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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 December 31, 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 February 5, 2004: 18,547,790
RCG COMPANIES INCORPORATED AND SUBSIDIARIES
TABLE OF CONTENTS
........................................................................................................Page No
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at December 31, 2003 and June 30, 2003..............3
Condensed Consolidated Statements of Operations for the three and six months ended
December 31, 2003 and 2002................................................................4
Condensed Consolidated Statements of Cash Flows for the six months ended
December 31, 2003 and 2002................................................................5
Notes to Condensed Consolidated Financial Statements......................................6
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...........15
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk......................................21
ITEM 4. Controls and Procedures.........................................................................21
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings...............................................................................22
ITEM 2. Changes in Securities...........................................................................22
ITEM 3. Defaults Upon Senior Securities.................................................................22
ITEM 4. Submission of Matters to a Vote of Security Holders.............................................23
ITEM 5. Other Information...............................................................................23
ITEM 6. Exhibits and Reports on Form 8-K................................................................23
Exhibit Index ............................................................................................23
Signatures ............................................................................................24
2
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED):
RCG COMPANIES INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
December 31, June 30,
2003 2003
(Unaudited)
--------- ---------
ASSETS
Cash and cash equivalents ........................................ $ 2,242 $ 836
Restricted cash .................................................. 23,576 2,655
Accounts receivable, net of allowance of doubtful accounts of $353
and $235, respectively .................................... 3,483 2,436
Note receivable, net of reserve of $49 ........................... 49 49
Inventory ........................................................ 142 146
Investments ...................................................... 392 402
Prepaid expenses ................................................. 6,947 2,674
--------- ---------
Total current assets ........................... 36,831 9,198
Deferred costs and other assets ................................. 515 429
Property and equipment, net ...................................... 1,461 1,091
Net non-current assets of discontinued operations ................ -- 725
Goodwill and other intangible assets ............................. 30,349 16,541
--------- ---------
Total assets ................................... $ 69,156 $ 27,984
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable and other obligations - current portion ............ $ 3,234 $ 2,065
Notes payable and amounts due to related parties ................. 1,832 1,652
Accounts payable and accrued expenses ............................ 22,933 7,464
Net current liabilities of discontinued operations ............... -- 725
Unearned income .................................................. 20,540 4,049
--------- ---------
Total current liabilities ...................... 48,539 15,955
Notes payable and other obligations .............................. 7,887 161
Notes payable and amounts due to related parties ................. -- 600
--------- ---------
Total liabilities .............................. 56,426 16,716
--------- ---------
Minority interest ................................................ -- 314
--------- ---------
Shareholders' equity:
Common stock, $.04 par value, 200,000,000 shares authorized,
18,593,004 and 13,948,160 issued, respectively ........... 744 558
Additional paid-in capital ................................. 120,557 114,329
Accumulated deficit ........................................ (107,663) (103,025)
Accumulated other comprehensive loss ....................... (276) (276)
Treasury stock at cost (131,214 shares) .................... (632) (632)
--------- ---------
Total shareholders' equity ..................... 12,730 10,954
--------- ---------
Total liabilities and shareholders' equity ..... $ 69,156 $ 27,984
========= =========
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 December 31, Six months ended December 31,
2003 2002 2003 2002
------------ ------------ ------------ ------------
Revenue:
Services ........................................................ $ 35,783 $ 14,064 $ 51,570 $ 29,425
Product sales ................................................... 3,215 2,712 7,021 6,179
------------ ------------ ------------ ------------
Total revenue ........................................... 38,998 16,776 58,591 35,604
------------ ------------ ------------ ------------
Cost of revenue:
Services ........................................................ 32,885 13,024 47,707 27,210
Product sales ................................................... 2,790 2,342 6,174 5,388
------------ ------------ ------------ ------------
Total cost of revenue ................................... 35,675 15,366 53,881 32,598
------------ ------------ ------------ ------------
Gross profit ............................................ 3,323 1,410 4,710 3,006
------------ ------------ ------------ ------------
Selling, general and administrative expenses - compensation
related to issuance (reversal) of stock options ............. (244) -- (133) --
Selling, general and administrative expenses - other expenses
related to issuance of stock warrants ....................... 197 31 197 64
Selling, general and administrative expenses - other ............ 4,311 1,947 6,234 3,939
Provision for bad debts ......................................... 8 2 8 6
Goodwill impairment ............................................. 2,848 -- 2,848 --
Depreciation and amortization ................................... 190 128 319 235
------------ ------------ ------------ ------------
Operating costs and expenses ............................ 7,310 2,108 9,473 4,244
------------ ------------ ------------ ------------
Operating loss .......................................... (3,987) (698) (4,763) (1,238)
Interest expense, net ........................................... 308 94 402 196
Gain on investments, net ........................................ -- (179) (119) (354)
Loss on disposal of assets ...................................... -- 30 -- 30
Other income .................................................... (1) (3) (104) (266)
Equity in earnings of joint ventures ............................ (12) -- (9) --
------------ ------------ ------------ ------------
Loss from continuing operations before minority interest (4,282) (640) (4,933) (844)
Minority interest ............................................... (172) (109) (309) (163)
------------ ------------ ------------ ------------
Loss from continuing operations ......................... (4,110) (531) (4,624) (681)
(Gain) loss from discontinued operations net of minority interest
of $147 and $5, respectively ................................. (362) -- 14 --
------------ ------------ ------------ ------------
Net loss ........................................................ $ (3,748) $ (531) $ (4,638) $ (681)
============ ============ ============ ============
Basic and diluted net loss per share:
Loss from continuing operations ............................. $ (0.23) $ (0.04) $ (0.29) $ (0.05)
Gain from discontinued operations ........................... 0.02 -- -- --
------------ ------------ ------------ ------------
Net loss ................................................ $ (0.21) $ (0.04) $ (0.29) $ (0.05)
============ ============ ============ ============
Weighted average shares outstanding ............................. 17,551,406 12,548,388 15,922,102 12,443,775
============ ============ ============ ============
Weighted average shares outstanding, assuming dilution .......... 17,551,406 12,548,388 15,922,102 12,443,775
============ ============ ============ ============
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)
Six months ended December 31,
2003 2002
------- -------
Net cash used in operating activities ................................. (3,451) (497)
Cash flows from investing activities:
Purchase of property and equipment ............................ (45) (237)
Sale of investments ........................................... 25 425
Investment in joint ventures .................................. (15) --
Sale of assets ................................................ -- 111
Cash paid in connection with business acquisitions, net ....... (240) (50)
------- -------
Net cash provided by (used in) investing activities ........ (275) 249
Cash flows from financing activities:
Notes payable proceeds ........................................ 578 75
Principal debt repayments ..................................... (669) (250)
Net change in line of credit .................................. 266 --
Cash raised through LFSI transaction .......................... -- 274
LFSI private placement sale of common stock ................... -- 412
Sale of RCG common stock ...................................... 4,957 119
------- -------
Net cash provided by financing activities .................. 5,132 630
Net increase in cash and cash equivalents ............................. 1,406 382
Cash and cash equivalents at beginning of period ...................... 836 1,511
------- -------
Cash and cash equivalents at end of period ............................ $ 2,242 $ 1,893
======= =======
Supplemental cash flow information :
Six months ended December 31,
2003 2002
Cash paid during the period for: ------- -------
Interest ......................................................... $ 63 $ 23
Income taxes ..................................................... -- --
Non-cash investing and financing activities:
Common stock issued for acquired business ........................ $ 380 $ --
Note and Service Agreement Obligation issued for acquired business 9,068 --
Fixed assets acquired related to new businesses .................. 644 --
Common stock and warrants issued for conversion of debt .......... 768 --
Common stock issued for conversion of accounts payable ........... --
and acrued expenses ........................................... 112 --
Conveyance of RCG's LFSI common stock for services ............... 119 --
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 condensed consolidated financial statements are unaudited and include the
accounts of RCG Companies Incorporated and its subsidiaries ("RCG" or the
"Company"), substantially all of which are wholly-owned (the "Company"), except
for Lifestyle Innovations, Inc. ("LFSI") which RCG owns approximately 72%. 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. All significant intercompany accounts and
transactions have been eliminated in consolidation. These financial statements
have been prepared in accordance with accounting principles generally accepted
in the United States of America for interim financial information and the
instructions of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by such generally accepted accounting
principles for complete financial statements.
In the opinion of the management of the Company, the unaudited condensed
consolidated financial statements contain all adjustments, consisting only of
normal recurring adjustments, considered necessary for a fair statement of the
results of operations for the interim periods presented, with no material
retroactive adjustments. The results of operations for interim periods are not
indicative of the results that may be expected for a full year due to the
seasonality of the business. These interim unaudited condensed consolidated
financial statements should be read in conjunction with the audited consolidated
financial statements and notes thereto for the year ended June 30, 2003 included
in the Company's Annual Report on Form 10-KSB.
The Company experienced an operating loss from continuing operations of
$4,624,000 during the first six months of fiscal 2004 and used cash from
operations of $3,451,000 during the period. The Company's working capital
deficit of $11,708,000 is substantially due to accounts payable and accrued
expenses of $22,933,000 and unearned income of $20,540,000; these are only
partially offset by $23,576,000 of restricted cash and $6,947,000 of prepaid
expenses. A substantial portion of these amounts are from the Acquired
Businesses (see Note 2) of the travel services business which operate at a
higher volume than RCG has experienced historically. As a result of the
integration of these acquired businesses, operating performance and negative
working capital, the Company is currently exploring additional sources of
liquidity, including debt and equity financing alternatives, 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 in our
investments or operations, (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.
Certain reclassifications have been made to data from the previous period to
conform with the presentation of the current period.
SIGNIFICANT ACCOUNTING POLICIES
RESTRICTED CASH
All cash received from customers in advance of flight departure must be
deposited into escrow accounts in accordance with Department of Transportation
regulations. Withdrawals from such escrow accounts are allowed in order to make
required payments to air carriers at least 15 days in advance of departure.
Hotels may be paid from
6
escrow after air carriers have been paid. Remaining funds are released from
escrow 48 hours after return date. The Company classifies these escrow accounts
as restricted cash. All escrow accounts are maintained in one financial
institution and balances exceed insurable limits.
UNEARNED INCOME AND REVENUE RECOGNITION
Revenue from the sale of tour packages to either travel agents or
directly to passengers is recognized on the departure date of the trip. Direct
air and hotel costs, other related direct costs, and commissions associated with
the tour package are also recognized on the departure date. Cash received in
advance of the departure date is deposited into escrow accounts and recorded as
unearned income.
IMPUTED INTEREST
Long-term obligations that do not state an interest rate are discounted
to net present value using the Company's estimated incremental borrowing rate.
The discount is amortized over the life of the obligation.
STOCK BASED COMPENSATION
In December 2002, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 148, "Accounting
for Stock-Based Compensation - Transition and Disclosure". SFAS 148 amends SFAS
123, "Accounting for Stock-Based Compensation", to provide alternative methods
of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, SFAS 148 amends
the disclosure requirements of SFAS 123 to require more prominent disclosures in
both annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The additional disclosure requirements of SFAS 148 were effective for
fiscal years ending after December 15, 2002. The Company has elected to continue
to follow the intrinsic value method of accounting as prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25"), to account for employee stock options. Under APB 25, no compensation
expense is recognized unless the exercise price of the Company's employee stock
options is less than the market price of the underlying stock on the date of
grant.
The Company's other significant accounting policies are the same as those
applied at June 30, 2003 and disclosed in the Company's audited consolidated
financial statements and notes thereto for the year ended June 30, 2003,
included in the Company's Annual Report on Form 10-KSB.
NOTE 2. ACQUISITIONS
RCG concluded the acquisition of substantially all of the assets and
liabilities of VE Holdings, Inc. ("Vacation Express") and SunTrips, Inc.
("SunTrips") ("the Acquired Companies"), effective October 31, 2003. These
acquired companies were integrated into the Company's existing travel services
business to form its largest operating segment. The Company had previously
provided services to the acquired companies.
The Acquired Companies provide specialized distribution of leisure
travel products and services. Vacation Express based in Atlanta, Georgia sells
air and hotel packages to Mexico and Caribbean destinations and SunTrips, based
in San Jose, California, sells air and hotel packages to Mexico, Dominican
Republic, Costa Rica, Hawaii and the Azores out of Oakland, California and/or
Denver, Colorado.
Under the terms of the asset purchase agreement, FS Tours, Inc. ("FS
Tours") a wholly-owned subsidiary of Flightserv, which is a wholly-owned
subsidiary of RCG, acquired substantially all of the assets and liabilities of
Vacation Express, and FS SunTours, Inc. ("FS SunTours") a wholly-owned
subsidiary of Flightserv, acquired 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 discounted to $5.3 million at
12.00% per annum for imputed interest (the "Promissory Note") from Flightserv,
Inc. ("Flightserv") secured by certain RCG investment holdings. Additionally,
the Acquired Companies entered into a three-year agreement with MyTravel Canada
Holidays, Inc. ("MyTravel Canada"), for certain services, including the
purchasing of hotel accommodations on an exclusive basis. MyTravel Canada will
be paid approximately $4.5 million over three years under this agreement
discounted to $3.8 million at 12.00% per annum for imputed interest (the
"Service Agreement Obligation").
7
The acquisition was accounted for under the purchase method of
accounting in accordance with Statement of Financial Accounting Standards
("SFAS") No.141 "Business Combinations". The purchase price was allocated to the
net assets acquired, including the liabilities assumed as of October 31, 2003,
based upon their estimated fair values as of that date with the remainder being
recorded as goodwill. The consideration was allocated as follows (in thousands):
Current assets $ 25,115
Property and equipment 629
Goodwill 15,588
Other intangible assets 702
--------
Total assets acquired 42,034
Current liabilities 32,646
--------
Net assets acquired $ 9,388
========
On November 5, 2003, the technology solutions business completed the
acquisition of SchoolWorld Software, a Pittsburgh, PA based educational software
company. The consideration was allocated as follows (in thousands):
Property and equipment $ 14
Goodwill and other intangible assets 405
--------
Total assets acquired $ 419
========
Operations of the acquired businesses are included in the condensed consolidated
financial statements from the date of acquisition. The following sets forth pro
forma consolidated financial information as if the acquisitions had taken place
at the beginning of the periods presented (in thousands, except per share data):
Three months Ended December 31, Six months Ended December 31,
------------------------------- -----------------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Revenues $ 48,431 $ 43,232 $ 113,295 $ 105,610
Net loss $ (5,149) $ (6,378) $ (15,920) $ (9,816)
Basic and diluted loss per share $ (0.29) $ (0.51) $ (1.00) $ (0.79)
The proforma information indicates that the losses for all periods presented
would have been significantly higher had the businesses been acquired at the
beginning of the periods presented. The additional proforma losses include the
months of July through October of 2003 and the six months of July to December of
2002. Prior to the dates of acquisition, the acquired companies were significant
customers of the travel business segment. The acquisition of the travel
businesses was to more vertically integrate the travel business segment. It is
the belief of management that the acquisition will result in the Company being
able to obtain better purchasing power and to increase margins in the segment.
Management believes that it will be able to operate the acquired business at a
lower cost level and accordingly the losses presented on a proforma basis are
not indicative of what they would have been had the Company acquired the
business at an earlier date and been able to influence the operating results
related thereto.
In connection with the acquisition, the Company paid a premium over the fair
value of the assets acquired ("goodwill"). It is management's belief that it
will be successful in implementing a strategy to improve operating performance
of the travel business segment. Inasmuch as the acquisition was effective
October 31, 2003, significant time has not elapsed to indicate whether such
plans will be successful. As a result, the Company has not, at December 31,
2003, performed an impairment test with respect to the acquired goodwill. In
future periods, the Company will be monitoring the results of the acquisition to
determine if its plans are achieved. If the Company is unsuccessful in reversing
the losses of the acquired businesses, it could have significant impacts on the
company, including but not limited to the recoverability of the carrying amount
of goodwill.
NOTE 3. DISCONTINUED OPERATIONS
In March 2003 LFSI completed the acquisition of FutureSmart Systems, Inc.
("FutureSmart"), a manufacturer and distributor of structured wiring and home
networking distribution panels. In May 2003 the Board of Directors approved a
plan to dispose of FutureSmart. On October 17, 2003 LFSI completed the sale of
all of the assets of FutureSmart for $1,500,000. The $1,500,000 was allocated to
the secured creditors of FutureSmart, $200,000 to LFSI and $1,300,000 to the
8
other secured creditors. Thirty percent ($450,000) was paid at Closing pro rata
to the secured creditors ($60,000 to LFSI) and the remainder of $1,050,000 was
placed in escrow. The escrowed amount is subject to various adjustments 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.
While there are certain adjustments that may result from certain contingencies,
the structure of the agreements are such that any adjustments will effect the
consideration to the secured creditiors and will not impact the proceeds to the
Company. Accordingly, the Company has recognized the gain in the second quarter
of 2003. The gain from discontinued operations reflects a gain on the disposal
of these net assets of $629,510, net of operating losses of the discontinued
operations and net of the minority interest share of such net gain In the second
quarter of 2003.
NOTE 4. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets consists of the following (in thousands):
Travel Technology Home
Services Solutions Technology Corporate Total
-------- -------- -------- -------- --------
Balance at June 30, 2003 $ 939 $ 7,702 $ 6,900 $ 1,000 $ 16,541
Goodwill impairment (2,848) (2,848)
Goodwill and other intangible assets acquired
during period, net of $39 mortization 16,251 405 -- 16,656
-------- -------- -------- -------- --------
Balance at December 31, 2003 $ 17,190 $ 8,107 $ 4,052 $ 1,000 $ 30,349
======== ======== ======== ======== ========
During the quarter ended December 31, 2003, LFSI closed its Charlotte
location and its CEO resigned. LFSI had revenues that were lower in the period
ended December 31, 2003 than comparable periods of the preceding year by
$441,000 for the quarter and $501,000 for the six month period. These factors,
among others, caused management of RCG to evaluate its recorded goodwill
attributable to LFSI as of December 31, 2003. As a result of this evaluation,
RCG recorded an impairment of goodwill of $2,848,000 during the quarter ended
December 31, 2003.
9
NOTE 5. NOTES PAYABLE AND OTHER OBLIGATIONS
Notes payable and other obligations consists of the following (tabular amounts
in thousands):
December 31, June 30,
2003 2003
-------- --------
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 July 27, 2003 and unsecured (2) 200 250
Revolving credit facility - secured by a portion of the accounts receivable of the
technology solutions business 540 274
Capital lease obligation at 12% due in monthly installments of $590 through September 2004 2 5
Capital lease obligation at 8.5% due in monthly installments of $1,007 through November 2005 22 26
Note payable - unsecured and due on demand (3) -- 80
Service agreement obligation - with interest imputed at 12% and unsecured (4) 3,692 --
Note payable - with interest imputed at 12%, secured by certain RCG investment holdings (5) 5,289 --
Note payable - due on demand bearing interest at 10% secured by certain real estate 35 35
Note payable - due October 16, 2003 with interest at 12.59% (6) 295 --
Note payable - due in August 2003 with interest at 12% and collateralized by certain
home technology accounts receivable and inventory (6,7) 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
Note payable - due January 1, 2004 with interest at 12% and unsecured 145 225
Note payable - due on demand with interest at 36% and collateralized by 25,000 LFSI shares (8) 70 --
-------- --------
11,121 2,226
Less current maturities, including demand notes (3,234) (2,065)
-------- --------
Long-term portion $ 7,887 $ 161
======== ========
- ----------
(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 two debts referred to above,
plus accrued interest, were converted into RCG Common Stock on August 21,
2003 in accordance with above terms.
(2) On October 1, 2003 and November 25, 2003, $25,000 each of principal was
paid. The Company currently is negotiating with the debt holder to extend
the term or agree on a payment schedule.
(3) RCG repaid in October, 2003.
(4) On October 31, 2003, Flightserv agreed to pay $4.5 million to MyTravel
Canada for certain services over a 3 year period beginning 11/1/03.
(5) On October 31, 2003, Flightserv purchased 2 businesses (see Note 2) for a
$10 million non-interest bearing 7 year note. Payments commence quarterly
beginning June 30, 2004.
(6) The home technology company currently is negotiating with the debt holder
to extend the term or agree on a payment schedule.
(7) 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.
(8) 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.
10
NOTE 6. NOTES PAYABLE AND AMOUNTS DUE TO RELATED PARTIES
Notes payable and amounts due to related parties consists of the following
(tabular amounts in thousands):
December 31, June 30,
2003 2003
------- -------
Notes payable - due in August 2003 with interest imputed at 8% and unsecured (1) $ -- $ 267
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 (2) 750 750
Note payable - unsecured and due on demand (3) -- 5
Note payable - due on demand bearing interest at 8% 100 100
Note payable - unsecured and due on demand 18 --
Note payable - due in August 2003 with interest at 12% and unsecured (4) 397 292
Other advances 67 338
Note payable - unsecured and due on demand bearing interest at 6% 500 500
------- -------
1,832 2,252
Less current maturities, including demand notes (1,832) (1,652)
------- -------
Long-term portion $ -- $ 600
======= =======
- ----------
(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. This debt, plus accrued
interest, was converted into RCG Common Stock on August 21, 2003 in
accordance with above terms.
(2) 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 to the market. The Company can force the debt holder to
convert to stock at $7.00 per share under certain conditions. Discussions
have commenced with the debt holder regarding the December 31, 2003
delinquent payment.
(3) RCG repaid in October, 2003.
(4) The home technology company currently is negotiating with the debt holder
to extend the term or agree on a payment schedule.
NOTE 7. COMMON STOCK AND PAID IN CAPITAL
The following table summarizes the Company's stock and paid in capital activity
for the six months ended December 31, 2003 (in thousands, except for share
amounts):
Accumulated
Common Stock Additional Other
-------------------------- Paid-In Accumulated Comprehensive
Shares Amounts Capital Deficit Loss
-----------------------------------------------------------------------
Balance at June 30, 2003 13,948,160 $ 558 $ 114,329 $ (103,025) $ (276)
=========== =========== =========== =========== ===========
Comprehensive loss:
Net loss September 30, 2003 -- -- -- (890) --
Sale of Common Stock at $.25 per share to an
accredited investor 200,000 8 42 -- --
Sale of Common Stock at $1.12 per share to
seven accredited investors 837,502 34 904 -- --
Conversion of three debt holders and one
creditor 699,103 28 852 -- --
-----------------------------------------------------------------------
Balance at September 30, 2003 15,684,765 $ 628 $ 116,127 $ (103,915) $ (276)
=========== =========== =========== =========== ===========
Comprehensive loss:
Net loss December 31, 2003 (3,748)
Issuance of 230,000 Common Stock Warrants
consideration of professional services 197
Sale of Common Stock at $1.12 per share to
four accredited investors 233,927 9 253
Sale of Common Stock and Warrants at $1.60
per unit to ten accredited investors 2,500,000 100 3,607
Issuance of Common Stock at $2.18 per share
for SchoolWorld Software purchase 174,312 7 373
-----------------------------------------------------------------------
Balance at December 31, 2003 18,593,004 $ 744 $ 120,557 $ (107,663) $ (276)
=========== =========== =========== =========== ===========
Treasury
Stock Total
--------------------------
Balance at June 30, 2003 $ (632) $ 10,954
=========== ===========
Comprehensive loss:
Net loss September 30, 2003 -- (890)
Sale of Common Stock at $.25 per share to an
accredited investor -- 50
Sale of Common Stock at $1.12 per share to
seven accredited investors -- 938
Conversion of three debt holders and one
creditor -- 880
--------------------------
Balance at September 30, 2003 $ (632) $ 11,932
=========== ===========
Comprehensive loss:
Net loss December 31, 2003 (3,748)
Issuance of 230,000 Common Stock Warrants
consideration of professional services 197
Sale of Common Stock at $1.12 per share to
four accredited investors 262
Sale of Common Stock and Warrants at $1.60
per unit to ten accredited investors 3,707
Issuance of Common Stock at $2.18 per share
for SchoolWorld Software purchase 380
--------------------------
Balance at December 31, 2003 $ (632) $ 12,730
=========== ===========
11
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.
The Company issued 2,500,000 warrants at an exercise price of $2.44 in
conjunction with the $1.60 Common Stock Private Placement. The warrants are
exercisable after the six month anniversary of the closing date, October 31,
2003. The Company used the Black-Scholes Model to allocate $1.13 to the stock
and $.47 to the warrant.
The Company also issued 30,000 warrants at an exercise price of $.50 in
consideration for professional services and 200,000 warrants (100,000 with an
exercise price of $1.60 and 100,000 with an exercise price of $1.85) to G. David
Gordon, a related party, in consideration of legal fees. The Company used the
Black-Scholes Model to record expenses related to these services in the amount
of $197,000.
LFSI entered into an employment agreement with an executive in March 2003 that
involved the issuance of incentive and non-incentive stock options. The
executive terminated her employment in October 2003 as a result of LFSI's
disposal of FutureSmart. LFSI had accrued compensation expense for the issuance
of the options during the vesting period. Upon her termination of employment,
the compensation expense related to all unvested options recorded in previous
periods was adjusted by decreasing compensation expense in the period of
forfeiture. This resulted in the recognition of income for the three and six
months ended December 31, 2003 of 244,000 and $133,000, respectively.
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 (in thousands, except per share amounts):
For the three months For the six months
ended December 31, ended December 31,
------------------- --------------------
2003 2002 2003 2002
------- ------- ------- --------
Net loss, as reported $(3,748) $ (531) $(4,638) $ (681)
Stock-based employee compensation credit
included in reported net loss (176) -- (96) --
------- ------- ------- --------
(3,924) (531) (4,734) (681)
Deduct: Total stock-based compensation expense
determined under FAS 123 for all awards 176 (474) (203) (474)
------- ------- ------- --------
Pro forma net loss $(3,748) $(1,005) $(4,937) $ (1,155)
======= ======= ======= ========
Earnings per share:
Basic and diluted loss per share, as reported $ (.21) $ (0.04) $ (0.29) $ (0.05)
======= ======= ======= ========
Basic and diluted loss per share, pro forma $ (.21) $ (0.08) $ (0.31) $ (0.09)
======= ======= ======= ========
The above items are presented net of minority interest.
NOTE 9. 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 LFSI. 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 December 31,
2003, $18,000. This amount is the result of loans made to LFSI by Mr. Pruitt in
fiscal years 2003 and 2004. As of December 31, 2003, outstanding accrued
interest on these obligations was $10,000.
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 Carolinas
owed the Company and its subsidiaries $43,000 at December 31, 2003. The
franchise location in Maryland owed the Company and its subsidiaries $5,000 at
December 31, 2003.
During fiscal year 2002, Mr. Pruitt loaned money to the Company. The
note in the amount of $5,000 was repaid on October 2, 2003.
Mr. G. David Gordon, a Company Stockholder, has an ownership interest
in six LFSI franchises. 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,
12
Wilmington, and Greensboro, NC. These six franchise locations collectively owed
LFSI and its subsidiaries $130,000 at December 31, 2003.
At December 31, 2003, total debt outstanding to Mr. Gordon, his spouse,
and a company in which he is the president and a 65% shareholder, is $1,714,000
which is included in notes payable to related parties on the Company's
Consolidated Balance Sheet. The loans, which arose during fiscal 2002 through
fiscal 2004, bear interest at 12%. As of December 31, 2003, outstanding accrued
interest on these obligations was $72,000. 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. The
remaining $964,000 is due from LFSI and its subsidiaries.
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 $82,000 at
December 31, 2003. This amount is included in the $130,000 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 $310,000 as of December 31, 2003.
The Company owns an equity interest in a privately held company in
which the executive vice president of the Company's 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
investments on the Company's Consolidated Balance Sheet.
13
NOTE 10. BUSINESS SEGMENT INFORMATION
Information related to business segments is as follows (in thousands):
Three months ended December 31, 2003:
Travel Technology Home
Services Solutions Technology Corporate Total
-------- -------- -------- -------- --------
Revenue $ 35,662 $ 3,219 $ 117 $ -- $ 38,998
Income (loss) from continuing operations (567) (161) (2,720) (662) (4,110)
Identifiable assets 52,201 10,360 4,825 1,770 69,156
Capital expenditures 4 8 -- -- 12
Depreciation and amortization 103 53 30 4 190
Three months ended December 31, 2002:
Travel Technology Home
Services Solutions Technology Corporate Total
-------- -------- -------- -------- --------
Revenue $ 13,732 $ 2,486 $ 558 $ -- $ 16,776
Income (loss) from continuing operations 98 (80) (376) (173) (531)
Identifiable assets 5,021 10,439 10,350 1,582 27,392
Capital expenditures 129 24 8 -- 161
Depreciation and amortization 25 63 38 2 128
Six months ended December 31, 2003:
Travel Technology Home
Services Solutions Technology Corporate Total
-------- -------- -------- -------- --------
Revenue $ 51,240 $ 6,754 $ 597 $ -- $ 58,591
Income (loss) from continuing operations (410) (170) (3,078) (966) (4,624)
Identifiable assets 52,201 10,360 4,825 1,770 69,156
Capital expenditures 19 18 8 -- 45
Depreciation and amortization 140 114 57 8 319
Six months ended December 31, 2002:
Travel Technology Home
Services Solutions Technology Corporate Total
-------- -------- -------- -------- --------
Revenue $ 28,801 $ 5,705 $ 1,098 $ -- $ 35,604
Income (loss) from continuing operations 726 (107) (884) (416) (681)
Identifiable assets 5,021 10,439 10,350 1,582 27,392
Capital expenditures 132 63 42 -- 237
Depreciation and amortization 43 122 64 6 235
o * Prior information for the Call Center segment is now incorporated with the
Travel Services segment
NOTE 11: SUBSEQUENT EVENT
On January 21, 2004 the Board of Directors approved the execution of a
consulting agreement to provide investment relations and public relations
services. The Company will issue 440,000 shares of common stock upon execution
of the agreement and will pay a monthly consulting fee of $6,000. The Company
will incur an expense of approximately $541,000 in the fiscal third quarter of
2004 in connection with the issuance of the common stock.
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.
14
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 travel services business is seeking to recover through litigation
approximately $360,000 in unpaid aviation fuel from Southeast Airlines, Inc. In
relation to the above, Globe Ground North America is seeking $360,000 from
Flightfuel, Inc.
Guarantee Obligation
The Company's Travel Services segment has certain guarantees with an
airline provider that agrees to a minimum number of hours during each program
year and is required to pay any shortage to the provider. The segment does not
anticipate a shortage and accordingly no amount has been accrued.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS:
Overview
The following table summarizes results of operations for the three and six
months ended December 31, 2003 and 2002 (in thousands):
Three Months Ended Three Months Ended Six Months Ended Six Months Ended
December 31, 2003 December 31, 2002 December 31, 2003 December 31, 2002
----------------- ----------------- ----------------- -----------------
% of % of % of % of
Revenue Revenue Revenue Revenue
------- ------- ------- -------
Revenue:
Services $ 35,783 91.8% $ 14,064 83.8% $ 51,570 88.0% $ 29,425 82.6%
Product sales 3,215 8.2% 2,712 16.2% 7,021 12.0% 6,179 17.4%
----------------- ----------------- ----------------- -----------------
Total revenue 38,998 100.0% 16,776 100.0% 58,591 100.0% 35,604 100.0%
----------------- ----------------- ----------------- -----------------
Cost of revenue:
Services 32,885 84.3% 13,024 77.6% 47,707 81.4% 27,210 76.4%
Product sales 2,790 7.2% 2,342 14.0% 6,174 10.5% 5,388 15.1%
----------------- ----------------- ----------------- -----------------
Total cost of revenue 35,675 91.5% 15,366 91.6% 53,881 92.0% 32,598 91.6%
----------------- ----------------- ----------------- -----------------
Gross profit 3,323 8.5% 1,410 8.4% 4,710 8.0% 3,006 8.4%
----------------- ----------------- ----------------- -----------------
Selling, general and administrative expenses -
compensation related to issuance (reversal)
of stock options and warrants (244) -0.6% -- 0.0% (133) -0.2% -- 0.0%
Selling, general and administrative expenses -
other expenses related to issuance of stock
options and warrants 197 0.5% 31 0.2% 197 0.3% 64 0.2%
Selling, general and administrative expenses -
other 4,311 11.1% 1,947 11.6% 6,234 10.6% 3,939 11.1%
Provision for bad debts 8 0.0% 2 0.0% 8 0.0% 6 0.0%
Goodwill impairment 2,848 7.3% -- 0.0% 2,848 4.9% -- 0.0%
Depreciation and amortization 190 0.5% 128 0.8% 319 0.5% 235 0.7%
----------------- ----------------- ----------------- -----------------
Operating costs and expenses 7,310 18.7% 2,108 12.6% 9,473 16.2% 4,244 11.9%
----------------- ----------------- ----------------- -----------------
Operating loss (3,987) -10.2% (698) -4.2% (4,763) -8.1% (1,238) -3.5%
Interest expense, net 308 0.8% 94 0.6% 402 0.7% 196 0.6%
Gain on investments, net -- 0.0% (179) -1.1% (119) -0.2% (354) -1.0%
Loss on disposal of assets -- 0.0% 30 0.2% -- 0.0% 30 0.1%
Other income (1) 0.0% (3) 0.0% (104) -0.2 (266) -0.7%
Equity in earnings of joint ventures (12) 0.0% -- 0.0% (9) 0.0% -- 0.0%
----------------- ----------------- ----------------- -----------------
Loss from continuing operations before
minority interest (4,282) -11.0% (640) -3.8% (4,933) -8.4% (844) -2.4%
Minority interest (172) -0.4% (109) -0.6 (309) -0.5% (163) -0.5%
----------------- ----------------- ----------------- -----------------
Loss from continuing operations (4,110) -10.5% (531) -3.2 (4,624) -7.9% (681) -1.9%
(Gain) loss on discontinued operations net of
minority interest (362) -0.9% -- 0.0% 14 0.0% -- 0.0%
----------------- ----------------- ----------------- -----------------
Net loss $ (3,748) -9.6% $ (531) -3.2% $ (4,638) -7.9% $ (681) -1.9%
================= ================= ================= =================
15
Six Month Periods Ended December 31, 2003 and December 31, 2002
- ---------------------------------------------------------------
Effective October 31, 2003, the Company's travel services subsidiary concluded
the acquisition of substantially all of the assets and liabilities, except for
certain excluded items, of Vacation Express and SunTrips. Also effective
November 5, 2003, the Company's technology solutions subsidiary completed the
acquisition of substantially all of the assets and liabilities, except for
certain excluded items, of SchoolWorld. Accordingly the operating results of
these subsidiaries (the "Acquired Businesses") have been included in the
reported results of the Company subsequent to that date. The results of the
company, excluding the results of the Acquired Businesses, are referred to
herein as the existing business (the "Existing Business"). Refer to Note 2 to
the financial statements for more detail on the specifics of the transactions.
The Company's consolidated revenues for the six months ended December 31, 2003
were $58,591,000 compared to $35,604,000 in the same period a year ago. The
Acquired Businesses accounted for $23,118,000 of the increase of sales in the
period ending December 31, 2003. The revenues of the Existing Business decreased
$131,000 from the same period a year ago.
Gross profit for the six months ended December 31, 2003 was $4,710,000, compared
to $3,006,000 for the same period a year ago, an increase of $1,704,000 or
56.7%. The increase is primarily attributable to the Acquired Businesses. Gross
profit, as a percentage of sales declined to 8.0% for the six months ended
December 31, 2003 from 8.4% for the same period a year ago. Lower gross margins
in the Travel Services and Technology Solutions replaced higher gross margins in
the Home Technology segment.
In the six months ended December 31, 2003, the Company reported non-cash income
of $133,000 related to the forfeiture of previously issued options and expense
of $197,000 related to the issuance of warrants for services. In the six months
ended December 31, 2002, the Company reported non-cash expense of $64,000
related to warrants issued for the settlement of contracts with two service
providers.
Selling, general and administrative expenses-other ("SG&A-other") in the six
months ended December 31, 2003 was $6,234,000 compared to $3,939,000 in the
comparable period a year ago. The primary reason for the increase is the
addition of the SG&A-other of the Acquired Businesses. SG&A-other was 10.6% of
revenue in the six months ended December 31, 2003 compared to 11.1% of revenue
in the same period a year ago.
The Company's depreciation and amortization expense in the six month period
ended December 31, 2003 was $319,000 compared to $235,000 in the same period a
year ago. The increase is primarily due to fixed asset additions of the Acquired
Businesses.
In the six month period ended December 31, 2003, the Company incurred $402,000
of net interest expense related to its debt portfolio compared to $196,000 in
the same period a year ago. The increase in interest expense is primarily due to
the new debt related to the travel business.
In the six months ended December 31, 2003, the Company recognized a gain on
investments of $119,000 relating to the conveyance of LFSI stock for services.
In the six months ended December 31, 2002, the Company recorded a net gain on
investments of $354,000 of which $208,000 relates to Company's sale of LFSI
stock.
In the six months ended December 31, 2003, the Company recorded other income of
$104,000 compared to $266,000 of other income in the same period a year ago. The
Company's technology solutions business recorded a $100,000 amount to other
income related to a prior project in the six month period ended December 31,
2003. The Company's travel services business received $263,000 in grant proceeds
in the six months ended December 31, 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.
16
Three Month Periods Ended December 31, 2003 and December 31, 2002
- -----------------------------------------------------------------
The Company's consolidated revenues for the quarter ended December 31, 2003 were
$38,998,000 compared to $16,776,000 in the same period a year ago. The Acquired
Businesses accounted for $23,118,000 of the increase in the period ending
December 31, 2003. The revenues of the Existing Business decreased $896,000 from
the same period a year ago, primarily from a decrease of $523,000 in the Travel
Services segment and a decrease of $441,000 from the Home Technology segment.
Gross profit for the three months ended December 31, 2003 was $3,323,000,
compared to $1,410,000 for the same period a year ago, an increase of $1,913,000
or 135.67%. The increase is primarily attributable to the Acquired Businesses.
Gross profit, as a percentage of sales, increased slightly to 8.5 for the six
months ended December 31, 2003 from 8.4% for the same period a year ago, which
is relatively unchanged.
In the three months ended December 31, 2003, the Company reported non-cash
income of $244,000 related to the forfeiture of previously issued options and
expense of $197,000 related to the issuance of warrants for services. In the six
months ended December 31, 2002, the Company reported non-cash expense of $31,000
related to warrants issued for the settlement of contracts with two service
providers.
Selling, general and administrative expenses-other ("SG&A-other") in the quarter
ended December 31, 2003 was $4,311,000 compared to $1,947,000 in the comparable
period a year ago. The primary reason for the increase is the addition of the
SG&A-other of the Acquired Businesses. SG&A-other was 11.1% of revenue in the
quarter ended December 31, 2003 compared to 11.6% of revenue in the same period
a year ago.
The Company's depreciation and amortization expense in the quarter ended
December 31, 2003 was $190,000 compared to $128,000 in the same period a year
ago. The increase is primarily due to fixed asset additions of the Acquired
Businesses.
In the quarter ended December 31, 2003, the Company incurred $308,000 of net
interest expense related to its debt portfolio compared to $94,000 in the same
period a year ago. The increase in interest expense is primarily related to the
Acquired Businesses.
In the quarter ended December 31, 2003, the Company did not recognize a gain on
investments. In the quarter ended December 31, 2002, the Company recognized a
net gain on investments of $179,000, $233,000 of which related to a gain on the
Company's sale of LFSI restricted stock, and $54,000 related to a loss on
non-cash market adjustments of common stock purchase warrants.
Minority interest represents the minority shareholders' share of losses of LFSI.
17
Continuing Operations of Business Segments
The following table summarizes results of continuing operations by business
segment for the three and six months ended December 31, 2003 and 2002 (in
thousands):
Three Months Ended December 31, 2003 Three Months Ended December 31, 2002
----------------------------------- ------------------------------------
Gross Income Gross Income
Revenue Profit (Loss) Revenues Profit (Loss)
-------- -------- -------- -------- -------- --------
Travel Services $ 35,662 $ 2,864 $ (567) $ 13,732 $ 822 $ 98
Home Technology 117 35 (2,720) 558 349 (376)
Technology Solutions 3,219 424 (161) 2,486 239 (80)
Corporate -- -- (662) -- -- (173)
--------------------------------- ---------------------------------
$ 38,998 $ 3,323 $ (4,110) $ 16,776 $ 1,410 $ (531)
======== ======== ======== ======== ======== ========
Six Months Ended December 31, 2003 Six Months Ended December 31, 2002
---------------------------------- ----------------------------------
Gross Income Gross Income
Revenue Profit (Loss) Revenues Profit (Loss)
-------- -------- -------- -------- -------- --------
Travel Services $ 51,240 $ 3,697 $ (410) $ 28,801 $ 1,819 $ 726
Home Technology 597 154 (3,078) 1,098 765 (884)
Technology Solutions 6,754 859 (170) 5,705 422 (107)
Corporate -- -- (966) -- -- (416)
--------------------------------- ---------------------------------
$ 58,591 $ 4,710 $ (4,624) $ 35,604 $ 3,006 $ (681)
======== ======== ======== ======== ======== ========
* Prior information for the Call Center segment is now incorporated with the
Travel Services segment
Travel Services
The Company's travel services business generated revenues in the second quarter
and first half of fiscal year 2004 of $35,662,000 and $51,240,000 compared to
$13,732,000 and $28,801,000 in the same periods a year ago. The Acquired
Businesses accounted for $22,439,000 of the increase for both the second quarter
and the first half of fiscal year 2004, while the Existing Business revenues
declined slightly. The decrease was due to a reduction in three tour programs in
the second quarter of fiscal 2004, which was offset by an increase in the first
quarter of fiscal year 2004 due to revenues related to Suntrips.
Gross profit for the Company's travel services business in the second quarter
and first half of fiscal year 2004 were $2,864,000 and $3,697,000 compared to a
gross profit of $822,000 and $1,819,000 in the same periods a year ago. The
gross profit percentage increased from 5.9% to 8% for the second quarter and
from 6.3% to 7.2% for the 6 months ended December 31, 2003 when compared to the
same periods a year ago.
This business generated losses in the second quarter and first half of fiscal
year 2004 of $567,000 and $410,000 compared with income of $98,000 and $726,000
in the same periods a year ago.
Home Technology
Our home technology business, LFSI, a separate publicly traded company of which
the Company owns approximately 72% of the outstanding common stock, generated
revenues in the second quarter and first half of fiscal year 2004 of $117,000
and $597,000 compared to $558,000 and $1,098,000 in the same periods a year ago.
During the quarter ended December 31, 2003, LFSI closed its Charlotte location,
had a significant decline in its
18
Atlanta location, and did not have any sales of franchises. All these factors
caused the significant decline in both periods of fiscal year 2004 compared to
fiscal year 2003.
Gross profit for the Company's home technology segment in the second quarter and
first half of fiscal year 2004 were $35,000 and $154,000 compared to a gross
profit of $349,000 and $765,000 in the same periods a year ago. The gross profit
percentage decreased significantly to 25.8% from 69.7% for the first six months
of fiscal 2004 compared to the same period a year ago. The same factors in the
preceding paragraph that caused the decrease in revenue contributed to the
decrease in gross profit and gross profit percentage.
This business generated losses in the second quarter and first half of fiscal
year 2004 of $2,720,000 and $3,078,000 compared with losses of $376,000 and
$884,000 in the same periods a year ago.
The factors mentioned above, among others, caused management of RCG to evaluate
its recorded goodwill attributable to LFSI as of December 31, 2003. As a result
of this evaluation, RCG recorded an impairment of goodwill of $2,848,000 during
the quarter ended December 31, 2003. The officers and management of LFSI are in
the process of developing a new business plan and securing additional funding.
Technology Solutions
The Company's technology solutions business generated revenues in the second
quarter and first half of fiscal year 2004 of $3,219,000 and $6,754,000 compared
to $2,486,000 and $5,705,000 in the same periods a year ago. The Acquired
Business accounted for $679,000 of the increase for both the second quarter and
the first half of fiscal year 2004. The Existing Business generated an increase
in revenues for the six months ended December 31, 2003 of approximately $370,000
due to an increase in school budgets compared to the prior year.
Gross profit for the Company's technology solutions business in the second
quarter and first half of fiscal year 2004 were $424,000 and $859,000 compared
to a gross profit of $239,000 and $422,000 in the same periods a year ago. The
gross profit percentage increased significantly from 7.4% to 12.7% for the first
six months of fiscal 2004 compared to the same period a year ago. This increase
was due to a higher gross margin on the Acquired Business and a recovery to
normal margins aided by a decrease in costs because of dealing directly with
manufacturers on targeted sales opportunities.
This business generated losses in the second quarter and first half of fiscal
year 2004 of $161,000 and $170,000 compared with losses of $80,000 and $107,000
in the same periods a year ago. The increase in losses is primarily from costs
incurred integrating the new acquisition as well as interest expense related to
a line of credit that was not in place during the six month period ending
December 31, 2002.
Corporate
Corporate incurred losses in the second quarter and first half of fiscal year
2004 of $662,000 and $966,000 compared with losses of $173,000 and $416,000 in
the same periods a year ago. The increase in loss is due to increases in
insurance, public relations, legal fees, and salaries and benefits as well as
less of a gain from investments in the current fiscal year.
Seasonality
The Company experiences significant seasonality in its travel services and
technology solutions businesses. The seasonality in the 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
19
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 Travel Services
segment has certain guarantees with an airline provider that agrees to a minimum
number of hours during each program year and is required to pay any shortage to
the provider. The segment does not anticipate a shortage and accordingly no
amount has been accrued.
Liquidity and Capital Resources
The Company's net loss for the six months ended December 31, 2003 of $4,638,000,
was offset by an increase to shareholders' equity related to the sale of Common
Stock and Warrants, with net proceeds of $4,957,000, the issuance of Warrants
for legal fees and other services valued at $197,000, the issuance of Company
Stock of $380,000 for a business acquisition, and debt and accounts payable
conversions totaling $880,000, resulting in a net increase in shareholders'
equity of $1,776,000 for the six months ended December 31, 2003.
Minority interest decreased mainly due to the minority shareholders' portion of
LFSI's losses of $314,000.
For the six months ended December 31, 2003, operations used $3,451,000 of cash
primarily due to the travel services use of cash in the scheduling of flights.
For the six months ended December 31, 2003, net cash used by investing
activities was $275,000 due primarily to business acquisitions. For the six
months ended December 31, 2003, net cash provided by financing activities was
$5,132,000 due primarily to the Company receiving $4,957,000 through the sale of
the Company's Common Stock. At December 31, 2003, the Company had a working
capital deficit of $11,274,000. At December 31, 2003 the Company held cash and
cash equivalents of $2,242,000 and investments of $392,000.
The Company experienced an operating loss from continuing operations of
$4,624,000 during the first six months of fiscal 2004. The Company's working
capital deficit of $11,274,000 is substantially due to accounts payable and
accrued expenses of $22,499,000 and unearned income of $20,540,000; these are
only partially offset by $23,576,000 of restricted cash and $6,947,000 of
prepaid expenses. A substantial portion of these amounts are from the Acquired
Businesses of the travel services segment which operate at higher dollar volume
than RCG has experienced historically. The Company is currently exploring
additional sources of liquidity, including debt and equity financing
alternatives, 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 or operations, (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.
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.
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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 as
of the end of the period, 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.
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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 travel services business is seeking to recover through litigation
approximately $360,000 in unpaid aviation fuel from Southeast Airlines, Inc. In
conjunction with the preceding, Globe Ground North America is seeking to recover
through litigation approximately $360,000 from Flightfuel, Inc.
ITEM 2. CHANGES IN SECURITIES
Common Stock
Issued and Outstanding
----------------------
Balance at September 30, 2003 15,684,765
Private placement at $1.60 per share to ten accredited investors 2,500,000
Private placement at $1.12 per share to four accredited investors 233,927
Private placement at $2.18 per share for SchoolWorld purchase 174,312
----------
Balance at December 31, 2003 18,593,004
==========
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.
22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIY HOLDERS
(a) The Annual Meeting of Stockholders was held on November 14, 2003.
(b) All Director nominees were elected.
(c) The proposals submitted to the vote of stockholders and the
results of the votes were as follows:
Broker
Election of Directors For Against Withheld Abstained Non-Votes
- ---------------------------------------------------------------------------------------------
Jeffery F. Willmott 10,376,375 -- 2,784 -- --
Michael D. Pruitt 10,376,304 -- 2,854 -- --
Dr. James Verbrugge 10,376,304 -- 2,855 -- --
P. Roger Byer 10,376,374 -- 2,785 -- --
To change the Company's
name from "eResource
Capital Group, Inc." to
"RCG Companies
Incorporated" 10,377,603 536 1,020 -- --
Ratification of the
appointment of Crisp
Hugh Evans, LLP as the
Company's independent
accountants 10,377,739 465 -- 955 --
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Certification of Principal Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 Certification
of Principal Financial Officer pursuant to
31.2 Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Principal Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Principal Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
(b) Financial Reports on Form 8-K and 8-K/A
(i) The Company filed the following reports on Form 8-K and 8-K/A with the
Securities and Exchange Commission ("SEC") during the quarter ended December
31, 2003:
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(a) on October 16, 2003 filed a report containing a press release relating
to financial results for fiscal year ended June, 30 2003;
(b) on October 20, 2003 filed a report containing information on the Asset
Purchase of "Vacation Express" and "Suntrips"; and
(c) on November 17, 2003 filed a report containing information on the
"Stock Purchase Agreement" and Common Stock Purchase Agreement" for
the funding of the Asset Purchase referred to in (b) above.
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: February 20, 2004 By: /s/ Michael D. Pruitt
------------------------------------------
Michael D. Pruitt
President and Chief Executive Officer
(Principal executive officer and principal
financial officer)
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