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
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
9
CNE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE B - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
NOTE C - RESTRUCTURING OF CERTAIN NOTES PAYABLE
As of June 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 $220,000 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 include 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. Management
of 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
10
CNE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE D - LITIGATION (CONTINUED)
[3] 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
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.
On May 9, 2005, the Company tendered 850,000 shares of its common stock in
accordance with the applicable provisions of the settlement agreement. On
or about July 9, 2005, Mr. and Mrs. Gutowski and Mr. Reid delivered to the
Company those securities required to be delivered by the settlement
agreement. The Company subsequently retired these securities. All other
provisions of the settlement agreement have also been satisfied by both
parties.
11
CNE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE E - CONSULTING AGREEMENT
On May 11, 2005 the Company entered into a consulting Agreement with an
individual that included the issuance of 300,000 shares of its restricted Common
Stock and three-year warrants to purchase an aggregate of 250,000 shares at
$0.46 per share, subject to appropriate anti-dilution provisions.
NOTE F - SUBSEQUENT EVENT
On July 28, 2005, the Company signed an Agreement of Plan to Merge with Arrow
Resources Development Ltd. ("Arrow"), a Bermuda registered company based in New
York City, to merge operations subject to stockholder approval. The current
stockholders and creditors of the Company. will retain 4% of the common stock of
the Company, and the stockholders of Arrow, at Closing, will be issued 96% of
the common stock of the Company, on a fully diluted basis. In connection
therewith, the Company will issue 10,000,000 shares of its Series AAA Preferred
Stock which will be automatically convertible into such number of shares of the
Company's common Stock as shall equal 96% of the then number of outstanding
shares if and when stockholder approval is obtained for such conversion.
Arrow is initiating the commercial development of timber resources and a
eucalyptus plantation operation in Papua, New Guinea through Arrow Pacific
Resources PNG Ltd. ("APR"), an affiliated company. Arrow has entered into a
Marketing Agreement with APR to act as the publicly-listed management, financial
and corporate operations arm for all of APR's timber activities in Papua, New
Guinea.
APR has been granted licenses from the government of Papua, New Guinea for the
development of plantation operations on more than 750,000 acres of land. The
Marketing Agreement provides for Arrow to receive 10% of the gross sales
generated by all plantation operations, from all resources and any and all
derivative products (e.g. paper, pulp, chips).
The Agreement of Plan to Merge replaces the previous transaction announced on
June 1, 2005, in which CNE Group's Board of Directors approved a spin-off to its
stockholders of a recently formed subsidiary.
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 had a restriction that could require
their repayment, specifically if we were to relocate a substantial portion
our operations outside of New York City. On May 1, 2005 the restriction
lapsed and, accordingly, we removed the liability and recorded grant
income on our financial statements.
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 June 30, 2005, our allowance for doubtful accounts was $66,000 or 28.1%
of gross receivables, compared to $51,000 or 22.9% of gross receivables as
of December 31, 2004. The increase in the reserve as a percentage of gross
receivables at June 30, 2005 as compared to December 31, 2004 is primarily
the result of increased requirement for an allowance for doubtful accounts
at June 30, 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
15
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 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 June 30, 2005 Compared to the Three-Month Period
--------------------------------------------------------------------------
Ended June 30, 2004
-------------------
16
Revenues
Total revenues decreased to $303,557 for the three-month period ended June
30, 2005 from $550,318 for the three-month period ended June 30, 2004
primarily due to a reduction of the contracts awarded to Connectivity and
ECI.
Product sales income decreased to $132,836 for the three-month period
ended June 30, 2005 from $261,962 for the three-month period ended June
30, 2004 primarily due to a reduction of the contracts awarded to
Connectivity.
Service fee income decreased to $152,230 for the three-month period ended
June 30, 2005 from $262,518 for the three-month period ended June 30, 2004
primarily due to a reduction of the contracts awarded to Connectivity.
Internet related income decreased to $18,491 for the three-month period
ended June 30, 2005 from $25,838 for the three-month period ended June 30,
2004 as the operations of our subsidiary, CareerEngine, Inc. have
continued to decline due to our relatively small size in the e-recruiting
industry.
Cost of Goods Sold
Costs of goods sold, which relates to product sales and related service
fee income decreased to $150,340 for the three-month period ended June 30,
2005 from $281,616 for the three-month period ended June 30, 2004 due to
the related decrease in revenues
Other Expenses
Total other expenses decreased to $473,031 for the three-month period
ended June 30, 2005 from $908,546 for the three-month period ended June
30, 2004 as the effect of certain cost reduction initiatives, including
the reduction of our executive personnel, which when instituted effected
the three-month period ended June 30, 2005 however did not effect the
three month period ended June 30, 2004.
Advertising expenses increased to $16,477 for the three-month period ended
June 30, 2005 from $12,208 for the three-month period ended June 30, 2004
as we increased our attendance at industry trade shows.
Compensation and related costs decreased to $189,686 for the three-month
period ended June 30, 2005 from $453,030 for the three-month period ended
June 30, 2004 as we instituted certain payroll reduction initiatives in,
primarily, the third quarter of 2004, including the reduction of our
executive personnel.
General and administrative expenses decreased to $218,526 for the
three-month period ended June
17
30, 2005 from $363,083 for the three-month period ended June 30, 2004 due
to the decreased cost and use of professional services in the operations
of the Company.
Product development expenses decreased to nil for the three-month period
ended June 30, 2005 from $31,368 for the three-month period ended June 30,
2004 due to the cessation of certain initiatives commenced by SRC and its
subsidiaries to develop products to meet our customers' future
requirements.
Depreciation and amortization expenses modestly decreased to $48,342 for
the three-month period ended June 30, 2005 from $48,857 for the
three-month period ended June 30, 2004
Other Items
Amortization of debt discount decreased to $8,327 for the three-month
period ended June 30, 2005 from $24,963 for the three-month period ended
June 30, 2004 as the debt discount was fully amortized at April 30, 2005.
There was one month of amortization in the three-month period ended June
30, 2005 as compared to three months in the three-month period ended June
30, 2004.
Interest expense decreased to $64,252 for the three-month period ended
June 30, 2005 from $86,460 for the three-month period ended June 30, 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%.
Grant income increased to $300,000 for the three-month period ended June
30, 2005 from nil for the three-month period ended June 30, 2004 as the
restrictions set forth in the grant have expired.
Operating Loss
On a pre-tax basis, we had a net loss before income taxes of $92,330 for
the three-month period ended June 30, 2005 compared with a net loss before
income taxes of $751,112 for the three-month period ended June 30, 2004.
Our net loss for the three-month period ended June 30, 2005 was $92,330
compared with a net loss of $751,112 for the three-month period ended June
30, 2004. For the three-month period ended June 30, 2005, net loss per
common share, basic and diluted, was $0.01 per share. For the three-month
period ended June 30, 2004, net loss per common share, basic and diluted,
was $0.07 per share.
Six-Month Period Ended June 30, 2005 Compared to the Six-Month Period
--------------------------------------------------------------------------
Ended June 30, 2004
-------------------
18
Revenues
Total revenues decreased to $930,328 for the six-month period ended June
30, 2005 from $1,533,260 for the six-month period ended June 30, 2004
primarily due to a decrease in the dollar amount of the contracts awarded
to Connectivity and ECI.
Product sales income decreased to $512,961 for the six-month period ended
June 30, 2005 from $893,400 for the six-month period ended June 30, 2004
primarily due to a decrease in the dollar amount of the contracts awarded
to Connectivity.
Service fee income increased to $352,414 for the six-month period ended
June 30, 2005 from $582,653 for the six-month period ended June 30, 2004
primarily due to a decrease in the dollar amount of the contracts awarded
to ECI.
Internet related income increased to $64,953 for the six-month period
ended June 30, 2005 from $57,207 for the six-month period ended June 30,
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 $327,869 for the six-month period ended June 30,
2005 from $785,315 for the six-month period ended June 30, 2004 due to the
related decrease in revenues
Other Expenses
Total other expenses decreased to $992,811 for the six-month period ended
June 30, 2005 from $1,655,784 for the six-month period ended June 30, 2004
as the effect of certain cost reduction initiatives, including the
reduction of our executive personnel, were instituted in the six-month
period ended June 30, 2005 that were not instituted in the six month
period ended June 30, 2004.
Advertising expenses modestly decreased to $34,285 for the six-month
period ended June 30, 2005 from $36,928 for the six-month period ended
June 30, 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 $401,287 for the six-month
period ended June 30, 2005 from $821,592 for the six-month period ended
June 30, 2004 as we instituted certain payroll reduction initiatives in,
primarily, the third quarter of 2004, including the reduction of our
executive personnel.
19
General and administrative expenses decreased to $459,692 for the
six-month period ended June 30, 2005 from $663,299 for the six-month
period ended June 30, 2004 due to the decreased cost and use of
professional services in the operations of the Company.
Product development expenses decreased to nil for the six-month period
ended June 30, 2005 from $37,609 for the six-month period ended June 30,
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 $97,547 for
the six-month period ended June 30, 2005 from $96,356 for the six-month
period ended June 30, 2004.
Other Items
Amortization of debt discount decreased to $33,290 for the six-month
period ended June 30, 2005 from $149,784 for the six-month period ended
June 30, 2004 due the combined effect of a decreased period of time that
the amortization of the debt discount ($699,000), relating to the 10%
subordinated notes issued in April 2003, pertained, and the change in the
rate of amortization when the notes were extended for an additional year
in March 2004. The debt discount was fully amortized on April 30, 2005.
Interest expense decreased to $134,125 for the six-month period ended June
30, 2005 from $167,342 for the six-month period ended June 30, 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%.
Grant income increased to $300,000 for the six-month period ended June 30,
2005 from nil for the six-month period ended June 30, 2004 as the
restrictions set forth in the grant have expired.
Operating Loss
On a pre-tax basis, we had a net loss before income taxes of $257,676 for
the six-month period ended June 30, 2005 compared with a net loss before
income taxes of $1,224,666 for the six-month period ended June 30, 2004.
Our net loss for the six-month period ended June 30, 2005 was $257,676
compared with a net loss of $1,224,666 for the six-month period ended June
30, 2004. For the six-month period ended June 30, 2005, net loss per
common share, basic and diluted, was $0.02 per share. For the six-month
period ended June 30, 2004, net loss per common share, basic and diluted,
was $0.12 per share.
20
B. Liquidity and Capital Resources
-------------------------------
We have incurred substantial losses, sustained substantial cash outflows
from operating activities and had a working capital deficit at June 30,
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 June 30, 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, (ii) additional equity and debt financing
activities, and (iii) a merger/acquisition transaction or a transaction of
a similar nature in addition to those set forth in the financial
statements.
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 requested the Company to submit a plan
that would demonstrate to AMEX the Company's ability to regain compliance
(the "Plan"). On June 6, 2005 the Company submitted the Plan. On June 13,
2005, the Staff notified the Company that it had determined that the Plan
did not make a reasonable demonstration of the Company's ability to regain
compliance with the continued listing standards, as required by Section
1009 of the Company Guide and, as provided by Section 1009(d) thereof, the
Staff has determined to proceed with the filing of an application with the
Securities and Exchange Commission to strike the Company's common stock
from listing and registration on AMEX. In accordance with Sections 1203
and 1009(d) of the Company Guide the Company had a limited right to appeal
the Staff's determination at an oral hearing or one based on a written
submission before a Listing Qualifications Panel. The Company requested,
and was subsequently granted, an oral hearing on August 8, 2005 to appeal
the Staff's determination. The Company is awaiting the decision of the
Listing Qualifications Panel. The Company can give no assurance that its
appeal will be successful. If the appeal is successful 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 may 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 June 30, 2005, our Stockholders' Equity was approximately $5,661,000,
our current assets were $597,000, and our current liabilities were
$3,868,000 that
21
primarily included notes payable ($1,850,000 due as of June 30, 2005) and
related interest payable amounting to approximately $2,097,000. 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
On July 28, 2005, the Company signed an Agreement of Plan to Merge with
Arrow Resources Development Ltd. ("Arrow"), a Bermuda registered company
based in New York City, to merge operations subject to stockholder
approval. The current stockholders and creditors of the Company. will
retain 4% of the common stock of the Company, and the stockholders of
Arrow, at Closing, will be issued 96% of the common stock of the Company,
on a fully diluted basis. In connection therewith, the Company will issue
10,000,000 shares of its Series AAA Preferred Stock which will be
automatically convertible into such number of shares of the Company's
common Stock as shall equal 96% of the then number of outstanding shares
if and when stockholder approval is obtained for such conversion.
Arrow is initiating the commercial development of timber resources and a
eucalyptus plantation operation in Papua, New Guinea through Arrow Pacific
Resources PNG Ltd. ("APR"), an affiliated company. Arrow has entered into
a Marketing Agreement with APR to act as the publicly-listed management,
financial and corporate operations arm for all of APR's timber activities
in Papua, New Guinea.
APR has been granted licenses from the government of Papua, New Guinea for
the development of plantation operations on more than 750,000 acres of
land. The Marketing Agreement provides for Arrow to receive 10% of the
gross sales generated by all plantation operations, from all resources and
any and all derivative products (e.g. paper, pulp, chips).
The Agreement of Plan to Merge replaces the previous transaction announced
on June 1, 2005, in which CNE Group's Board of Directors approved a
spin-off to its stockholders of a recently formed subsidiary.
Off-Balance Sheet Arrangements
------------------------------
At June 30, 2005 and December 31, 2004, we had no off-balance sheet
arrangements.
22
Operating Activities
--------------------
We utilized $136,512 of cash in operating activities during the six-month
period ended June 30, 2005. We had a net loss of $257,676 during this
period, which included an aggregate of $199,837 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 six-month period ended June 30,
2004 also reflected an increase in accounts receivable, inventory, and
accounts payable, accrued expenses, and deferred grant revenue, and a
decrease in prepaid expenses and other assets.
We utilized $853,961 of cash in operating activities during the six-month
period ended June 30, 2004. We had a net loss of $1,224,666 during this
period, which included an aggregate of $172,347 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 six-month period ended June 30,
2004 also reflected an increase in accounts receivable, inventory, and
accrued expenses and other liabilities, and a decrease in prepaid expenses
and other assets.
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
23
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 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
(which we are currently negotiating an extension) 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 notified the Class B Warrant holders that, to
satisfy the now 19% non-dilutive provisions of their Warrants, these
Warrants are now 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
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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 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 April 20, 2005, an individual purchased 100,000 shares of the
Company's Series G Preferred Stock at a price of $0.20 per share.
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
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and bearing interest at the annual rate of 20% payable at maturity. The
note was (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. On June 10, 2005 the Company repaid this note in full. In
addition, on or about April 15, 2005, the Company sold to this lender, for
an aggregate purchase price of $50,000, 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.
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.
For information relating to a merger transaction entered into on July 28,
2005 by the Company see Note F - Subsequent Event to the interim financial
statements included with this filing.
We did not have any material commitments for capital expenditures as of
June 30, 2005.
C. Inflation
---------
Due to the nature of our business, inflation does not significantly impact
our operations.
26
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.
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PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
We are a party to various vendor related litigations. Based on the
opinion of management, 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:
2.1 Agreement and Plan of Merger between CNE Group, Inc. and
Arrow Development Resources Ltd. dated as of August 1,
2005
2.2 Series AAA Preferred Stock Purchase Agreement
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 May 26, 2005, a
report on Form 8-K on June 17, 2005, a report on Form 8-K/A on
June 23, 2005, and a report on Form 8-K on August 2, 2005.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CNE GROUP, INC.
/s/ George W. Benoit
------------------------------------
Date: August 12, 2005 George W. Benoit, Chairman of the Board
of Directors, and Chief Executive
Officer
/s/ Anthony S. Conigliaro
------------------------------------
Date: August 12, 2005 Anthony S. Conigliaro, Vice President and
Chief Financial Officer
29