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U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
COMMISSION FILE NUMBER 1-8662
RCG COMPANIES INCORPORATED
(Exact name of registrant as specified in its charter)
DELAWARE 23-2265039
(State of Incorporation) (IRS Employer Identification No.)
6836 MORRISON BOULEVARD
SUITE 200
CHARLOTTE, NC 28211
(704) 366-5054
(Address of registrant's principal executive
offices including zip code and telephone number, including area code)
Check whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
twelve 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 [ ]
CHECK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS DEFINED IN RULE 12b-2
OF THE EXCHANGE ACT)
Yes [ ] No [X]
The number of shares outstanding of the Registrant's common stock ("Common
Stock") as of November 10, 2003: 18,238,814
RCG Companies Incorporated
TABLE OF CONTENTS
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.............................................................................................................Page No
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at September 30, 2003 and June 30, 2003.................3
Condensed Consolidated Statements of Operations for the three months ended
September 30, 2003 and 2002................................................................4
Condensed Consolidated Statements of Cash Flows for the three months ended
September 30, 2003 and 2002.................................................................5
Notes to Interim Condensed Consolidated Financial Statements..................................6
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................19
Item 3. Qualification and Qualitative Disclosures about Market Risk .........................................
ITEM 4. Controls and Procedures..............................................................................25
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings....................................................................................25
ITEM 2. Changes in Securities................................................................................25
ITEM 3. Defaults Upon Senior Securities......................................................................25
ITEM 4. Submission of Matters to a Vote of Security Holders..................................................25
ITEM 5. Other Information....................................................................................25
ITEM 6. Exhibits and Reports on Form 8-K.....................................................................25
Exhibit Index .................................................................................................25
Signatures ...............................................................................................26
Certifications
Section 302 Certification of the Principal Executive Officer...................................27
Section 302 Certification of the Principal Accounting .........................................28
Section 906 Certification.......................................................................................29-30
2
RCG COMPANIES INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
September 30, June 30,
2003 2003
(Unaudited)
------------- -------------
ASSETS
Cash and cash equivalents ................................................................ $ 2,415 $ 3,491
Accounts receivable, net of allowance of doubtful accounts of $235 ....................... 1,982 2,435
Note receivable, net of reserve of $49 ................................................... 50 49
Inventory ................................................................................ 153 146
Investments .............................................................................. 405 402
Prepaid expenses ......................................................................... 1,745 2,674
------------- -------------
Total current assets ..................................................... 6,750 9,197
Deferred costs and other assets ......................................................... 440 429
Property and equipment, net .............................................................. 995 1,091
Net non-current assets of discontinued operations ........................................ 616 725
Goodwill, net ............................................................................ 16,541 16,541
------------- -------------
Total assets ............................................................. $ 25,342 $ 27,983
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable - current portion .......................................................... $ 2,709 $ 3,379
Due to affiliates ........................................................................ 106 338
Accounts payable and accrued expenses .................................................... 6,426 7,463
Net current liabilities of discontinued operations ....................................... 1,180 725
Unearned income .......................................................................... 2,206 4,049
------------- -------------
Total current liabilities ................................................ 12,627 15,954
Notes payable ............................................................................ 752 761
------------- -------------
Total liabilities ........................................................ 13,379 16,715
------------- -------------
Minority interest ........................................................................ 31 314
------------- -------------
Shareholders' equity:
Common stock, $.04 par value, 200,000,000 shares authorized,
15,684,765 and 13,948,160 issued, respectively ..................................... 628 558
Preferred stock, $0.01 par value, 10,000,000 shares authorized, none oustanding ... -- --
Additional paid-in capital ........................................................ 116,127 114,329
Accumulated deficit ............................................................... (103,915) (103,025)
Accumulated other comprehensive loss .............................................. (276) (276)
Treasury stock at cost (131,214 shares) ........................................... (632) (632)
------------- -------------
Total shareholders' equity ............................................... 11,932 10,954
------------- -------------
Total liabilities and shareholders' equity ............................... $ 25,342 $ 27,983
============= =============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
RCG COMPANIES INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Three months ended September 30,
2003 2002
------------- -------------
Revenue:
Services ............................................................. $ 15,787 $ 15,361
Product sales ........................................................ 3,806 3,467
------------- -------------
Total revenue ................................................ 19,593 18,828
------------- -------------
Cost of revenue:
Services ............................................................. 14,822 14,186
Product sales ........................................................ 3,384 3,046
------------- -------------
Total cost of revenue ........................................ 18,206 17,232
------------- -------------
Gross profit ................................................. 1,387 1,596
------------- -------------
Selling, general and administrative expenses - compensation
related to issuance of stock options and warrants ................ 111 33
Selling, general and administrative expenses - other ................. 1,923 1,992
Provision for bad debts .............................................. -- 4
Depreciation and amortization ........................................ 129 107
------------- -------------
Operating costs and expenses ................................. 2,163 2,136
------------- -------------
Operating loss ............................................... (776) (540)
Interest expense, net ................................................ 94 102
(Gain) on investments, net ........................................... (119) (175)
Other (income) ....................................................... (103) (263)
Equity in losses of joint ventures ................................... 3 --
------------- -------------
Loss from continuing operations before minority interest ..... (651) (204)
Minority interest .................................................... (137) (54)
------------- -------------
Loss from continuing operations .............................. (514) (150)
Loss on discontinued operations, net of minority interest of $147 ... 376 --
------------- -------------
Net loss ............................................................. $ (890) $ (150)
============= =============
Basic and diluted net loss per share:
Loss from continuing operations .................................. $ (0.04) $ (0.01)
Loss from discontinued operations ................................ $ (0.03) --
------------- -------------
Net income (loss) ............................................ $ (0.07) $ (0.01)
============= =============
Weighted average shares outstanding .................................. 14,292,798 12,319,907
============= =============
Weighted average shares outstanding, assuming dilution ............... 14,292,798 12,319,907
============= =============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
RCG COMPANIES INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
Three months ended September 30,
2003 2002
--------- ---------
Cash flows from operating activities:
Net loss ................................................................. $ (890) $ (150)
Loss on discontinued operations, net of minority interest of $146 ....... 376 --
--------- ---------
Loss from continuing operations before minority interest ................. (514) (150)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization ........................................ 129 107
Bad debt expense ..................................................... -- 4
Stock purchase warrants received for services ........................ -- 33
Gain on sale of investments .......................................... -- (208)
Compensation expense related to stock options and warrants ........... 111 33
Deferred debt cost amortization ...................................... 17
Minority interest .................................................... (47) (54)
Changes in operating assets and liabilities:
Accounts and notes receivables .................................... 452 632
Inventory ......................................................... (7) (25)
Prepaid expenses .................................................. 919 756
Deferred costs and other assets ................................... (82) (52)
Accounts payable and accrued expenses ............................. (1,045) (502)
Due to affiliates ................................................. (232) (48)
Unearned income ................................................... (1,844) (811)
--------- ---------
Cash used in continuing operations ................................ (2,160) (268)
Net cash provided by discontinued operations ...................... 73 --
--------- ---------
Net cash used in operating activities ............................. (2,087) (268)
Cash flows from investing activities:
Purchase of property and equipment ................................... (33) (76)
Sale of investments .................................................. -- 131
Cash paid in connection with business acquisitions, net .............. -- (50)
--------- ---------
Net cash provided by (used in) continuing investing activities .... (33) 5
Net cash used in discontinued operations .......................... (10) --
--------- ---------
Net cash provided by (used in) investing activities ............... (43) 5
Cash flows from financing activities:
Notes payable proceeds ............................................... 4,006 --
Principal debt repayments ............................................ (3,918) (62)
Cash raised through LFSI transaction ................................. -- 274
LFSI private placement sale of common stock .......................... -- 260
Sale of RCG common stock ............................................. 988 119
--------- ---------
Net cash provided by continuing financing activities .............. 1,076 591
Net cash used in discontinued operations .......................... (22) -
--------- ---------
Net cash provided by financing activities ......................... 1,054 591
--------- ---------
Net increase (decrease) in cash and cash equivalents ........................... (1,076) 328
Cash and cash equivalents at beginning of period ............................... 3,491 1,511
--------- ---------
Cash and cash equivalents at end of period ..................................... $ 2,415 $ 1,839
========= =========
Supplemental cash flow information - Cash paid during the period for:
Interest ............................................................. $ 31 $ --
========= =========
Income taxes ......................................................... $ -- $ --
========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
RCG COMPANIES INCORPORATED AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited financial statements include the accounts of RCG
Companies Incorporated ("RCG") and its subsidiaries (collectively the
"Company"). At September 30, 2003, the Company operated businesses in the
aviation travel services, home technology, technology solutions and
telecommunications call center segments in the United States. On November 14,
2003 the company changed its name from eResource Capital Group, Inc. to RCG
Companies Incorporated to better reflect the nature and evolution of the
Company's business strategy. In October 2001, the Company changed its name from
flightserv.com, Inc. to eResource Capital Group, Inc. to better reflect its plan
to acquire substantial interests in, operate and enhance the value of expansion
phase companies operating in the travel, entertainment and technology services
sectors. Prior to that time, the Company was engaged in the development of its
private aviation business and limited commercial real estate activities.
The financial statements included in this report have been prepared by the
Company pursuant to the rules and regulations of the Securities and Exchange
Commission for interim reporting and include all adjustments (consisting only of
normal recurring adjustments) that are, in the opinion of management, necessary
for a fair presentation. These financial statements have not been audited.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations for
interim reporting. The Company believes that the disclosures contained herein
are adequate to make the information presented not misleading. However, these
financial statements should be read in conjunction with the financial statements
and notes thereto included in the Company's Annual Report for the period ended
June 30, 2003, which is included in the Company's Form 10-KSB filed on October
14, 2003.
The Company experienced an operating loss from continuing operations of
$514,000 during the first quarter of fiscal 2004 and used cash of $2,160,000 in
operations during the quarter. This cash loss was partially offset by the
raising of equity financing. At September 30, 2003, the Company has cash and
cash equivalents of $2.4 million and investments of $0.4 million. The Company
believes that its existing balances of cash and cash equivalents and
investments, together with the proceeds of a $1.2 million private placement at
$1.12 per share of Common Stock ($208,000 of which has been received as of
11/6/03), will be sufficient to meet the working capital and capital expenditure
requirements of our continuing operations through the end of fiscal 2004.
CONSOLIDATION
The Company's consolidated financial statements include the assets and
liabilities and results of operations of RCG and each business acquired by RCG
from the date of its acquisition through September 30, 2003. All significant
intercompany balances and transactions have been eliminated. Certain prior
period amounts have been reclassified to conform to the fiscal 2004
presentation.
CASH AND CASH EQUIVALENTS
The Company classifies as cash equivalents any investments which can be
readily converted to cash and have an original maturity of less than three
months. At times cash and cash equivalent balances at a limited number of banks
and financial institutions may exceed insurable amounts. The Company believes it
mitigates its risks by depositing cash or investing in cash equivalents in major
financial institutions.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations
of credit risk consist principally of cash, accounts receivable, investments,
and notes payable. The Company places its temporary cash with high credit
quality principal institutions. The Company performs periodic credit evaluations
of its customers' financial condition and generally does not require collateral.
Although due dates of receivables vary based on contract terms, credit losses
have been within management's estimates in determining the level of allowance
for doubtful accounts. Overall financial strategies are reviewed periodically.
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
o Cash and cash equivalents: The carrying amount reported in the balance
sheet for cash approximates its fair value.
o Accounts receivable and accounts payable: Due to their short term
nature, the carrying amounts reported in the balance sheet for
accounts receivable and accounts payable approximate their fair value.
The Company provides for any losses through its allowance for doubtful
accounts.
6
o Investments: The fair values for available-for-sale equity securities
are based on quoted market prices.
o Notes Payable: The carrying amount of the Company's notes payable
approximate their fair value.
During the first quarter of fiscal year 2004 and 2003, sales to Vacation
Express and its sister company, Suntrips, Inc. ("Suntrips"), both part of the
MyTravel Group, a customer of the Company's aviation travel services business,
represented 71% and 69%, respectively, of the Company's consolidated revenue.
The company signed a definitive agreement to acquire SunTrips and Vacation
Express on October 17, 2003 and closed the transaction on October 31, 2003.
Under the terms of the asset purchase agreement, FS Tours, Inc. ("FS Tours") a
wholly-owned subsidiary of Flightserv, will acquire substantially all of the
assets and liabilities of Vacation Express, and FS SunTours, Inc ("FS SunTours")
a wholly-owned subsidiary of Flightserv, will acquire substantially all of the
assets and liabilities of SunTrips, except for certain excluded items, for a $10
million non-interest bearing seven-year promissory note from Flightserv secured
by certain RCG investment holdings. The agreement requires the Company to
provide additional cash if the working capital deficit of the acquired business
exceeds $2 million. Additionally, FS Tours and FS SunTours entered into a
three-year agreement with MyTravel Canada Holidays, Inc. ("MyTravel Canada"),
for certain services, including the purchasing of hotel accommodations for FS
Tours and FS SunTours on an exclusive basis. MyTravel Canada will be paid
approximately $4.5 million over three years under this agreement.
TRADE ACCOUNTS RECEIVABLE
Accounts receivable from the sale of products or services are recorded at
net realizable value and the Company grants credit to customers on an unsecured
basis. The Company provides an allowance for doubtful collections that is based
upon a review of outstanding receivables, historical collection information, and
existing economic conditions. Normal trade receivables are due from 15 to 30
days after the issuance of an invoice. Receivables past due more than 120 days
are considered delinquent. Delinquent receivables are written off based on
individual credit evaluation and specific circumstances of the customer.
The Company computes finance charges on accounts that are 30 days past due. The
finance charges are recognized into income when accrued unless collection is
doubtful.
INVENTORY
Inventory consists mainly of purchased-in components used in the Company's
Home Technology business. Inventory is recorded at the lower of cost or market
with cost being determined on a first-in, first-out basis.
INVESTMENTS
Investments, including certificates of deposit with maturities of greater
than three months, not readily marketable equity securities, and other
marketable securities, are classified as available for sale. Investment
securities that are not readily marketable include securities (a) for which
there is no market on a securities exchange or no independent publicly quoted
market, (b) that cannot be publicly offered or sold unless registration has been
effected under the Securities Act of 1933, or (c) that cannot be offered or sold
because of other arrangements, restrictions, or conditions applicable to the
securities or the Company. Certificates of deposit are recorded at cost plus
accrued interest. Marketable equity securities are recorded at estimated values
based on quoted market values for marketable securities of the investee
discounted for trading restrictions. If there is no quoted market value, the
recorded values are based on the most recent transactions in the securities
discounted for lack of marketability. Investment securities transactions are
recorded on a trade date basis. The difference between cost and fair value is
recorded as unrealized gain or loss on available for sale securities as a
component of comprehensive income.
Investments also include stock purchase warrants, which the Company
periodically receives as part of its compensation for services. Stock purchase
warrants from companies with publicly traded common stock are considered
derivatives in accordance with SFAS 133 "Accounting for Derivative Investments
and Hedging Activities". The Company recognizes revenue at the fair value of
such stock purchase warrants when earned based on the Black - Scholes valuation
7
model. The Company recognizes unrealized gains or losses in the statement of
operations based on the changes in value in the stock purchase warrants as
determined by the Black - Scholes valuation model subsequent to the date
received.
PREPAID EXPENSES
Prepaid expenses include insurance, deferred costs, certain taxes, and
charter flight costs. Depending upon the volume and timing of charter flight
activity, the amount of prepaid charter flight costs can fluctuate
significantly.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated depreciation.
Depreciation is computed on the straight-line basis over the assets' estimated
useful lives. Expenditures for maintenance and repairs are expensed as incurred.
Expenditures for improvements which extend the useful life or add value to the
asset are capitalized and then expensed over that asset's remaining useful life.
Sales and disposals of assets are recorded by removing the related cost and
accumulated depreciation amounts with any resulting gain or loss reflected in
the statement of operations.
The carrying value of property and equipment and predevelopment costs is
reviewed for impairment whenever events or changes in circumstances indicate
that such amounts may not be recoverable. If such an event occurred, the Company
would prepare projections of future results of operations for the remaining
useful lives of such assets. If such projections indicated that the expected
future net cash flows (undiscounted and without interest) are less than the
carrying amounts of the property and equipment and the predevelopment costs, the
Company would record an impairment loss in the period such determination is
made.
GOODWILL AND INTANGIBLE ASSETS
The Company records goodwill and intangible assets arising from business
combinations in accordance with Financial Accounting Standards Board Statement
("SFAS") No. 141 "Business Combinations" ("SFAS 141") which requires that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001. SFAS 141 also specifies the criteria applicable to
intangible assets acquired in a purchase method business combination to be
recognized and reported apart from goodwill.
The Company accounts for goodwill and intangible assets in accordance with
SFAS No. 142 "Goodwill and Other Intangible Assets" ("SFAS 142").
SFAS 142 requires that goodwill and intangible assets with indefinite useful
lives no longer be amortized, but instead be tested at least annually for
impairment. SFAS 142 also requires that intangible assets with definite useful
lives be amortized over their respective estimated useful lives to their
estimated residual values, and be reviewed for impairment.
Goodwill, which represents the cost in excess of fair value of net assets
acquired, is subject to an impairment test on an annual basis, or when there is
reason to believe that the value has been diminished or impaired. The fair value
of the Company's identified reporting units was estimated using the expected
present value of corresponding future cash flows and market values of comparable
businesses where available.
REVENUE RECOGNITION
Charter Travel Aviation
Revenue related to the Company's aviation travel services consists of fees
for charter flights and is recognized upon completion of the related flight.
8
Home Technology
The Company's home technology services work is completed in three phases -
pre-wiring, trim-out and then hardware installation. The Company invoices its
customers and records revenue as work is completed on each project. For alarm
monitoring service contracts sold by the Company, revenue is recognized only
when the contracts are sold to third party finance companies or as billed if the
Company holds and services the contract. The Company sells substantially all of
its alarm monitoring contracts immediately subsequent to the date the contracts
are signed by the customer.
Sales of franchise licenses are recognized as revenue when the Company's
obligations under the franchise agreement are "substantially complete." The
Company generally defines "substantially complete" as the completion of training
by the franchisee's General Manager and the approval by the Company of the
franchise location plan.
Royalties are based on a percentage of the sales recorded by franchisees and
are recorded as earned. Procurement fees charged to franchisees are recorded in
the month that the related product is shipped to the franchisee.
Technology Solutions
Internet website development services project revenue is recognized on a
percentage of completion basis for fixed fee contracts, based on the ratio of
costs incurred to total estimated costs for individual projects. Revenue is
recognized as services are performed for time and material contracts at the
applicable billing rates.
Unbilled revenue represents revenue earned under contracts in advance of
billings. Such amounts are normally converted to accounts receivable within 90
days. Unearned income represents amounts billed or cash received in advance of
services performed or cost incurred under contracts. Any anticipated losses on
contracts are charged to operations when identified.
The Company provides e-commerce marketing and business development services
to clients pursuant to contracts with varying terms. The contracts generally
provide for monthly payments and, in some cases, advance deposits. Revenue is
recognized over the respective contract period as services are provided.
Revenue from uncollateralized e-commerce sales or sales of hardware and
software is recognized upon passage of title of the related goods to the
customer.
NET LOSS PER SHARE
The Company computes net loss per share in accordance with SFAS No. 128,
"Earnings per Share" which requires dual presentations of basic and diluted
earnings per share.
Basic earnings per share is computed using the weighted average number of
common shares outstanding during the period. Diluted earnings per share is
computed using the weighted average number of common shares outstanding and
potentially dilutive shares outstanding during the period. Options and warrants
to purchase 4,398,696 and 3,757,449 shares of Common Stock were outstanding at
September 30, 2003 and 2002, respectively. Such outstanding options and warrants
could potentially dilute earnings per share in the future but have not been
included in the computation of diluted net loss per share in 2003 and 2002 as
the impact would have been anti-dilutive.
ADVERTISING
The Company expenses advertising costs as incurred. Advertising expense
aggregated $36,000 and $74,000 for the quarters ended September 30, 2003 and
2002, respectively.
INCOME TAXES
The Company accounts for income taxes in accordance with the liability
method as provided under SFAS No. 109, "Accounting for Income Taxes."
Accordingly, deferred income taxes are recognized for the tax consequences of
9
differences between the financial statement carrying amounts and the tax bases
of existing assets and liabilities. The measurement of deferred tax assets is
reduced, if necessary, by the amount of any benefits that, based on available
evidence, are not expected to be realized.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the period. Actual results could differ from those estimates.
RECENT ACCOUNTING PRONOUNCEMENTS
Reference is made to all recent accounting pronouncements in the Company's
Annual Report for the year ending June 30, 2003.
NOTE 2. GROUP BUSINESSES AND ACQUISITIONS
AVIATION TRAVEL SERVICES
The Company's aviation travel services business provides tour operators,
corporate travel departments, sports teams and casinos cost effective and
reliable charter air transportation. The Company acts as a program manager for
these customers by providing turnkey aircraft services including ground support
and aircraft fueling, passenger service and support, and real-time flight
tracking.
HOME TECHNOLOGY
The Company's home technology business, Lifestyle Innovations, Inc. (
"LFSI"), is a full service home technology integration company providing
complete installation and equipment for structured wiring, home security, PC
networking, home audio, home theater, central vacuum and accent lighting. It
offers these products to residential homeowners through its relationships with
home builders and to the commercial market. The Company operates two company
owned locations in Charlotte, NC and Atlanta, GA and has franchise operations in
14 other markets in the South, Southeast and Texas.
On March 7, 2003 LFSI completed its acquisition of FutureSmart Systems, Inc.
"FutureSmart"), a manufacturer and distributor of structured wiring and home
networking distribution panels. On May 28, 2003 the Board of Directors approved
a plan to dispose of FutureSmart. Accordingly, its operations since March 7,
2003 have been included in discontinued operations. On October 17, 2003 the
Company completed its sale of all of the assets of FutureSmart for an "Initial
Purchase Price" of $1,500,000, which is subject to adjustment as provided in the
Asset Purchase Agreement to the "Final Purchase Price." The Initial Purchase
Price is allocated to the secured creditors of FutureSmart, $200,000 to the
Company and $1,300,000 to the other secured creditors. Thirty percent ($450,000)
of the Initial Purchase Price was paid at Closing pro rata to the secured
creditors ($60,000 to the Company) and the remainder of $1,050,000 was placed in
escrow. The escrowed amount is subject to various adjustments, including
determination of the final net assets as of the Closing Date and settlement of
certain other obligations. The remaining balance will be disbursed by the Escrow
Agent no later than one year and one day after the Closing Date.
The purchase price of $876,910 on March 7, 2003 consisted of the issuance of
1,000,000 shares of LFSI's $.10 par value preferred stock, a bridge loan by LFSI
to FutureSmart of $224,830 and $552,080 in direct transaction costs. The
acquisition of FutureSmart was accounted for as a purchase in accordance with
SFAS 141, and the Company has accordingly allocated the purchase price of
FutureSmart based upon the fair values of the net assets acquired and
liabilities assumed.
10
Pursuant to the acquisition agreement, the shareholders of FutureSmart could
receive "Earn out Consideration" of up to 1,200,000 LFSI common shares if
FutureSmart achieves certain "Performance Milestones."
In connection with LFSI's acquisition of FutureSmart, RCG agreed until March 3,
2005, or one year from the registration of the shares of common stock for the
FutureSmart shareholders if sooner, that if RCG proposes to transfer 15% or more
of the shares of LFSI owned by RCG (excluding registered offerings, sales to
certain investors and related party sales) then certain of the FutureSmart
shareholders shall have the right to participate in such transfer of stock on
the same terms and conditions for up to 25% of the total sale.
TECHNOLOGY SOLUTIONS
The Company's technology solutions business provides integrated products and
services to assist customers in meeting their strategic technology initiatives.
The Company's products and services include distribution of third-party
published software titles to the educational market and corporate customers,
full service Internet development, Internet site hosting and co-location and
Internet business development services encompassing partner site management and
marketing. In its Internet business development and marketing services, the
Company generally participates in the development and implementation of the
business plan in exchange for revenue-sharing and/or equity-based arrangements.
On October 15, 2003, the technology solutions business completed the
acquisition of SchoolWorld Software, a Pittsburgh, PA based educational software
company for $380,000 of the Company's Common Stock.
TELECOMMUNICATIONS CALL CENTER
The Company operates a telecommunications call center providing
telemarketing, help desk and other services for Internet related and other
companies. The call center provides support to aviation travel services
businesses as a reservations and customer care center for airlines, tour
operators and for internal programs for which the Company takes reservations
from travelers. On September 1, 2003 the Company closed its Pensacola, FL call
center facility and future programs will be managed by the avation travel
services division.
DISCONTINUED OPERATIONS
Home Technology
On March 7, 2003 LFSI completed its acquisition of FutureSmart Systems, Inc.,,
("FutureSmart"), a manufacturer and distributor of structured wiring and home
networking distribution panels. On May 28, 2003 the Board of Directors approved
a plan to dispose of FutureSmart. Accordingly, its operations since March 7,
2003 have been included in discontinued operations.
NOTE 3. INVESTMENTS
Investments consist of the following (in thousands):
September 30, 2003 June 30, 2003
------------------ -------------
Gross Gross Gross Gross
----- ----- ----- -----
Unrealized Unrealized Fair Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
----- ---- ------ ----- ----- ---- ------ -----
Equity securities $ 585 $ 45 $ (321) $ 309 $ 585 $ 45 $ (321) $ 309
Private joint ventures 71 71 68 68
Certificates of deposit 25 - - 25 25 - - 25
----- ---- ------ ----- ----- ---- ------ -----
$ 681 $ 45 $ (321) $ 405 $ 678 $ 45 $ (321) $ 402
====== ==== ====== ===== ===== ==== ====== =====
The Company's certificate of deposit at September 30, 2003 is pledged as
collateral security for the Company's letter of credit for a trade credit line.
During October 2003 this certificate of deposit was not renewed. The remaining
11
balance was repaid to Michael Pruitt, who originally put up the collateral. As
of September 30, 2003, $300,000 of the Company's equity securities relate to a
privately held company that provides high speed internet access to the hotel
industry. The president of the Company's aviation travel services business is a
director and shareholder of this company.
12
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
September 30, June 30,
2003 2003
---- ----
Land, buildings and improvements 160 160
Furniture and fixtures 371 369
Computers and office equipment 1,427 1,404
Software 264 264
Showroom (home technology) 155 147
Vehicles (home technology) 12 12
------- -------
2,389 2,356
Accumulated depreciation (1,394) (1,265)
------- -------
$ 995 $ 1,091
======= =======
NOTE 5. NOTES PAYABLE
Notes payable consists of the following (in thousands):
September 30, June 30,
2003 2003
------- -------
Note payable - due on demand bearing interest at 8% $ 100 $ 100
Note payable - unsecured and due on demand (6) 85 85
Note payable - unsecured and due on demand 10 -
Note payable - due on demand bearing interest at 10% secured by certain real estate 35 35
Notes payable - due in August 2003 with interest imputed at 8% and unsecured (1) - 267
Note payable - due in August 2003 with interest at 10% and collateralized by certain home technology
assets (1) - 300
Note payable - due in August 2003 with interest at 10% and unsecured (1) - 200
Note payable - due in August 2003 with interest at 12% and unsecured (2) 347 292
Note payable - due July 27, 2003 and unsecured (3) 250 250
Note payable - due October 16, 2003 with interest at 12.59% 295
Note payable - due December 18, 2003 with interest at 36% and collateralized by 25,000 LFSI shares (7) 70 -
Note payable - due in August 2003 with interest at 12% and collateralized by certain home technology
accounts receivable and inventory (2,4) 650 650
Note payable - due in monthly installments of $3,000 and a balloon payment in July 2005,
interest payable at 8.00% and collateralized by home technology accounts receivable 181 181
Revolving credit facility - secured by a portion of the accounts receivable of the technology
solutions business 15 274
Capital lease obligation at 12% due in monthly installments of $590 through September 2004 4 5
Capital lease obligation at 8.5% due in monthly installments of $1,007 through November 2005 24 26
Note payable - unsecured and due on demand bearing interest at 6% 500 500
Note payable - due January 1, 2004 with interest at 12% and unsecured 145 225
Note payable - $150,000 due December 31, 2003 and $600,000 due December 31, 2004 with interest at
12% and collateralized by certain aviation travel service business assets (5) 750 750
------- --------
3,461 4,140
Less current maturities, including demand notes (2,709) (3,379)
------- -------
Long-term portion $ 752 $ 761
======= =======
(1) The principal and accrued interest on this note payable are convertible to
shares of Common Stock at the greater of (i) $1.12 per share or (ii) a 20%
discount to the average closing price of the Common Stock for the five
days immediately preceding the conversion date. The three debts referred
to above, plus accrued interest, were converted into RCG Common Stock on
August 21, 2003 in accordance with above terms.
(2) The home technology company has reached an agreement to extend these
debts.
(3) On October 1, 2003, $25,000 of principal was paid. The Company currently
is negotiating with the debt holder to extend the term or agree on a
payment schedule
(4) At the option of the noteholder, this note can be converted into RCG's
Common Stock at a ratio of one (1) share of Common Stock for each $4.55 of
outstanding principal and interest.
(5) In connection with this note, the Company issued 71,429 shares of
restricted stock and 42,857 warrants to purchase its Common Stock at a
price of $2.45 and for a term of three years, both as loan origination
fees. This note is convertible into the Company's Common Stock at the
option of the debt holder at a per share price of the lesser of $2.10 or a
25% discount. The Company can force the debt holder to convert to stock at
$7.00 per share under certain conditions.
(6) RCG repaid in October, 2003.
(7) At the option of the noteholder, this note can be converted into LFSI's
Common Stock at a ratio of one (1) share of Common Stock for each $2.50 of
outstanding principal.
13
NOTE 6. INCOME TAXES
The Company did not record an income tax benefit against the pre-tax loss for
the first quarter of fiscal year 2004. The deferred tax asset increased by
$303,000. The deferred tax asset is fully offset by the valuation allowance at
September 30, 2003 because, due to the company's recent operation performance,
it is management's opinion that it is likely that a portion of the deferred tax
benefits will not be realized. Realization of these tax benefits, including
potential tax saving of approximately $19.8 million from the use of net
operation loss and tax credit carry forwards, is generally dependent on the
generation of taxable income in the future. The Company will continue to assess
the valuation allowance, and to the extent it is determined that all or a
portion of the allowance is no longer required, that tax benefits relating to
the net deferred tax assets will be recognized in the future.
The Company did not record an income tax benefit against the pre-tax loss for
the first quarter of fiscal year 2003. The deferred tax asset increased by
$51,000. The deferred tax asset is fully offset by the valuation allowance at
September 30, 2002. Realization of these tax benefits, including potential tax
saving of approximately $13 million from the use of net operation loss and tax
credit carry forwards, is generally dependent on the generation of taxable
income in the future.
In fiscal 2001, the Company received a preliminary Internal Revenue Service
report on the Company's 1996 and 1997 and one of its subsidiary's 1994 and 1995
tax returns, which the Company has appealed. At September 30, 2003 and June 30,
2003, the Company had recorded a federal tax liability of $305,830 related to
such assessment.
NOTE 7. COMMON STOCK AND PAID IN CAPITAL
The following table summarizes the Company's stock and paid in capital activity
for the quarter ended September 30, 2003.
Accumulated
Common Stock Additional Other
----------------------- Paid-In Accumulated Comprehensive Treasury
Shares Amounts Capital Deficit Income (Loss) Stock Total
-----------------------------------------------------------------------------------------
Balance at June 30, 2003 13,948,160 $ 558 $ 114,329 $ (103,025) $ (276) $ (632) $ 10,954
========== ========== ========== ========== ========== ========== ==========
Comprehensive loss:
Net loss September 30, 2003 -- -- -- (890) -- -- (890)
Sale of Common Stock at $.25 per
share to an accredited investor 200,000 8 42 -- -- -- 50
Sale of Common Stock at $1.12 per
share to seven accredited investors 837,502 34 904 -- -- -- 938
Conversion of three debt holders and
one creditor at $1.12 per share 699,103 28 852 -- -- -- 880
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at September 30, 2003 15,684,765 $ 628 $ 116,127 $ (103,915) $ (276) $ (632) $ 11,932
========== ========== ========== ========== ========== ========== ==========
NOTE 8. STOCK OPTIONS AND WARRANTS
The Company accounts for stock option grants in accordance with APB Opinion No.
25, "Accounting For Stock Issued To Employees" and options and warrants issued
to non-employees under SFAS No. 123, "Accounting For Stock Based Compensation".
For the options and warrants issued to non-employees, the fair value of each
award has been calculated using the Black-Scholes Model in accordance with SFAS
No. 123.
14
September 30, 2003
------------------
Vesting
Exercise Term Period
Shares Price (Years) (Months)
- ------ ----- ------- --------
1,072,000 0.55 to .60 7 to 10 * 12 to 48 *
3,000 1.15 7 33 to 43
72,857 1.26 7 48
426,428 1.75 to 1.96 7 to 10 12 to 48
242,857 4.90 10 12
142,857 5.25 5 --
42,965 5.46 to 6.65 6 to 10 33 to 39
14,286 7.00 10 46
71,429 10.06 3 --
17,857 21.00 7 --
---------
2,106,536
=========
June 30, 2003
-------------
Vesting
Exercise Term Period
Shares Price (Years) (Months)
- ------ ----- ------- --------
1,019,500 $ 0.55 7 to 10 * 12 to 48 *
350,000 0.75 7 ** 48 **
3,000 1.15 7 33 to 43
72,857 1.26 7 48
432,142 1.75 to 1.96 7 to 10 12 to 48
242,857 4.90 10 12
142,857 5.25 5 --
42,965 5.46 to 6.65 6 to 10 33 to 39
14,286 7.00 10 46
71,429 10.06 3 --
17,857 21.00 7 --
----------
2,409,750
=========
* 35,714 non-qualified options issued to an employee in December 2001 have a
three-year term and are fully vested.
** Employee resigned from the company on 4/30/03 and options were cancelled as
of 7/30/03.
The following table summarizes the outstanding options at September 30, 2003 and
June 30, 2003:
Of the options outstanding at September 30, 2003, 1,373,159 are exercisable.
The following table summarizes the outstanding warrants at September 30, 2003
and June 30, 2003:
September 30, 2003 June 30, 2003
------------------------------------ -------------------------------------
Exercise Term Exercise Term
Shares Price (Months) Shares Price (Months)
------ ----- -------- ------ ----- --------
793,768 $ 0.28 54 793,768 $ 0.55 54
37,500 1.05 to 1.75 36
42,857 2.45 36 42,857 2.45 36
57,143 3.50 120 57,143 3.50 120
679,106 5.25 120 679,106 5.25 120
14,286 5.67 48 14,286 5.67 48
1,429 7.00 -- 1,429 7.00 --
7,143 7.70 36 7,143 7.70 36
96,428 12.25 -- 96,428 12.25 --
82,143 21.00 * 82,143 21.00 *
517,857 28.00 120* 517,857 28.00 120*
--------- ---------
2,292,160 2,329,660
========= =========
All of the warrants issued by the Company are exercisable, except for 79,377
with an exercise price of $0.28 that vest in December 2002, 14,286 with an
exercise price of $5.67 that vest over 3 years, 150,000 that vest in equal
quarterly amounts in September 2002, December 2002, March 2003 and June 2003 and
16,667 that vest upon the holder meeting the requirements of a capital raise
commitment.
The Company's pro forma net loss and net loss per share assuming compensation
cost was determined under SFAS No. 123 for all options would have been the
following for the three months ended September 30, 2003 and 2002 (in thousands,
except share amounts):
For the three months ended September 30,
----------------------------------------
2003 2002
---------- ----------
Loss before minority interest $ (1,174) $ (150)
Add: Stock-based employee compensation included in net loss as reported 108 33
---------- ----------
(1,066) (117)
Deduct: Stock-based compensation expense determined under FAS 123 (434) (576)
---------- ----------
(1,500) (693)
Add: Minority interest included in stock-based employee compensation expense 368 319
---------- ----------
Pro forma net loss as if stock-based compensation had been reported under FAS 123 $ (1,132) $ (374)
========== ==========
Pro forma basic and diluted net loss per share as if stock-based compensation had
been reported under FAS 123 $ 0.08) $ (0.03)
========== ==========
15
NOTE 9: GENERAL AND ADMINISTRATIVE EXPENSE - OTHER
Following is a summary of the Company's general and administrative expenses (in
thousands):
Three months Ended September 30,
--------------------------------
2003 2002
---- ----
Compensation expense $1,138 $1,121
Legal and professional fees 148 194
Public and investor relations 81 23
Marketing and advertising 36 74
Rent expense 140 144
Insurance 86 58
Telecommunications 48 69
Office and printing expense 78 112
Travel and entertainment 90 101
Other 78 96
------ ------
$1,923 $1,992
====== ======
NOTE 10. RELATED PARTY TRANSACTIONS
During fiscal 2002, Mr. Pruitt, President and CEO of the Company, pledged
certain of his personal assets to secure a $100,000 bank line of credit for
Lifestyle Innovations, Inc., ("LFSI"). LFSI is a separately traded public
company, of which the Company owns approximately 15.6 million restricted common
shares as of September 30, 2003. These shares represent an equity ownership of
approximately 76.5% of the company. Mr. Pruitt repaid the $100,000 due on the
line of credit with personal funds on August 8, 2003 in exchange for a note from
LFSI. The note bears interest at 8% per annum and is due on demand.
In addition to this note, LFSI owed Mr. Pruitt, as of September 30, 2003,
$42,567. This amount is the result of loans made to LFSI by Mr. Pruitt prior to
fiscal year 2003 and accrued interest calculated on the note.
Mr. Pruitt owns 33.3% and is a director in a company that purchased
franchise licenses and business operations from LFSI in three markets located in
South Carolina. Mr. Pruitt also owns 15% of another company that is a LFSI
franchisee in the state of Maryland. The franchise locations in the Carolina's
owed the Company and its subsidiaries $41,163 at September 30, 2003. The
franchise location in Maryland owed the Company and its subsidiaries $3,997 at
September 30, 2003.
During fiscal year 2002, Mr. Pruitt loaned money to the Company. At September
30, 2003, $5,000 was due to Mr. Pruitt. The $5,000 was payable to Mr. Pruitt on
demand. The interest rate on the note is 8%. This note was repaid on October 2,
2003.
Mr. G. David Gordon, a Company Stockholder, has an ownership interest in six
LFSI franchises, including two locations that were purchased from the Company
during fiscal 2002 and for which the Company recorded a gain on sale of
$119,000. Mr. Gordon also acts as legal counsel to the Company from time to
time. Mr. Gordon has an ownership interest in the Charleston, SC, and Hilton
Head, SC markets along with Mr. Pruitt, and the Dallas, TX, market along with
Paul B. Johnson, President of LFSI. Mr. Gordon is an investor in a Company that
owns the franchise locations in Raleigh, Wilmington, and Greensboro, NC. These
six franchise locations collectively owed LFSI and its subsidiaries $125,017 at
September 30, 2003.
At September 30, 2003, total debt outstanding to Mr. Gordon and a company in
which he is the president and a 65% shareholder, is $1,096,782 which is included
in notes payable on the Company's Consolidated Balance Sheet. The loans, which
arose during fiscal 2002 through fiscal 2004, bears interest at 12%. As of
September 30, 2003, outstanding accrued interest on these obligations was
$53,704. These debts mature in fiscal 2004 and 2005. The above outstanding debt
includes a Note for $750,000 which is convertible into Common Stock of the
Company at the lesser of $2.10 per share or a 25% discount to the fair market
value of the Company's Common Stock.
16
LFSI and its subsidiaries also have various outstanding debt obligations
due to Mr. Gordon and his spouse. As of September 30, 2003, these obligations
totaled $846,782, $500,000 of which is due to Mr. Gordon's spouse.
Mr. Johnson is an investor in a company, which in November 2001 became a
franchisee of LFSI in the Dallas, Texas market and purchased franchises for two
additional Dallas, Texas markets during the quarter ended March 31, 2003. In
addition, Mr. Johnson was named Chief Executive Officer and a board member of
LFSI, which acquired the Company's home technology business in September 2002.
Mr. Johnson resigned as a director of the Company effective October 31, 2002 due
to his being appointed the CEO of LFSI. Mr. Johnson resigned as CEO and as a
board member from LFSI during March 2003 and remained President and Treasurer.
Mr. Johnson is also an officer and director of various LFSI subsidiaries. The
Dallas franchise locations owed the Company and its subsidiaries $80,192 at
September 30, 2003. This amount is included in the $125,017 owed by Mr. Gordon's
franchises mentioned in the above paragraph.
During fiscal 2002, Glenn Barrett resigned as President of Lifestyle
Technologies, Inc. and began LVA Technologies LLC ("LVA"), a low voltage wiring
business that operates as a Lifestyle franchisee headquartered in Charlotte, NC
to serve the commercial market. The Company waived LVA's initial franchise fee
for the commercial franchise. LVA also owns the Greenville and Columbia, SC
franchises of LFSI. LVA's low voltage wiring business pays royalties on products
purchased from LFSI at the same rate as LFSI's other franchisees, however, it
does not pay royalties on revenue generated from products purchased elsewhere as
required of the Company's other franchisees, including the Greenville and
Columbia, SC franchises. LVA and its subsidiaries owed the Company and its
subsidiaries $308,594 as of September 30, 2003.
Revenues from the franchisees discussed above for the quarters ended
September 30, 2003 and 2002 are as follows:
2003 2002
Houston and three North Carolina markets $ 59,000 $ 55,000
Three South Carolina markets 24,000 20,000
Three Maryland markets 6,000 --
LVA and subsidiaries 25,000 18,000
Dallas 17,000 9,000
------------ ----------
Total $ 131,000 $ 102,000
============ ==========
In September 2003, P. Roger Byer, a director of the Company, purchased 89,285
shares of restricted Common Stock for $100,000 or $1.12 per share. Mr. Byer
subscribed to purchase an additional 44,642 shares of restricted Common Stock
for $50,000 which was closed in early October, 2003.
The Company owns an equity interest in a privately held company in which
the executive vice president of the Company's aviation travel services business
is a director and shareholder. Avenel Ventures, Inc. owned this equity interest
prior to being acquired by the Company in fiscal 2002. The amount is included in
investment on the Company's Consolidated Balance Sheet.
17
NOTE 11. BUSINESS SEGMENT INFORMATION
Information related to business segments is as follows (in thousands):
Three months ended September 30, 2003: Aviation
Travel Call Technology Home
Services Center Solutions Technology Corporate Total
-------- -------- ---------- ---------- --------- --------
Revenue $ 15,535 $ 43 $ 3,535 $ 480 $ -- $ 19,593
Income (loss) from continuing operations 161 (4) (9) (358) (304) (514)
Identifiable assets 4,892 54 9,822 8,419 2,155 25,342
Capital expenditures 15 -- 10 8 -- 33
Depreciation and amortization 34 3 61 27 4 129
Three months ended September 30, 2002: Aviation
Travel Call Technology Home
Services Center Solutions Technology Corporate Total
-------- -------- ---------- ---------- --------- --------
Revenue $ 15,060 $ 9 $ 3,219 $ 540 $ -- $ 18,828
Income (loss) from continuing operations 670 (42) (27) (508) (243) (150)
Identifiable assets 5,008 106 10,445 10,340 1,936 27,835
Capital expenditures 2 1 39 34 -- 76
Depreciation and amortization 14 4 59 26 4 107
NOTE 12. CONTINGENCIES
Legal Proceedings
During the normal course of business, the Company is subject to various
lawsuits, which may or may not have merit. Management intends to vigorously
pursue and/or defend such suits, as applicable, and believes that they will not
result in any material loss to the Company.
The Company's aviation services business is seeking to recover through
litigation approximately $70,000 from Southeast Airlines, Inc. related to a
fiscal year 2003 charter flight program. Flightfuel, Inc. a joint venture of the
Company's aviation travel services business is seeking to recover through
litigation approximately $360,000 in unpaid aviation fuel from Southeast
Airlines, Inc.
18
Item 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Overview
The following table summarizes results of operations for the quarters ended
September 30, 2003 and 2002 (in thousands):
Three Months Ended Three Months Ended
September 30, 2003 September 30, 2002
------------------------- -----------------------
% of % of
Revenue Revenue
Revenue:
Services $ 15,787 80.6% $ 15,361 81.6%
Product sales 3,806 19.4% 3,467 18.4%
------------------------- -----------------------
Total revenue 19,593 100.0% 18,828 100.0%
------------------------- -----------------------
Cost of revenue:
Services 14,822 75.6% 14,186 75.3%
Product sales 3,384 17.3% 3,046 16.2%
------------------------- -----------------------
Total cost of revenue 18,206 92.9% 17,232 91.5%
------------------------- -----------------------
Gross profit 1,387 7.1% 1,596 8.5%
------------------------- -----------------------
Selling, general and administrative expenses - compensation
related to issuance of stock options and warrants 111 0.6% 33 0.2%
Selling, general and administrative expenses - other 1,923 9.8% 1,992 10.6%
Provision for bad debts -- 0.0% 4 0.0%
Depreciation and amortization 129 0.7% 107 0.6%
------------------------- -----------------------
Operating costs and expenses 2,163 11.0% 2,136 11.3%
------------------------- -----------------------
Operating loss (776) -4.0% (540) -2.9%
Interest expense, net 94 0.5% 102 0.5%
(Gain) on investments, net (119) -0.6% (175) -0.9%
Other (income) (103) -0.5% (263) -1.4%
Equity in losses of joint ventures 3 0.0% 0.0%
------------------------- -----------------------
Loss from continuing operations before minority interest (651) -3.3% (204) -1.1%
Minority interest (137) -0.7% (54) -0.3%
------------------------- -----------------------
Loss from continuing operations (514) -2.6% (150) -0.8%
Loss on discontinued operations, net of minority interest of $147 376 -1.9%
------------------------- -----------------------
Net loss $ (890) -4.5% $ (150) -0.8%
========================= =======================
The Company's revenues in the three months ended September 30, 2003 were
$19,593,000 compared to $18,828,000 in the same period a year ago. The increase
in the current period is due to the aviation travel services expanded charter
aviation business as well as the technology solutions expanded sales activity in
the computer software business and internet businesses. These increases were
partially offset by the decrease in revenues from the home technology business
due to a focused reduction of business with certain unprofitable customers.
During the three month period ended September 30, 2003, sales to Vacation
Express and Suntrips, both members of the MyTravel Group, customers of the
Company's aviation travel services business, represented 71% of the Company's
consolidated revenue. For the quarter ended September 30, 2002, sales to
Vacation Express and Suntrips, represented 69%, of the Company's consolidated
revenue.
Gross profit in the three months ended September 30, 2003 was $1,387,000
compared to $1,596,000 in the same period a year ago. The decrease in the
current period is primarily due to the aviation travel services decrease in the
scheduled flights from Vacation Express as well as a decrease in the home
technology business due to less high-
19
margin revenue being booked. The Company reported a 7.1% overall gross margin in
the quarter ended September 30, 2003 compared to 8.5% in the same period a year
ago. The decrease in margin was due to a decrease in revenues from the Vacation
Express program which operated at a gross margin of approximately 9%, as well as
an increase in revenues from Suntrips which operated at a zero gross margin.
In the quarter ended September 30, 2003, the Company reported $111,000 of
non-cash expense related to the issuance of options and warrants compared to
$33,000 in the same period a year ago. The increase is all attributable to the
home technology segment's issuance of options to a former officer of the
company.
Selling, general and administrative expenses-other in the three months ended
September 30, 2003 was $1,923,000 compared to $1,992,000 in the comparable
period a year ago. This decrease is due to lower telecommunications costs
resulting from reduced number of employees, lower marketing and advertising
costs and lower office related expenses. Selling, general and administrative
expenses-other were reduced to 9.8% of revenue in the three months ended
September 30, 2003 from 10.6% of revenue in the same period a year ago.
Provision for bad debts decreased to zero in the three months ended September
30, 2003 compared to $4,000 in the same period a year ago. Management believes
that the amount reserved at June 30, 2003 for bad debts does not need further
adjustment in the current quarter.
The Company's depreciation and amortization expense in the three month period
ended September 30, 2003 was $129,000 compared to $107,000 in the same period a
year ago. The increase is due to depreciation of the fixed asset additions.
In the three month period ended September 30, 2003, the Company incurred $94,000
of net interest expense related to its debt portfolio compared to $102,000 in
the same period a year ago. This is due to debt conversions discussed in Note 5
of the consolidated financial statements.
In the quarter ended September 30, 2003, the Company recorded a gain on
investments of $119,000 relating to the issuance of LFSI stock for services. In
the quarter ended September 30, 2002, the Company recorded a net gain on
investments of $175,000 of which $208,000 relates to Company's sale of LFSI
stock obtained in the LFSI Transaction. In September 2002, the Company completed
the private sale of 125,000 shares of LFSI common stock to a private investor.
The Company sold these shares at $2.00 per share and received $250,000 in
proceeds as a result of this sale. $150,000 of the proceeds was received in
September 2002 with the balance being received in October 2002. The net gain on
all investment activity during the quarter is net of losses of approximately
$33,000 related to non-cash market adjustments of common stock purchase
warrants.
In the quarter ended September 30, 2003, the Company recorded other income of
$103,000 compared to $263,000 in the same period a year ago. The Company's
technology solutions business recorded a $100,000 amount to other income in the
current quarter related to a prior project. The Company's aviation travel
services business received $263,000 in grant proceeds in the quarter ended
September 30, 2002 from a government assistance program designed to provide
grants to companies whose businesses were directly impacted by the events of
September 11, 2001.
Minority interest represents the minority shareholders' share of losses of LFSI
for the quarter ended September 30, 2003 as well as the technology solutions
business share of profits in its 75% owned business, 123Shoes.com.
Continuing Operations of Business Segments
The following table summarizes results of continuing operations by business
segment for the quarters ended September 30, 2003 and 2002 (in thousands):
20
Three Months Ended Three Months Ended
September 30, 2003 September 30, 2002
------------------------------- -------------------------------
Gross Income Gross
Revenue Profit (Loss) Revenues Profit (Loss)
-------- -------- -------- -------- -------- --------
Aviation Travel Services $ 15,535 $ 833 $ 161 $ 15,060 $ 987 $ 670
Telecommunications Call Center 43 -- (4) 9 9 (42)
Home Technology 480 119 (358) 540 183 (508)
Technology Solutions 3,535 435 (9) 3,219 417 (27)
Corporate -- -- (304) -- -- (243)
-------- -------- -------- -------- -------- --------
$ 19,593 $ 1,387 $ (514) $ 18,828 $ 1,596 $ (150)
======== ======== ======== ======== ======== ========
Aviation Travel Services
The Company's aviation travel services business revenues in the three months
ended September 30, 2003 were $15,535,000 compared to $15,060,000 in the same
period a year ago. The increase from the prior year represents increases in
charter air revenue related to the Suntrips contract which began in July 2002.
Total revenues with Vacation Express and Suntrips, members of the MyTravel
Group, were $13,966,000 in the quarter ended September 30, 2003 compared to
$12,996,000 in the same period a year ago. The Company signed a definitive
agreement to acquire SunTrips and Vacation Express on October 17, 2003 and
closed the transaction on October 31, 2003.
Gross profit for the Company's aviation travel services business in the three
months ended September 30, 2003 was $833,000 compared to a gross profit of
$987,000 in the same period a year ago. This business generated income of
$161,000 for the quarter ended September 30, 2003 compared to income of $670,000
in the same period a year ago. The inferior results were due primarily to the
Company's receipt during the quarter ending September 30, 2002 of $263,000 in
grant proceeds from a government assistance program designed to provide grants
to companies whose businesses were directly impacted by the events of September
11, 2001. Also, the quarter ended September 30, 2003 was adversely affected by a
reduction in scheduled flights by Vacation Express.
Home Technology
The Company's home technology business represents the activities of LFSI. The
Company is a majority owner of LFSI and consolidates the business while
recording minority interests for the percentage of income and equity of LFSI
owned by other shareholders.
This business recorded revenues of $480,000 for the quarter ended September 30,
2003 compared to $540,000 for the same period a year ago. The overall decrease
in revenues is the result of substantial cost and staff reductions.
Gross profit for the Company's home technology business in the three months
ended September 30, 2003 was $119,000, or 25%, compared to $183,000, or 34%, in
the same period a year ago. The decrease in gross profit percentage was due to
the Company's location in Charlotte terminating the majority of its direct labor
and began utilizing sub-contract services for the majority of its installation
work. During this period, overall costs of labo and materials were higher than
normally experienced, with total direct costs exceeding revenue. Accordingly,
management is still evaluating the effectiveness and cost of this approach and
may make further changes in the future.
Home technology incurred a loss from continuing operations of $358,000 in the
three months ended September 30, 2003, compared to a loss of $508,000 in the
same period a year ago. As mentioned above as the cause of declining revenue,
the cost reductions and staff reductions have reduced expenses and therefore
have decreased the loss from the prior period.
Technology Solutions
The Company's technology solutions business recorded revenues of $3,535,000 for
the quarter ended September 30, 2003 compared to $3,219,000 for the same period
a year ago. The increase in revenues is the result of the expansion of products,
services and its sales force, primarily in the computer software business.
21
Gross profit for the Company's technology solutions business in the three months
ended September 30, 2003 was $435,000 compared to a gross profit of $417,000 in
the same period a year ago. This is a negligible decrease in gross profit
percentage.
This business incurred a loss of $9,000 for the quarter ended September 30, 2003
compared to a loss of $27,000 in the same period a year ago. The results
improved results were due to a one-time income adjustment offset by an increase
in interest expense and finance charges related to a line of credit and an
increase in rent and marketing expenses.
Corporate
Corporate incurred a loss $304,000 for the quarter ended September 30, 2002
compared to a loss of $243,000 in the same period a year ago. The increase in
loss from continuing operations is due to increases in insurance and public
relations as well as less of a gain from investments in the current period.
22
Seasonality
The Company experiences some seasonality in its aviation travel services and
technology solutions businesses. The seasonality in the aviation travel services
business is due to the higher level of charter travel to Caribbean and Mexican
destinations during the vacation season, which coincides with the Company's
first and fourth fiscal quarters. The Company's technology solutions business
generally experiences higher revenue in the first and fourth fiscal quarters,
with the largest amount being recognized in the fourth quarter, due to the fact
that the Company's year end coincides with the year end of most schools and
universities. These customers are tied to strict budgets and normally purchase
more product at the start and the end of their fiscal year.
Guarantee Obligation
The Company's aviation travel services business (the "Aviation Business") has
certain guarantees outstanding with an airline provider that indicate if the
Aviation Business does not utilize a minimum number of hours during each program
year, then the Aviation Business would be required to pay the shortage to the
provider. The Aviation Business has a similar arrangement with Vacation Express
whereby Vacation Express has guaranteed a certain number of travel hours to the
Aviation Business. The Aviation Business does not anticipate incurring a net
loss on these guarantees and has not accrued any such loss on its balance sheet
as of September 30, 2003.
Liquidity and Capital Resources
The Company's net loss for the three months ended September 30, 2003 of $990,000
were offset by an increase to shareholders' equity related to the sale of Common
Stock, with net proceeds of $988,000, as well as debt and accounts payable
conversions totaling $880,000. Minority interest decreased mainly due to the
minority shareholders' portion of LFSI's losses of $284,000.
For the quarter ended September 30, 2003, operations used $2,160,000 of cash
primarily due to the aviation travel services use of cash in the scheduling of
flights. For the quarter ended September 30, 2003, net cash used by investing
activities was $43,000 due primarily to the purchase of property and equipment.
For the quarter ended September 30, 2003, net cash provided by financing
activities was $1,054,000 due primarily to the Company receiving $988,000
through the sale of the Company's Common Stock. At September 30, 2003, the
Company had a working capital deficit of $5,947,000. At September 30, 2003 the
Company held cash and cash equivalents of $2,415,000 and investments of
$405,000.
The Company's significant working capital deficit is partially due to $2,709,000
of current debt. Approximately 67% of total debt is attributable to the home
technology business. The Company is currently exploring additional sources of
liquidity, including debt and equity financing alternatives and potential sales
of additional shares of LFSI, a portion of which may or may not be sold from
time to time depending on market conditions and the effectiveness of a LFSI
registration statement, to provide additional cash to support operations,
working capital and capital expenditure requirements for the next 12 months and
to meet the scheduled debt repayments. Additionally, the Company plans on
negotiating with its debt holders to extend some or all of this debt. If (i) we
are unable to grow our business or improve our operating cash flows as expected,
(ii) we suffer significant losses on our investments, (iii) we are unable to
realize adequate proceeds from investments, including our holdings of LFSI
stock, or (iv) we are unsuccessful in extending a substantial portion of the
debt repayments, then we will need to secure alternative debt or equity
financing to provide us with additional working capital. There can be no
assurance that additional financing will be available when needed or, if
available, that it will be on terms favorable to the Company and its
stockholders. If the Company is not successful in generating sufficient cash
flow from operations, or in raising additional capital when required in
sufficient amounts and on terms acceptable to the Company, these failures would
have a material adverse effect on the Company's business, results of operations
and financial condition. If additional funds are raised through the issuance of
equity securities, the percentage ownership of its then current stockholders
would be diluted.
23
The Company's Board of Directors had previously considered distributing a
portion of the LFSI shares to the shareholders of the Company. The Board of
Directors and its advisors currently believe the most prudent use of these
shares is the sale of LFSI shares to external parties and does not currently
intend to distribute any shares as a dividend.
The Company's business, results of operations, and financial condition are
subject to many risks. In addition, statements in this report relating to
matters that are not historical facts are forward-looking statements based on
management's belief and assumptions based on currently available information.
Such forward-looking statements include statements relating to estimates of
future revenue and operating income, cash flow and liquidity. Words such as
"anticipates", "expects", "intends", "believes", "may", "will", "future" or
similar expressions are intended to identify certain forward-looking statements.
In addition, any statements that refer to expectations, projections or other
characterizations of future events or circumstances are forward-looking
statements. Although the Company believes that the expectations reflected in
such forward-looking statements are reasonable, it cannot give any assurances
that these expectations will prove to be correct. Such statements involve a
number of risks and uncertainties, including, but not limited to, those
discussed herein or in other documents filed by the Company with the SEC.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK:
None
ITEM 4. CONTROLS AND PROCEDURES:
Disclosure controls and procedures
The Company has established and currently maintains controls and other
procedures designed to ensure that material information required to be disclosed
in its reports filed under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported, within the time periods specified by the
Securities and Exchange Commission.
In conjunction with the close of each fiscal quarter, the Company conducts an
update and a review and evaluation of the effectiveness of the Company's
disclosure controls and procedures. It is the opinion of the Company's principal
executive officer and principal accounting officer, based upon an evaluation
completed within 90 days prior to the filing of this report, that the Company's
disclosure controls and procedures are sufficiently effective to ensure that any
material information relating to the Company is recorded, processed, summarized
and reported to its principal officers to allow timely decisions regarding
required disclosures.
Changes in internal controls
There were no significant changes in the Company's internal accounting processes
and control procedures during the quarter.
24
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
During the normal course of business, the Company is subject to various
lawsuits, which may or may not have merit. Management intends to vigorously
pursue and/or defend such suits, as applicable, and believes that they will not
result in any material loss to the Company.
The Company's aviation services business is seeking to recover through
litigation approximately $70,000 from Southeast Airlines, Inc. related to a
fiscal year 2003 charter flight program. Flightfuel, Inc. a joint venture of the
Company's aviation travel services business is seeking to recover through
litigation approximately $360,000 in unpaid aviation fuel from Southeast
Airlines, Inc.
ITEM 2. CHANGES IN SECURITIES
Common Stock
Issued and
Outstanding
------------
Balance at June 30, 2003 13,948,160
Private placement at $.25 per share to an accredited investor 200,000
Private placement at $1.12 per share to seven accredited investors 837,502
Conversion of three debt holders and one creditor at $1.12 per share 699,103
----------
Balance at September 30, 2003 15,684,765
==========
The securities issued in connection with the above were issued without
registration under the Securities Act in reliance upon Section 4(2) of the
Securities Act. The Company based such reliance on representations made to the
Company by the recipient of such securities as to such recipient's investment
intent and sophistication, among other things.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIY HOLDERS
None.
ITEM 5. OTHER INFORMATION
On November 14, 2003 the company changed its name from eResource Capital
Group, Inc. to RCG Companies Incorporated to better reflect the nature and
evolution of the Company's business strategy.
The company signed a definitive agreement to acquire SunTrips and Vacation
Express on October 17, 2003 and closed the transaction on October 31, 2003.
Under the terms of the asset purchase agreement, FS Tours, Inc. ("FS Tours") a
wholly-owned subsidiary of Flightserv, will acquire substantially all of the
assets and liabilities of Vacation Express, and FS SunTours, Inc ("FS SunTours")
a wholly-owned subsidiary of Flightserv, will acquire substantially all of the
assets and liabilities of SunTrips, except for certain excluded items, for a $10
million non-interest bearing seven-year promissory note from Flightserv secured
by certain RCG investment holdings. The agreement requires the Company to
provide additional cash if the working capital deficit of the acquired business
exceeds $2 million. Additionally, FS Tours and FS SunTours entered into a
three-year agreement with MyTravel Canada Holidays, Inc. ("MyTravel Canada"),
for certain services, including the purchasing of hotel accommodations for FS
Tours and FS SunTours on an exclusive basis. MyTravel Canada will be paid
approximately $4.5 million over three years under this agreement.
On October 17, 2003 the Company completed its sale of all of the assets of
FutureSmart for an "Initial Purchase Price" of $1,500,000, which is subject to
adjustment as provided in the Asset Purchase Agreement to the "Final Purchase
Price." The Initial Purchase Price is allocated to the secured creditors of
FutureSmart, $200,000 to the Company and $1,300,000 to the other secured
creditors. Thirty percent ($450,000) of the Initial Purchase Price was paid at
Closing pro rata to the secured creditors ($60,000 to the Company) and the
remainder of $1,050,000 was placed in escrow. The escrowed amount is subject to
various adjustments, including determination of the final net assets as of the
Closing Date and settlement of certain other obligations. The remaining balance
will be disbursed by the Escrow Agent no later than one year and one day after
the Closing Date.
On October 15, 2003, the technology solutions business completed the
acquisition of SchoolWorld Software, a Pittsburgh, PA based educational software
company for $380,000 of the Company's Common Stock.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Rule 13a-14(a)/15d-4a Certification of Principal Executive
Officer
31.2 Financial Officer
32.1 Section 1350 Certification of Principal Executive Officer
32.2 Section 1350 Certification of Principal Financial Officer
25
(b) Financial Reports on Form 8-K
None filed during the quarter ending September 30, 2003.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
RCG Companies Incorporated
Date: November 14, 2003 By: /s/ Michael D. Pruitt
---------------------------------------------
Michael D. Pruitt
President and Chief Executive Officer and
and Principal executive officer and principal
financial officer
Date: November 14, 2003 By: /s/ Jeffrey F. Willmott
---------------------------------------------
Jeffrey F. Willmott
Chairman of the Board