UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended June 30, 2004 Commission file number 1-8662
RCG Companies Incorporated
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(Exact name of registrant as specified in its charter)
DELAWARE 23-2265039
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(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
6836 MORRISON BLVD, SUITE 200, CHARLOTTE, NC 28211-2668
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number (704) 366-5054
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
Common Stock, par value, $0.04 American Stock Exchange
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Securities registered under Section 12(g) of the Exchange Act: NONE
Indicate by check mark 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 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES |X| NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K, Section 229.405 of this chapter, is not contained herein, and
will not be contained to the best of registrant's knowledge, in definitive Proxy
or information statements incorporated by reference in Part III of this Form
10-K or any amendments to this Form 10-K.
YES |X| NO [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12 b-2). YES [ ] NO |X|
As of December 31, 2003, which was the last business day of the registrant's
most recently completed second quarter, 18,461,790 common shares were
outstanding, and the aggregate market value of the common shares (based upon the
closing price of these shares on the American Stock Exchange) held by
nonaffiliates was approximately $33 million. Shares of Common Stock held,
directly or indirectly, by each director and executive officer of the Company,
have been excluded in that such persons are deemed to be affiliated.
Documents Incorporated by Reference
Portions of registrant's definitive proxy statements, which will be filed with
the Commission not later than 120 days after June 30, 2004, are incorporated
into Part III of this Form 10-K.
TABLE OF CONTENTS
PART I
Page
----
Item 1. Business....................................................................................................3
Item 2. Properties.................................................................................................10
Item 3. Legal Proceedings..........................................................................................10
Item 4. Submission of Matters to a Vote of Security Holders........................................................10
PART II
Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity
Securities.................................................................................................11
Item 6. Selected Financial Data....................................................................................13
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations......................14
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.............................................18
Item 8. Financial Statements and Supplementary Data................................................................19
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.......................45
Item 9A. Controls and Procedures................................................................................45
Item 9B. Other Information......................................................................................45
PART III
Item 10. Directors and Executive Officers of the Registrant.........................................................46
Item 11. Executive Compensation.....................................................................................46
Item 12. Security Ownership of Certain Beneficial Owners and Management.............................................46
Item 13. Certain Relationships and Related Transactions.............................................................46
Item 14. Principal Accountant Fees and Services.....................................................................46
PART IV
Item 15. Exhibits, Financial Statement Schedules....................................................................47
Signatures
2
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PART I
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"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
Certain statements contained in this report, including, without limitation,
statements containing the words "believes", "anticipates", "expects" and words
of similar import, constitute forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors that
may cause the actual results, performance or achievements of the Company, or
industry results, to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. Such factors include, among others, the following: international,
national and local general economic and market conditions; the ability of the
Company to sustain, manage or forecast its growth; the ability of the Company to
successfully make and integrate acquisitions; existing governmental regulations
and changes in or the failure to comply with, governmental regulations; adverse
publicity; competition; changes in business strategy or development plans;
business disruptions; the ability to attract and retain qualified personnel; and
other factors referenced in this report. Certain of these factors are discussed
in more detail elsewhere in this report. Given these uncertainties, readers of
this report and investors are cautioned not to place undue reliance on such
forward-looking statements. The Company disclaims any obligation to update any
such factors or to publicly announce the result of any revisions to any of the
forward-looking statements contained herein to reflect future events or
developments.
Item 1. Business
RCG Companies Incorporated and its subsidiaries ("RCG", "We" or the "Company")
is a network of travel and technology services companies brought together under
one operating company to benefit from synergistic relationships and the infusion
of intellectual and capital resources. The Company is engaged in the operation
of travel services and technology solutions businesses. Incorporated in 1982,
RCG is a Delaware corporation headquartered in Charlotte, North Carolina. The
Company's fiscal year ends on June 30.
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 fiscal year 2001, the Company brought in new
executive management and modified its business plan to focus on acquiring and
enhancing travel and technology services companies. The Company also brought in
new management to its aviation business and completed the acquisition of an
aviation services company that, together, have expanded that business into a
highly specialized travel organization that delivers a unique turnkey air
service. The Company has increased its focus on the travel sector and plans to
continue to operate, enhance and acquire substantial interests in the value of
expansion phase companies operating in the travel sector.
Through its wholly owned subsidiary, Flightserv, Inc. ("Flightserv"), 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 Flightserv, 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 Mexican and Caribbean destinations. SunTrips, based in San
Jose, California, sells air and hotel packages for Mexico, the Dominican
Republic, Costa Rica, Hawaii and the Azores. The flights originate in Oakland,
California and/or Denver, Colorado.
3
Logisoft Corp. ("Logisoft"), the Company's technology solutions business,
provides integrated products and services to assist customers in meeting their
strategic technology initiatives. Our products and services include distribution
of third-party-published software titles for the educational market and
corporate customers, full-service Internet development, Internet Web site
hosting and co-location, and Internet business development services encompassing
partner-site management and marketing. In our Internet business development and
marketing services business, we generally participate in the development and
implementation of the business plan in exchange for revenue-sharing and/or
equity-based arrangements.
On November 5, 2003, Logisoft completed the acquisition of SchoolWorld Software,
a Pittsburgh, Pennsylvania-based educational software company.
During the third quarter of 2004, the Company's Board of Directors (the "Board")
authorized the disposition of the Company's investment in Lifestyle Innovations,
Inc. ("LFSI"), a full-service home technology integration company. Accordingly,
the operations of LFSI were reclassified to "discontinued operations" for all
periods presented. During the fourth quarter, the Company contributed
approximately 4 million shares to the treasury of LFSI, a substantial portion of
which were reissued to certain LFSI investors to settle certain contingent
claims. LFSI also issued other shares, which resulted in RCG's interest in LFSI
being reduced to an effective 45.5% beneficial ownership. Considering the
substantial reduction in ownership and the lack of control over LFSI, the
investment in LFSI is now recorded using the equity method and is no longer a
consolidated subsidiary. The change resulted in RCG restoring its negative
carrying value during the forth quarter.
Factors Affecting Future Results and Forward-Looking Statements
The Company's business, results of operations and financial condition are
subject to many risks, including those set forth below. The following discussion
highlights some of these risks; others are discussed elsewhere herein or in
other documents filed with the United States Securities and Exchange Commission
("SEC") by the Company. 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 using currently available information.
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 set forth below.
We received a going concern opinion from our independent auditors.
We received from our independent auditors and included in this report an opinion
on our consolidated financial statements that expresses substantial doubt as to
our ability to continue as a going concern as a result of recurring losses from
operations and deficiencies in working capital and equity at June 30, 2004.
We may need to raise additional funds in order to continue to operate and grow
our business.
If we are unable to grow our business or improve our operating cash flows as
expected; if we suffer significant losses on our investments; or if we are
unable to realize adequate proceeds from those investments, we will then need to
secure alternative equity or debt financing to provide us with additional
working capital. However, there can be no assurance that we will be able to
complete such financing if required. If we raise funds through debt financing,
then we will incur additional interest expense going forward. If we raise
additional funds by issuing additional equity securities, then the percentage
ownership of our current stockholders will be diluted. We cannot be certain that
additional financing will be available when and to the extent required, or that,
if available, it will be on acceptable terms. In addition, our ability to
complete future financings may be affected by the market price of our common
stock. If adequate funds are not available on acceptable terms, then we will be
unable to continue to fund our existing businesses or planned expansion, or take
other steps necessary to enhance our business or continue our operations.
4
We have incurred operating losses; there can be no assurance
that we will achieve or sustain profitability.
We have incurred operating losses since inception. Certain of our other
operating businesses have incurred and continue to incur operating losses. We
expect to continue to incur significant operating costs in connection with our
efforts to expand our existing businesses and to grow through acquisitions. As a
result of these costs and uncertain revenue growth, there can be no assurance
that we will achieve or sustain profitability.
The price of our Common Stock has been volatile; if the market price of our
Common Stock decreases, stockholders may be unable to sell their common shares
at a profit.
Both the stock market in general and the market for travel and technology
services companies have recently experienced extreme volatility. Similarly, the
per-share trading price of our Common Stock during the year ended June 30, 2004,
as reported by the American Stock Exchange, fluctuated from a high of $2.74 to a
low of $0.46. Fluctuations in the price of our Common Stock may occur, among
other reasons, in response to:
o Operating results;
o Regulatory changes;
o Economic changes;
o Market valuation of firms in related businesses; and
o General market conditions.
In addition, the volume of shares of our Common Stock bought and sold on any
trading day has been subject to wide fluctuations, which also contributes to
fluctuations in the trading price of our Common Stock. The trading price of our
Common Stock could continue to be subject to wide fluctuations in response to
these or other factors, many of which are beyond our control.
We may be unable to maintain our listing on the American Stock Exchange;
if we are delisted, the trading of our Common Stock could be more difficult.
Our Common Stock is presently listed and trading on the American Stock Exchange
(the "Exchange"). The Company believes that it meets the standards for continued
listing but such a determination is subjective and no assurance can be given
that the Exchange will agree or that our Common Stock will be trading on the
Exchange at the time that the stockholders are able to sell shares under
applicable securities laws. If our Common Stock is delisted from the Exchange,
trading in our securities could be more difficult, and trading of our common
stock could be subject to the "penny-stock" rules.
If we cannot integrate our recent or future acquisitions,
we may be unable to successfully execute our strategy.
We anticipate that a portion of our future growth will be accomplished through
acquisitions. The success of this plan depends upon our ability to:
o Identify suitable acquisition opportunities;
o Effectively integrate acquired personnel, operations, products and
technologies into our organization;
o Retain and motivate the personnel of acquired businesses;
o Retain customers of acquired businesses; and
o Obtain necessary financing on acceptable terms or use our securities
as consideration for acquisitions.
5
Turbulence in financial markets and the current U.S. economy may result in a
diminished pool of companies that meet our criteria for acquisition. Even if we
are successful in acquiring companies, we may be unable to integrate them into
our business model or achieve the expected synergies.
Our acquisition strategy has and will continue to dilute our current
stockholders' ownership.
Our acquisition strategy contemplates that we will continue to issue shares of
our securities to make strategic acquisitions and attempt to grow our business.
Each of the acquisitions that we complete in the future involving the issuance
of securities will further dilute our current stockholders' ownership interest
in the Company.
We face competition from other acquirors and investors,
which may prevent us from realizing strategic opportunities.
We plan to acquire or invest in existing companies to fulfill our business plan.
In pursuing these opportunities, we face competition from other capital
providers and operators of companies, including publicly traded companies,
venture capital companies and large corporations. Some of these competitors have
greater financial, operational and human resources than we do. This competition
may limit our opportunity to acquire interests in companies that we believe
could help us fulfill our business plan and increase our value.
Our growth places strain on our managerial, operational and financial resources.
Our growth has placed, and is expected to continue to place, a significant
strain on our managerial, operational and financial resources. Further growth
will increase this strain on our managerial, operational and financial
resources, which may inhibit our ability to successfully implement our business
plan.
We depend on certain important employees;
the loss of any of those employees may harm our business.
Our performance is substantially dependent on the performance of our executive
officers and other key employees. The familiarity of these key employees with
their respective industries makes those employees especially critical to our
success. In addition, our success is dependent on our ability to attract, train,
retain and motivate high quality personnel, especially for our management team.
The loss of the services of any of our executive officers or key employees may
harm our business. Our success also depends on our continuing ability to
attract, train, retain and motivate other highly qualified technical and
managerial personnel. Competition for such personnel is intense and our limited
resources are likely to make it more difficult for us to attract and retain such
personnel.
We depend on certain airline contracts.
The Company's travel services business generally contracts with three carriers
for charter tour operator contracts. While this concentration generally reduces
the costs of the carrier service, if one or more of these carriers are unable to
perform under its contract, our travel services business may experience service
interruptions that could reduce its revenue. Additionally, the Company's travel
services business may be forced to replace such a carrier, which could result in
higher operating costs for the carrier services, thereby reducing profitability.
6
Future events similar to those of September 11, 2001 may have an adverse effect
on our businesses.
The terrorist attack against the United States on September 11, 2001 produced
great uncertainty in the economy in general and in the aviation industry in
particular. Industry reports indicate that these events are still having a
negative impact on the air travel industry. These events may drastically alter
the long-term demand for charter services. In addition, these events may lead
the Federal Aviation Administration to place additional restrictions on charter
flight operators, which may increase the cost of private charter services. The
long-term impact of these events on the aviation industry and the chartered
services segment of that industry are not known. These events could have a
material adverse effect on our travel services business including the operation
of our charter hub service through Atlanta, Georgia.
Also, additional terrorist attacks against the United States could produce
uncertainty in the financial markets, which could negatively affect economic
performance of the United States. These events could also have a material
adverse effect on our businesses.
Travel services contracts may result in losses.
The Company actively pursues opportunities to operate scheduled and ad-hoc
charter service outside of its two primary travel services contracts with major
tour operators, in order to utilize capacity on aircraft that it has under
contract. These programs often require the Company to provide such services for
a fixed fee or with limited ability to pass along increases in operating costs
over the amounts estimated during the bid process. If actual operating costs are
higher than forecast, the Company may lose money on such programs and these
losses may exceed the operating profit generated on other travel services
contracts. Management believes that passenger demand was significantly adversely
affected by the war in Iraq, which coincided with the startup of some of the
scheduled Interstate Jet service.
Government regulation of the travel industry could impact our travel services'
business operations.
Certain segments of the travel industry are regulated by the United States
Government and, while we are not currently required to be certified or licensed
under such regulation, certain services offered by our travel services business
are affected by such regulation. Charter flights operators, upon which our
travel services business depends, are subject to vigorous and continuous
certification requirements by the Federal Aviation Administration. Changes in
the regulatory framework for charter aviation travel could adversely affect our
travel services business' operations and financial condition.
Our travel services business faces intense competition from the travel industry.
We provide leisure vacation packages and charter jet travel and face intense
competition from commercial airlines for the potential customers who travel to
these locations and other locations that we may serve in the future. These
commercial airlines have greater resources, marketing efforts and brand equity
than we do and they offer a potential customer more flights to these locations.
Furthermore, travelers have numerous choices of location when choosing travel
destinations. Since we offer only limited travel destinations, we face intense
competition from travel agents, commercial airlines, hotels, resorts, casinos
and other organizations in the travel industry that offer alternative travel
destinations to those offered by us. Such competitors possess far greater
capital and human resources, marketing efforts and brand equity than we do. If
we are unable to compete effectively with these various competitors in the
travel industry, we may not be able to maintain profitability.
7
Our technology solutions business generally does not have long-term contracts.
The clients of our technology solutions business are generally retained on
project-by-project basis, rather than pursuant to long-term contracts. As a
result, a client may or may not engage us for further services once a project is
completed or may unilaterally reduce the scope of, or terminate, existing
projects. The absence of long-term contracts creates an uncertain revenue
stream, which could negatively affect the financial condition of our technology
solutions business.
The developing market for strategic Internet services and the level of
acceptance of the Internet as a business medium will affect our technology
solutions business.
The market for strategic Internet services is relatively new and is evolving
rapidly. The future growth of our technology solutions business is dependent
upon the ability of such business to provide strategic Internet services that
are accepted by existing and future clients. Demand and market acceptance for
recently introduced services are subject to a high level of uncertainty. The
level of demand and acceptance of strategic Internet services is dependent upon
a number of factors, including:
o The growth in consumer access to and acceptance of new interactive
technologies such as the Internet;
o Companies adopting Internet-based business models;
o The development of technologies that facilitate two-way
communication between companies and targeted audiences;
o The level of capital spending on Internet, technology and
communications initiatives; and
o The extent and nature of any domestic or international regulation of
e-business or uses of the Internet.
Significant issues concerning the commercial use of these technologies include
security, reliability, cost, ease of use and quality of service. These issues
remain unresolved and may inhibit the growth of Internet business solutions that
utilize these technologies.
Industry analysts and others may have made many predictions concerning the
growth of the Internet as a business medium. You should not rely upon these
predictions. Recently, the market for strategic Internet services in particular
has contracted. If the market for strategic Internet services fails to develop,
or develops more slowly than expected, or if the services provided by our
technology solutions business do not achieve market acceptance, then revenue and
operating results of such business may be volatile and our technology solutions
business may be unable to achieve or sustain operating profits.
Our technology solutions business may be unable to keep up
with the continuous technological change in its market.
The success of our technology solutions business will depend, in part, on its
ability to respond to technological advances. This business may not be
successful in responding quickly, cost-effectively and sufficiently to these
developments. Many of the competitors of our technology solutions business are
larger than we are and have significantly more financial resources to invest in
advances in technology, products, engagement methodology and other areas central
to providing technology and Internet solutions. Our technology solutions
business will not be able to compete effectively or meet its growth objectives
if it is unable, for technical, financial or other reasons, to adapt in a timely
manner in response to technological advances. In addition, employee time
allocated to responding to technological advances will not be available for
client engagements.
8
The success of our technology solutions business is largely dependent upon its
ability to retain its manufacturer authorizations that allow it to sell software
to educational customers at discounted pricing.
Our technology solutions business has been accumulating authorizations from key
software manufacturers that allow it to sell products to educational facilities
at deep discounts. If our technology solutions business were to lose any of
these authorizations, its ability to sell computer products to educational
customers would be adversely impacted, which could have a similar impact on its
sales, profitability and ability to expand within this business line. In
addition, this business uses credit lines extended by software and hardware
manufacturers and distributors. The loss of any of these credit lines would
limit the ability of our technology solutions business to meet customer demand,
thereby reducing sales and profits.
The exercise of outstanding options, warrants and convertible preferred stock
could substantially dilute existing stockholders and could have a negative
effect on our stock price.
We have adopted the RCG Companies Incorporated Stock Option Plan (the "Plan")
and our stockholders have authorized the issuance of options to acquire up to
20,000,000 shares of Common Stock under the Plan. As of June 30, 2004, we have
outstanding options for 2,261,657 shares, under the Plan that have been granted
to our officers, directors, employees and other service providers of which
options for 1,831,243 shares are vested. There have been zero options exercised
for fiscal year 2004 of Common Stock that were issued under the Plan. In
addition to options issued under the Plan, we currently have outstanding
warrants as of June 30, 2004 for 6,421,963 shares, including 6,000 that were
exercised during this fiscal year. Our outstanding options and warrants have
exercise prices ranging from $0.28 to $28.00. As of the filing date, we
currently have outstanding convertible preferred shares for 4,574,468.09 common
shares at a conversion price of $.94 per share, none of which have been
converted as of the filing date. The exercise of these options, warrants or
preferred shares will dilute the percentage ownership of our current
stockholders and the potential sale of shares issued upon the exercise of these
warrants, options or preferred shares could have a negative impact on the market
price of our Common Stock.
The future sales of restricted securities could have a negative effect on our
stock price.
The market price of our Common Stock could be negatively affected by the future
sale of shares of restricted Common Stock, including shares of restricted Common
Stock underlying options and warrants that have been or will be issued by us. As
of June 30, 2004 and June 30, 2003, approximately 4,800,000 of our 21,289,004,
and 2,100,000 of our 13,948,160, respectively, issued and outstanding shares of
Common Stock are believed to be restricted securities as defined in Rule 144
promulgated under the Securities Act or otherwise not available for trading by
the public. Rule 144 provides generally that restricted securities must be held
for a one-year period prior to resale and provides certain additional
limitations on the sale of such shares, including limitations on the volume of
such shares that a beneficial owner may sell in any three-month period
thereafter. Generally, non-affiliated stockholders may sell restricted shares
that have been held for at least two years without any limitations. In addition,
Rule 145 permits the sale by non-affiliates of restricted securities issued in
connection with certain business combinations one year after such shares are
issued. As restricted shares become eligible for resale pursuant to Rule 144 or
Rule 145, the number of sellers of our Common Stock could increase significantly
and, as a result, the market price of our Common Stock could decrease.
9
Inability to Protect Intellectual Property Rights
We rely primarily on a combination of intellectual property laws and contractual
provisions to protect our proprietary rights and technologies, brand and marks.
These laws and contractual provisions provide only limited protection of
proprietary rights and technology. If we are not able to protect our
intellectual property, proprietary rights and technology, we could lose those
rights and incur substantial costs policing and defending those rights. Our
means of protecting our intellectual property, proprietary rights and technology
may not be adequate.
Employees
At June 30, 2004, the Company had 347 full-time employees in its continuing
businesses as follows.
Travel Services .......................................................... 307
Technology Solutions ..................................................... 34
Corporate ................................................................ 6
---
Total .................................................................... 347
===
The Company has no collective bargaining agreements with any unions and believes
that overall relations with its employees are good.
Recent Accounting Pronouncements
In December 2003, the SEC issued SAB 104, "Revenue Recognition", which codifies,
revises and rescinds certain sections of SAB 101, "Revenue Recognition", in
order to make this interpretive guidance consistent with current authoritative
accounts and audit guidance and SEC rules and regulations. The changes noted in
SAB 104 did not have a material effect on the Company's consolidated results of
operations, financial position or cash flows.
Item 2. Properties
At June 30, 2004, the Company's continuing businesses leased office-building
space as follows.
Business Segment Locations Sq. Ft. Annual Rent Termination
- -------------------- --------------------------------------------- ------- ----------- -----------
Travel Services Atlanta, GA; San Jose, CA; Honolulu, HI 48,116 $1,034,148 Aug. 2010
Technology Solutions Fairport, NY; Charlotte, NC; West Mifflin, PA 13,310 $ 158,274 Dec. 2009
Corporate Charlotte, NC 3,304 $ 68,062 Sept. 2005
Management believes that all property occupied by the Company and its
subsidiaries are adequately covered by insurance.
Item 3. Legal Proceedings
In the ordinary course of business, the Company and its subsidiaries are
involved from time to time in various claims and legal actions. In the opinion
of management, the Company is not party to any legal proceedings the adverse
outcome of which would have any material adverse effect on its business, its
assets, or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter ended June 30, 2004.
10
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PART II
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Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
Market Information
The Company's $.04 par value Common Stock ("Common Stock") is listed on the
American Stock Exchange under the symbol "RCG". The prices reflect inter-dealer
prices, without retail markup, markdown or commission and may not represent
actual transactions. The following table shows the high and low trading and
closing prices of the Common Stock during the last two fiscal years as reported
on the Exchange.
Fiscal Year 2004 High Low Close
---------------- -------- -------- --------
First Quarter ..................... $ 2.23 $ 0.46 $ 1.87
Second Quarter .................... 2.74 1.40 1.98
Third Quarter ..................... 2.15 1.50 1.82
Fourth Quarter .................... 2.40 1.64 2.10
Fiscal Year 2003 High Low Close
---------------- -------- -------- --------
First Quarter ..................... $ 1.50 $ 0.66 $ 0.80
Second Quarter .................... 0.93 0.35 0.61
Third Quarter ..................... 0.65 0.26 0.31
Fourth Quarter .................... 0.70 0.27 0.55
Dividends
The Company has never paid cash dividends and currently intends to retain any
future earnings to expand its operations. Therefore, it is not contemplated that
cash dividends will be paid on the Company's Common Stock in the foreseeable
future.
Record Holders
The approximate number of record holders of the Company's Common Stock as of
June 30, 2004 was 5,000.
Securities Authorized for Issuance Under Equity Compensation Plans
The information called for by this item is hereby incorporated by reference from
the Company's definitive proxy statement to be filed pursuant to Regulation 14A
not later than 120 days after the end of the fiscal year covered by this report.
11
Sales of Unregistered Securities
The following is a summary of Common Stock activity during the quarter ended
June 30, 2004.
Common Stock
Issued and
Outstanding
-----------
Balance at March 31, 2004.............................................................................19,289,004
Shares issued for debt conversion at $1.67 per share............................................. 450,000
Private placement at $.25 per share to an accredited investor*................................... 250,000
Shares issued for SchoolWorld acquisition........................................................ 50,000
Private placement at $.80 per share to an accredited investor**.................................. 1,250,000
-----------
Balance at June 30, 2004..............................................................................21,289,004
===========
- ----------
* Shares issued pursuant to an agreement dated April 2003. As of June 30,
2004, this private placement is closed and $62,500 was recorded as a
receivable. This amount was received on July 28, 2004.
** Strategic transaction concerning the substitution of a letter of credit
In fiscal year 2004, the Company issued options to purchase its Common Stock to
employees and directors. Following is a summary of options issued in fiscal year
2004.
Number of Exercise Vesting
Purchasable Price Per Grant Term Period
Shares Share Date (Years) (Months)
------ ----- ---- ------- --------
85,000.....................$0.55.........................7/1/2003......................10.......................12
75,000.....................$0.60........................7/14/2003.......................7.......................48
50,000.....................$1.90.........................1/4/2004.......................7.......................48
30,000.....................$1.84........................2/10/2004.......................7........................4
50,000.....................$1.84........................2/10/2004.......................7.......................48
- ------------
290,000
============
All of the options indicated in the table above were granted under the Company's
option plan, which was registered on Form S-8. The options were issued without
registration under the Securities Act, in reliance upon the exemption in Section
4(2) of the Securities Act.
12
Item 6. Selected Financial Data
Financial Highlights
Year Ended June 30
2004 (1) 2003 2002 2001 2000
------------- ------------- ------------- ------------- -------------
Revenues ............................. $ 180,807,076 $ 73,609,775 $ 37,846,061 $ 12,632,491 $ 10,040
Loss from continuing
operations ......................... (8,521,522) (709,651) (2,994,372) (19,592,208) (56,874,317)
Basic and fully diluted loss per share
- continuing operations ............ (0.51) (0.06) (0.26) (2.53) (12.60)
Weighted average shares outstanding .. 16,799,540 12,661,743 11,520,096 7,740,503 4,513,792
Total assets ......................... 84,294,008 27,098,092 26,598,415 18,139,782 8,315,477
Working capital (deficit) ............ (11,121,088) (6,721,362) (1,438,818) 1,286,120 4,451,007
Long-term liabilities ................ 7,656,891 616,080 1,290,648 179,046 --
- ----------
(1) Includes the operations of recent acquisitions, see Note 1 to the financial
statements in Item 8.
13
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Management's Discussion and Analysis should be read with the Consolidated
Financial Statements.
OVERVIEW
Results of Continuing Operations
The following table summarizes results of continuing operations by business
segment for each of the three fiscal years in the period ended June 30, 2004.
Year Ended June 30, 2004
Loss from
Continuing
Revenue Gross Profit Operations
----------------- ----------------- -----------------
Travel Services................................................ $ 165,394,996 $ 10,842,456 $ (4,680,596)
Technology Solutions........................................... 15,412,080 1,908,737 (587,893)
Corporate...................................................... - - (3,253,033)
----------------- ----------------- -----------------
$ 180,807,076 $ 12,751,193 $ (8,521,522)
================= ================= =================
Year Ended June 30, 2003
Revenue Gross Profit Profit (Loss)
----------------- ----------------- -----------------
Travel Services................................................ $ 62,607,443 $ 3,545,793 $ 887,882
Technology Solutions........................................... 11,001,598 1,546,162 (340,172)
Corporate...................................................... 734 734 (1,257,361)
----------------- ----------------- -----------------
$ 73,609,775 $ 5,092,689 $ (709,651)
================= ================= =================
Year Ended June 30, 2002
Loss from
Continuing
Revenue Gross Profit Operations
----------------- ----------------- -----------------
Travel Services................................................ $ 27,272,819 $ 971,926 $ (945,862)
Technology Solutions........................................... 10,294,141 1,922,854 (609,099)
Corporate...................................................... 279,101 279,101 (1,439,411)
----------------- ----------------- -----------------
$ 37,846,061 $ 3,173,881 $ (2,994,372)
================= ================= =================
Fiscal Year 2004 Compared with Fiscal Year 2003
The Company's revenue in the year ended June 30, 2004 was $180,807,076 compared
to $73,609,775 in 2003. The acquisitions by the travel service business and the
technology solutions business accounted for $105,755,169 and $3,032,993,
respectively, of the increase. The revenues of the existing travel service
business decreased $2,967,616, while the revenues of the existing technology
solutions business increased $1,377,489.
Gross profit in 2004 was $12,751,193 compared to $5,092,689 in the prior year,
an increase of $7,658,504. The acquisitions by the travel service business and
the technology solutions business accounted for $8,369,679 and $416,543,
respectively, of the increase. The gross profit of the existing travel service
and technology solution businesses decreased $1,073,016 and $53,968,
respectively. The Company reported a 7.1% overall gross profit percentage in
2004 as compared to 6.9% in 2003, which is not a substantial change.
14
Selling, general and administrative expenses in the year ended June 30, 2004 was
$18,636,833 compared with $5,709,547 in fiscal year 2003, an increase of
$12,927,286. This increase is due to expenses of the newly acquired businesses
and increased staff in the travel services business to support its expanded
charter operations, and partially offset by lower marketing expenses, due to the
termination of the jet shuttle service and reduced corporate expenses. Selling,
general and administrative expense other as a percentage of revenue increased
from 8% to 10% of revenue in 2004.
The Company's depreciation and amortization expense in the year ended June 30,
2004 was $809,680 as compared with $363,852 in the prior year. The increase is
primarily due to the acquisitions.
In fiscal year 2004, the Company incurred $841,642 of net interest expense as
compared to $194,230 in the prior year. The increase is primarily due to the
acquisition of the debt issued with the travel services business.
In the years ended June 30, 2004 and June 30, 2003, the Company recorded a net
gain on investments of $119,682 and $277,268, respectively. These amounts
consist of $0 and $89,604, respectively, relating to net losses on market value
adjustments of stock purchase warrants offset by a net realized gain of $119,682
and $366,872, respectively, on sales of securities. These results are reported
primarily in the corporate segment results. The Company's operating results for
2003 also include a loss of $54,195, primarily on the sale of two office units
by the technology solutions business.
The Company's operating segments were tested for impairment at the end of fiscal
year 2004. The fair value of the reporting units were estimated based upon the
expected present value of future cash flows and comparison to similar companies.
The Company evaluates goodwill throughout the fiscal year and made an adjustment
of $1,199,690 to write down the goodwill associated with its corporate and
technology solutions segments. The decline in the fair value is attributed to a
decrease in the forecasted profitability in the technology solutions segment and
the corporate segment no longer performing investment advisory services.
The Company experiences significant seasonality in its travel services and
limited seasonality in its technology solutions businesses. The seasonality in
the travel services business is due to the higher level of vacation and 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 fiscal year end coincides
with the year end of many schools and universities. These customers are tied to
strict budgets and normally purchase more software at the start and the end of
their fiscal years.
Fiscal Year 2003 Compared with Fiscal Year 2002
The Company's revenue in the year ended June 30, 2003 was $73,609,775 compared
to $37,846,061 in 2002. The increase of $35,763,714 or 94% in 2003 is primarily
due to the travel services significant expansion of its charter aviation
business as well as a 7% increase in technology solutions revenue. These
increases were partially offset by corporate not earning fees for business
advisory services in 2003.
15
Gross profit in 2003 was $5,092,689 compared to $3,173,881 in the prior year, an
increase of $1,918,808 or 60%. The increase in 2003 is due to the gross profit
generated by the expanded charter aviation business and elimination of the jet
shuttle business, which operated at a gross margin deficit. The Company reported
a 6.9% overall gross margin in 2003 as compared to 8.4% in 2002. The decrease in
margin was due to travel services increase in the dollar amount as a proportion
of consolidated gross profit.
Selling, general and administrative Common Stock-other in the year ended June
30, 2003 was $5,709,547 compared with $5,865,540 in fiscal year 2002. Selling,
general and administrative expenses as a percentage of revenue were
significantly reduced to 8% of revenue from 15% of revenue in 2002.
The Company's depreciation and amortization expense in the year ended June 30,
2003 was $363,852 as compared with $320,362 in the prior year. The increase is
due primarily to the continuing expansion of the travel services segment.
In fiscal year 2003, the Company incurred $194,230 of net interest expense as
compared to $128,345 in the prior year.
In the years ended June 30, 2003 and June 30, 2002, the Company recorded a net
gain on investments of $277,268 and $146,475, respectively. These amounts
consist of $89,604 and $476,185, respectively, relating to net losses on market
value adjustments of stock purchase warrants offset by a net realized gain of
$366,872 and $622,660, respectively, on sales of securities. These results are
reported primarily in the corporate segment results. The Company's operating
results for 2003 also include a loss of $54,195 on the sale of two office units
by the technology solutions business.
The Company realized a gain of $575,824 on the sale of its discontinued
commercial real estate business in the quarter ended September 30, 2001.
The Company's operating segments were tested for impairment at the end of fiscal
year 2003. The fair value of the reporting units were estimated based upon the
expected present value of future cash flows and comparison to similar companies.
In fiscal year 2002, the Company recorded the cumulative effect of a change in
accounting principle of $693,000, increasing the Company's reported net loss, as
a result of its implementation of FAS 142. This adjustment was recorded as of
July 1, 2001.
The Company experiences some 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 coincides with the year end of many schools and universities. These
customers are tied to strict budgets and normally purchase more software at the
start and the end of their fiscal years.
16
Liquidity and Capital Resources
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. The Company has suffered recurring losses from
operations and as of June 30, 2004 had a working capital deficit of $11,121,088.
These conditions raise substantial doubt about the Company's ability to continue
as a going concern. Management recognizes that in order to meet the Company's
capital requirements, and continue to operate, additional funding is necessary.
The Company is exploring additional sources of liquidity, through debt and
equity financing alternatives and potential sales of its Common Stock in private
placement transactions. Additionally the Company is negotiating the restructure
of its long-term debt. If the Company is (i) unable to grow its business or
improve its operating cash flows as expected, (ii) unsuccessful in extending a
substantial portion of the debt repayments currently past due, or (iii) unable
to raise additional funds through private placement sales of its Common Stock,
then the Company may be unable to continue as a going concern. 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
flows 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 the Company's current
shareholders would be diluted. These consolidated financial statements do not
include any adjustments that may result from the outcome of these uncertainties.
Cash and cash equivalents were $6,596,076 and $807,834 at June 30, 2004 and June
30, 2003, respectively. At June 30, 2004, the Company had current assets of
$57,806,513 as compared to $68,927,601 of total current liabilities, resulting
in a working capital deficit of $11,121,088. At June 30, 2003, we had current
assets of $8,492,428 as compared to $15,213,790 of total current liabilities,
resulting in a working capital deficit of $6,721,363.
Cash and cash equivalents increased by $5,788,242 during 2004. Cash of
$5,404,877, primarily from the sale of Common Stock, was provided from financing
operations and $1,272,269 from operating activities, offset by $888,904 used in
investing activities.
Cash of $1,272,269 was provided from operating activities during fiscal year
2004. The net loss of $12,112,568 for the year was offset by non-cash losses
from discontinued operation of $3,591,046, other non-cash charges of $1,362,253
and an increase of $8,431,583 from the net operating assets and liabilities.
Non-cash charges of $1,362,253 consist primarily of $1,199,690 goodwill
impairment, $809,720 in depreciation an amortization charges and issuance of
Common Stock for services and contract settlement of $773,106, offset by
$2,184,773 of amortization of an unfavorable airline contract.
The net increase in operating assets and liabilities of $8,431,538 was due
significantly to the increase in unearned income of $12,985,949 and accounts
payable and accrued expenses of $14,216,839, offset by an increase in restricted
cash of $19,356,089.
The following table summarizes contractual obligations as of June 30, 2004 (in
thousands).
Prior to July 1, 2005 July 1, 2007 July 1, 2009
Total June 30, 2005 to June 30, 2007 to June 30, 2009 and thereafter
----------- ----------------- ------------------- ------------------- -----------------
Purchase obligations................ $ 60,154 $ 30,865 $ 18,868 $ 10,421 $ -
Long-term notes payable............. 11,250 - 3,463 1,500 6,287
Operating and capital-
lease obligations................... 18,424 9,162 6,278 2,440 544
----------- ----------------- ------------------- ------------------- -----------------
$ 89,828 $ 40,027 $ 28,609 $ 14,361 $ 6,831
=========== ================= =================== =================== =================
17
Critical Accounting Policies
Determination of certain amounts in the Company's financial statements requires
the use of estimates. These estimates are based upon the Company's historical
experiences combined with management's understanding of current facts and
circumstances. Although the estimates are considered reasonable, actual results
could differ from the estimates. Discussed below are the accounting policies
considered by management to require the most judgment and to be critical in the
preparation of the financial statements.
Allowance for Doubtful Accounts - The Company maintains an allowance for
customer accounts that reduces receivables to amounts that are expected to be
collected. In estimating the allowance, management considers factors such as
current overall economic conditions, industry-specific economic conditions,
historical and anticipated customer performance, historical experience with
write-offs and the level of past-due amounts. Changes in these conditions may
result in additional allowances. The allowance for doubtful accounts was
$331,690 and $111,824 at June 30, 2004 and June 30, 2003, respectively.
Goodwill - Goodwill is tested for impairment annually or more frequently if
changes in circumstances or the occurrence of events suggest impairment exists.
The test for impairment requires the Company to make several estimates about
fair value, most of which are based on projected future cash flows. The
estimates associated with the goodwill impairment tests are considered critical
due to the judgments required in determining fair value amounts, including
projected future cash flows. Changes in these estimates may result in the
recognition of an impairment loss.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market risk generally represents the risk of loss that may result from the
potential change in value of a financial instrument as a result of fluctuations
in interest rates and market prices. We do not currently have any trading
derivatives nor do we expect to have any in the future. We have established
policies and internal processes related to the management of market risks, which
we use in the normal course of our business operations.
Intangible Asset Risk
We have a substantial amount of intangible assets. We are required to perform
goodwill impairment tests at least on an annual basis and whenever events or
circumstances indicate that the carrying value may not be recoverable from
estimated future cash flows. As a result of our annual and other periodic
evaluations, we may determine that the intangible asset values need to be
written down to their fair values, which could result in material charges that
could be adverse to our operating results and financial position. Although at
June 30, 2004, we believe our intangible assets are recoverable, changes in the
economy, the business in which we operate and our own relative performance could
change the assumptions used to evaluate intangible asset recoverability. We
continue to monitor those assumptions and their consequent effect on the
estimated recoverability of our intangible assets.
Commodity Price Risk
We do not enter into contracts for the purchase or sale of commodities. As a
result, we do not currently have any direct commodity price risk.
18
Item 8. Financial Statements and Supplementary Data
The following financial statements are contained in this Item 8.
o Report of Independent Registered Public Accounting Firm.
o Consolidated Balance Sheets as of June 30, 2004 and June 30, 2003.
o Consolidated Statements of Operations for the years ended June 30,
2004, June 30, 2003 and June 30, 2002.
o Consolidated Statements of Changes in Shareholders' Deficit for the
years ended June 30, 2004, June 30, 2003 and June 30, 2002.
o Consolidated Statements of Cash Flows for the years ended June 30,
2004, June 30, 2003 and June 30, 2002.
o Notes to the Consolidated Financial Statements.
19
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
RCG Companies Incorporated and Subsidiaries
Charlotte, North Carolina
We have audited the accompanying consolidated balance sheets of RCG Companies
Incorporated and Subsidiaries (The Company) as of June 30, 2004 and 2003 and the
related consolidated statements of operations, shareholders' deficit and cash
flows for each of the three years in the period ended June 30, 2004. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the financial statements of a subsidiary for 2004
and 2003, which statements reflect total assets of $0 and $7,753,042 as of June
30, 2004 and 2003, respectively, and losses from discontinued operations of
$6,994,497, $6,093,939 and $1,384,715 for the three years ended June 30, 2004.
Those statements were audited by other auditors whose reports have been
furnished to us, and our opinion, insofar as it relates to the amounts included
for the subsidiary, is based solely on the reports of the other auditors.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of RCG Companies Incorporated and
Subsidiaries at June 30, 2004 and 2003, and the results of its operations and
its cash flows for the three years ended June 30,2004 in conformity with
accounting principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations
and at June 30, 2004 had deficiencies in working capital and equity that raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 1. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ BDO Seidman
- -------------------------
BDO Seidman, LLP
Charlotte, North Carolina
Date: October 8, 2004
20
RCG Companies Incorporated and Subsidiaries
CONSOLIDATED BALANCE SHEETS
June 30,
2004 2003
------------- -------------
ASSETS
Cash and cash equivalents ........................................................... $ 6,596,076 $ 807,834
Restricted cash ..................................................................... 40,387,429 2,655,126
Accounts receivable, net of allowance for doubtful accounts of $331,690 and $111,824,
respectively ...................................................................... 4,531,918 1,966,094
Due from affiliates ................................................................. 68,500 --
Inventory ........................................................................... 71,970 44,893
Investments ......................................................................... 326,911 376,945
Prepaid expenses .................................................................... 5,823,709 2,641,536
------------- -------------
Total current assets .............................................. 57,806,513 8,492,428
Deferred costs and other assets ..................................................... 508,342 413,364
Property and equipment, net ......................................................... 1,526,746 797,887
Net non-current assets of discontinued operations ................................... -- 7,753,042
Goodwill, net ....................................................................... 24,452,407 9,641,371
------------- -------------
Total assets ...................................................... $ 84,294,008 $ 27,098,092
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable and other obligations - current portion ............................... $ 1,941,918 $ 818,790
Notes payable and amounts due to related parties .................................... -- 495,563
Accounts payable and accrued expenses ............................................... 28,466,748 5,109,880
Net current liabilities of discontinued operations .................................. -- 4,780,902
Unearned income ..................................................................... 38,518,935 4,008,655
------------- -------------
Total current liabilities ......................................... 78,104,462 15,213,790
Warrant obligation .................................................................. 1,520,000 --
Notes payable and other obligations ................................................. 7,656,861 16,080
Notes payable and amounts due to related parties .................................... -- 600,000
------------- -------------
Total liabilities ................................................. 76,584,462 15,829,870
------------- -------------
Minority interest ................................................................... -- 314,464
------------- -------------
Shareholders' equity:
Common Stock, $0.04 par value, 200,000,000 shares authorized, 21,289,004 and
13,948,160 issued and outstanding, respectively .............................. 849,561 557,927
Preferred stock, $0.01 par value, 10,000,000 shares authorized, none ........... -- --
outstanding
Additional paid-in capital ..................................................... 121,385,825 114,329,103
Accumulated deficit ............................................................ (115,137,478) (103,024,910)
Accumulated other comprehensive loss ........................................... (276,347) (276,347)
Treasury stock at cost (131,214 shares) ........................................ (632,015) (632,015)
------------- -------------
Total shareholders' equity ........................................ 6,189,546 10,953,758
------------- -------------
Total liabilities and shareholders' equity ........................ $ 84,294,008 $ 27,098,092
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
21
RCG Companies Incorporated and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended June 30,
2004 2003 2002
------------- ------------- -------------
Revenues:
Services ................................................ $ 165,764,601 $ 63,424,156 $ 28,827,495
Product sales ........................................... 15,042,475 10,185,619 9,018,566
------------- ------------- -------------
Total revenue ....................................... 180,807,076 73,609,775 37,846,061
------------- ------------- -------------
Cost of revenues:
Services ................................................ 154,812,412 59,536,123 26,872,970
Product sales ........................................... 13,243,471 8,980,963 7,799,210
------------- ------------- -------------
Total cost of revenue ............................... 168,055,883 68,517,086 34,672,180
------------- ------------- -------------
Gross profit ........................................ 12,751,193 5,092,689 3,173,881
------------- ------------- -------------
Selling, general and administrative expenses ................. 18,636,833 5,709,547 5,865,540
Depreciation and amortization ................................ 809,680 363,852 320,362
Goodwill impairment .......................................... 1,199,690 -- --
------------- ------------- -------------
Operating costs and expenses ........................ 20,646,203 6,073,399 6,185,902
------------- ------------- -------------
Loss from operations ................................ (7,895,010) (980,710) (3,012,021)
Interest expense, net ........................................ 841,642 194,230 128,345
Other income ................................................. (100,262) (238,905) --
Equity in earnings of joint ventures ......................... (14,067) (3,311) --
Loss (Gain) on sale of assets ................................ 18,881 54,195 481
Gain on investments, net ..................................... (119,682) (277,268) (146,475)
------------- ------------- -------------
Loss from continuing operations ..................... (8,521,522) (709,651) (2,994,372)
Loss from discontinued operations, net of minority interest of
$314,281, $1,552,798 and $0, respectively .................. (3,591,046) (4,541,141) (1,183,763)
Gain on disposal of discontinued operations .................. -- -- 575,824
------------- ------------- -------------
Loss before cumulative effect of change in accounting (12,112,568) (5,250,792) (3,602,311)
principle
Cumulative effect of change in accounting principle .......... -- -- (693,000)
------------- ------------- -------------
Net loss ............................................ $ (12,112,568) $ (5,250,792) $ (4,295,311)
============= ============= =============
Basic and diluted net loss per share:
Loss from continuing operations ......................... $ (0.51) $ (0.06) $ (0.26)
Loss from discontinued operations ....................... (0.21) (0.36) (0.10)
Gain (loss) on disposal of discontinued operations ...... -- -- 0.05
Cumulative effect of change in accounting principle ..... -- -- (0.06)
------------- ------------- -------------
Net loss ............................................ $ (0.72) $ (0.42) $ (0.37)
============= ============= =============
Weighted average shares outstanding .......................... 16,799,540 12,661,743 11,520,096
============= ============= =============
Weighted average shares outstanding, assuming dilution ....... 16,799,540 12,661,743 11,520,096
============= ============= =============
22
RCG Companies Incorporated and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' DEFICIT
FOR THE THREE YEARS ENDED JUNE 30, 2004
Additional Accumulated Other
Common Stock Paid-In Accumulated Comprehensive Treasury
Shares Amounts Capital Deficit Income (Loss) Stock Total
----------- -------- ------------ ------------- --------- --------- ------------
Balance at July 1, 2001 10,833,390 $433,335 $111,957,090 $ (93,478,807) $ 87,634 $ (11,333) $ 18,987,919
----------- -------- ------------ ------------- --------- --------- ------------
Comprehensive loss:
Net loss June 30, 2002 .. -- -- -- (4,295,311) -- -- (4,295,311)
Unrealized loss on
investments available
for sale .............. -- -- -- -- (139,127) -- (139,127)
----------- -------- ------------ ------------- --------- --------- ------------
Comprehensive loss . -- -- -- (4,295,311) (139,127) -- (4,434,438)
Sale of Common Stock .... 1,251,429 50,057 808,443 -- -- -- 858,500
Purchase of Business .... 172,103 6,884 767,075 -- -- -- 773,959
Issuance of Common Stock
for services .......... 53,112 2,124 178,163 -- -- -- 180,287
Issuance of Common Stock
for loan fee .......... 71,429 2,859 129,340 -- -- -- 132,199
Issuance of treasury
stock for services .... -- -- -- -- -- 3,604 3,604
Capital contribution .... -- -- 200,000 -- -- -- 200,000
Return of shares
pursuant to contract
settlement ............ -- -- -- -- -- (711,360) (711,360)
----------- -------- ------------ ------------- --------- --------- ------------
Balance at June 30, 2002 12,381,463 495,259 114,040,111 (97,774,118) (51,493) (719,089) 15,990,670
----------- -------- ------------ ------------- --------- --------- ------------
Comprehensive loss:
Net loss June 30, 2003 .. -- -- -- (5,250,792) -- -- (5,250,792)
Unrealized loss on
investments available
for sale .............. -- -- -- -- (224,854) -- (224,854)
----------- -------- ------------ ------------- --------- --------- ------------
Comprehensive loss . -- -- -- (5,250,792) (224,854) -- (5,475,646)
Issuance of treasury
stock for services .... (97,288) 110,859 13,571
Issuance/cancellation of
Common Stock for
services .............. 89,554 3,582 1,368 -- -- -- 4,950
Return of treasury stock
for loan fee settlement -- -- -- -- -- (23,785) (23,785)
Sale of Common Stock .... 1,477,143 59,086 384,912 -- -- -- 443,998
----------- -------- ------------ ------------- --------- --------- ------------
Balance at June 30, 2003 13,948,160 557,927 114,329,103 (103,024,910) (276,347) (632,015) 10,953,758
----------- -------- ------------ ------------- --------- --------- ------------
Comprehensive loss:
Net loss June 30, 2004 .. -- -- -- (12,112,568) -- -- (12,112,568)
Issuance of Common Stock
for debt and accounts
payable conversions ... 1,149,103 45,964 1,583,816 -- -- -- 1,629,780
Issuance of Common Stock
for services .......... 440,000 17,600 755,506 -- -- -- 773,106
Issuance of Common Stock
for business
acquisitions .......... 224,312 8,972 371,028 -- -- -- 380,000
Sale of Common Stock .... 5,527,429 219,098 4,346,372 -- -- -- 4,565,470
----------- -------- ------------ ------------- --------- --------- ------------
Balance at June 30, 2004 21,289,004 $849,561 $121,385,825 $(115,137,478) $(276,347) $(632,015) $ 6,189,546
=========== ======== ============ ============= ========= ========= ============
The accompanying notes are an integral part of these consolidated financial
statements.
23
RCG Companies Incorporated and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended June 30,
2004 2003 2002
------------ ------------ ------------
Cash flows from operating activities:
Net loss ................................................................ $(12,112,568) $ (5,250,792) $ (4,295,311)
Change in accounting principle........................................... 693,000
Loss from discontinued operations ....................................... 3,591,046 4,541,141 607,939
------------ ------------ ------------
Loss from continuing operations ......................................... (8,521,522) (709,651) (2,994,372)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization ....................................... 809,680 363,852 320,362
Bad debt expense .................................................... 157,087 5,917 209,497
Common Stock issued for services and settlement of contract ......... 541,000 (5,264) 180,207
Stock purchase warrants issued for services ......................... 232,106 -- --
Gain on sale of investments ......................................... (119,682) (238,905) --
Gain on joint venture ............................................... (14,067) (3,311) --
(Gain) loss on sale of assets ....................................... 18,881 54,195 481
Compensation expense related to stock options and warrants .......... -- -- --
Goodwill impairment ................................................. 1,199,690 -- 693,000
Deferred debt cost amortization ..................................... 722,331 53,289 --
Amortization of unfavorable airline contract ........................ (2,184,773) -- --
Changes in operating assets and liabilities:
Restricted cash ................................................ (19,356,089) (1,679,168) (493,062)
Accounts receivable ............................................ (994,955) 663,986 (1,299,834)
Inventory ...................................................... (27,077) 45,006 (51,879)
Prepaid expenses ............................................... 1,702,637 223,458 (1,036,967)
Deferred costs and other assets ................................ 27,266 (166,414) (52,038)
Accounts payable and accrued expenses .......................... 14,216,839 217,057 (353,733)
Due to/from affiliates ......................................... (68,500) -- --
Unearned income ................................................ 12,985,949 762,315 2,669,671
------------ ------------ ------------
Net cash provided by (used in) operating activities ............ 1,272,269 (413,638) (2,901,587)
------------ ------------ ------------
Cash flows from investing activities:
Purchase of property and equipment ...................................... (732,603) (271,336) (89,000)
Sale of investments ..................................................... 183,600 428,763 664,253
Sale of assets .......................................................... 22,892 257,881 (44,859)
Cash paid in connection with business acquisitions, net ................. (362,793) (439,107) (21,392)
------------ ------------ ------------
Net cash provided by (used in) investing activities ................. (888,904) (23,799) 509,002
------------ ------------ ------------
Cash flows from financing activities:
Notes payable proceeds .............................................. -- 330,000 1,466,000
Principal debt repayments ........................................... (840,097) (325,301) (210,320)
Net change in line of credit ........................................ 159,504 273,307 --
Sale of RCG Common Stock ............................................ 6,085,470 443,998 858,500
------------ ------------ ------------
Net cash provided by financing activities ...................... 5,404,877 722,004 2,114,180
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents ......................... 5,788,242 284,567 (278,405)
Cash and cash equivalents at beginning of period ............................. 807,834 523,267 801,672
------------ ------------ ------------
Cash and cash equivalents at end of period ................................... $ 6,596,076 $ 807,834 $ 523,267
============ ============ ============
Supplemental cash flow information - Cash paid during the period for:
Interest ............................................................ $ 493,161 $ 135,853 $ 74,975
============ ============ ============
Income taxes ........................................................ $ -- $ -- $ --
============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
24
RCG Companies Incorporated and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Years Ended June 30,
2004 2003 2002
---------- ---------- ----------
Non-cash investing and financing activities:
Common Stock issued for acquired business ............................................. $ 380,000 $ -- $ 773,959
Note and Service Agreement Obligation issued for acquired business .................... 9,067,964 -- --
Fixed assets acquired of new businesses ............................................... 643,275 -- --
Common Stock and warrants issued for conversion of debt ............................... 1,517,500 -- --
Common Stock and warrants issued for conversion of accounts payable and accrued
expenses ............................................................................ 112,280 -- --
Conveyance of RCG's LFSI Common Stock for services .................................... 118,800 -- --
Issuance of compensatory stock purchase warrants in connection with strategic
alliances and other services ........................................................ -- -- 94,900
Payment for services with Common Stock ................................................ -- -- 36,513
Unrealized loss on available for sale investments ..................................... -- 224,854 139,127
Issuance of Common Stock and warrants for loan origination fees ....................... -- -- 130,197
The accompanying notes are an integral part of these consolidated financial
statements.
25
RCG Companies Incorporated and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
These financial statements include the operations of RCG Companies Incorporated
("RCG") and its subsidiaries (collectively the "Company"). At June 30, 2004, the
Company operated businesses in the travel services and technology solutions
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.
Operations and Liquidity
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. The Company has suffered recurring losses from
operations and as of June 30, 2004 had a working capital deficit of $11,121,088.
These conditions raise substantial doubt about the Company's ability to continue
as a going concern. Management recognizes that in order to meet the Company's
capital requirements, and continue to operate, additional funding is necessary.
The Company is exploring additional sources of liquidity, through debt and
equity financing alternatives and potential sales of its Common Stock in private
placement transactions. Additionally the Company is negotiating the restructure
of its long-term debt. If the Company is (i) unable to grow its business or
improve its operating cash flows as expected, (ii) unsuccessful in extending a
substantial portion of the debt repayments currently past due, or (iii) unable
to raise additional funds through private placement sales of its Common Stock,
then the Company may be unable to continue as a going concern. 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
flows 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 the Company's current
shareholders would be diluted. These consolidated financial statements do not
include any adjustments that may result from the outcome of these uncertainties.
Consolidation
The Company's consolidated financial statements include the assets, liabilities
and results of operations of RCG and each business acquired by RCG from the date
of its acquisition through June 30, 2004. All significant intercompany balances
and transactions have been eliminated. Certain prior period amounts have been
reclassified to conform to the fiscal year 2004 presentation.
Cash and Cash Equivalents
The Company classifies as cash equivalents any investments that have an original
maturity of less than three months. At times cash and cash equivalent balances
are at a limited number of banks and financial institutions and may exceed
insurable amounts. The Company believes it mitigates its risks by depositing
cash or investing in cash equivalents in major financial institutions.
26
RCG Companies Incorporated and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 escrow after air carriers have been paid. Remaining
funds are released from escrow 48 hours after departure date. The Company
classifies these escrow accounts as restricted cash. All escrow accounts are
maintained in one financial institution and balances exceed insurable limits.
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.
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 fiscal years 2003 and 2002, sales to Vacation Express, a MyTravel Group
company, a customer of the Company's travel services business, represented 73%
and 63%, respectively, of the Company's consolidated revenue. This concentration
of revenue with Vacation Express, and its sister company, SunTrips, both part of
the MyTravel Group, increased in July 2002 with the beginning of a new scheduled
charter program for SunTrips.
Trade Accounts Receivable
Accounts receivable from the sale of products or services are recorded at net
realizable vale 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.
27
RCG Companies Incorporated and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Inventory
Inventory consists mainly of computer software for the technology solutions
segment. 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 issuer, 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 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 that 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.
28
RCG Companies Incorporated and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Goodwill and Intangible Assets
The Company records goodwill and intangible assets arising from business
combinations in accordance with Financial Accounting Standards Board Statement
("FASB") No. 141 "Business Combinations" ("FASB 141") which requires that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001. FASB 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 FASB
No. 142 "Goodwill and Other Intangible Assets" ("FASB 142"). The Company adopted
FASB 142 effective July 1, 2001. In completing the adoption of FASB 142, the
Company has allocated its previously existing goodwill as of July 1, 2001 to its
reporting units, as defined in FASB 142, and performed an initial test for
impairment as of that date.
In accordance with FASB 142, the Company no longer amortizes goodwill. FASB 142
requires that goodwill and intangible assets with indefinite useful lives no
longer be amortized, but instead be tested at least annually for impairment.
FASB 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. The Company evaluated goodwill throughout fiscal
year 2004 and made an adjustment of $1,199,690 to write down the goodwill
associated with its corporate and technology solutions segments. The decline in
the fair value is attributed to a decrease in the forecasted profitability in
the technology solutions segment and the corporate segment no longer performing
investment advisory services.
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 disclosures that are more
prominent in both annual and interim financial statements, in regards to 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
29
RCG Companies Incorporated and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 pro forma net loss and net loss per share assuming compensation
cost was determined under FASB No. 123 for all options would have been the
following for the years ended June 30, 2004, June 30, 2003 and June 30, 2002.
2004 2003 2002
------------ ------------ ------------
Net loss, as reported .................................................... $(12,112,568) $ (5,250,792) $ (4,295,311)
Stock-based employee compensation credit included in reported
net loss ............................................................... -- 49,920 2,700
------------ ------------ ------------
(12,112,568) (5,200,872) (4,292,611)
Deduct: Stock-based compensation expense determined under FAS
123 .................................................................... (179,855) (334,278) (1,326,211)
------------ ------------ ------------
Pro forma net loss ....................................................... $(12,292,423) $ (5,535,150) $ (5,618,822)
============ ============ ============
Earnings per share:
Basic and diluted loss per share, as reported ............................ $ (0.72) $ (0.42) $ (0.37)
============ ============ ============
Basic and diluted loss per share, pro forma .............................. $ (0.73) $ (0.44) $ (0.49)
============ ============ ============
Unearned Income and Revenue Recognition
Travel Services
Revenue from the sale of tour packages either to 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. Substantially all of the unearned income on the Company's balance sheet
is from the travel services business.
Technology Solutions
Internet Web site 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.
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 FASB No. 128,
"Earnings per Share" which requires dual presentations of basic and diluted
earnings per share.
Basic earnings per share are computed using the weighted average number of
common shares outstanding during the period. Diluted earnings per share are
computed using the weighted average number of common shares outstanding and
potentially dilutive shares outstanding during the period. Options and warrants
to purchase 8,699,635, 4,739,410 and 3,763,392 shares of Common Stock were
outstanding at June 30, 2004, June 30, 2003 and June 30, 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 $1,054,234, $109,477 and $255,624 for the years ended June 30, 2004,
June 30, 2003 and June 30 2002, respectively.
30
RCG Companies Incorporated and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Income Taxes
The Company accounts for income taxes in accordance with the liability method as
provided under FASB No. 109, "Accounting for Income Taxes". Accordingly,
deferred income taxes are recognized for the tax consequences of 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.
Reclassifications
Certain reclassifications have been made to data from the previous period to
conform to the presentation of the current period.
Recent Accounting Pronouncements
In December 2003, the SEC issued SAB 104, "Revenue Recognition", which codifies,
revises and rescinds certain sections of SAB 101, "Revenue Recognition", in
order to make this interpretive guidance consistent with current authoritative
accounts and audit guidance and SEC rules and regulations. The changes noted in
SAB 104 did not have a material effect on the Company's consolidated results of
operations, financial position or cash flows.
NOTE 2. BUSINESS ACQUISITIONS AND DISCONTINUED OPERATIONS
Acquisitions
Through its wholly owned subsidiary, Flightserv, Inc. ("Flightserv"), 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.
In connection with the acquisition, the Company issued 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,
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").
31
RCG Companies Incorporated and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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, which included acquisition cost of $314,091, was
allocated as follows.
Current assets ......................................... $25,115,629
Property and equipment ................................. 628,775
Goodwill ............................................... 15,050,524
Other intangible assets ................................ 702,000
-----------
-----------
Total assets acquired ............................. 41,496,928
Current liabilities .................................... 32,646,344
-----------
-----------
Net assets acquired ............................... $ 8,850,584
===========
On November 5, 2003, the technology solutions business completed the acquisition
of SchoolWorld Software, a Pittsburgh, Pennsylvania-based educational software
company. The consideration, which included acquisition costs of $48,702 and the
issuance of 174,300 shares valued at $380,000, was allocated as follows (in
thousands).
Property and equipment ...................................... $ 14,500
Goodwill and other intangible assets ........................ 414,402
--------
--------
Total assets acquired .................................. $428,702
========
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).
Years Ended June 30,
(unaudited)
2004 2003 2002
--------- --------- ---------
Revenues ................................................... $ 234,972 $ 218,884 $ 200,646
Net loss ................................................... (23,591) (33,139) (20,658)
Basic and diluted loss per share ........................... (1.40) (2.62) (1.79)
Discontinued Operations
During the third quarter of 2004, the Board authorized the disposition of the
Company's investment in LFSI. Accordingly, the operations of LFSI were
reclassified to discontinued operations for all periods presented. During the
fourth quarter, the Company contributed approximately 4 million shares to the
treasury of LFSI, of which a substantial portion of the contributed shares were
reissued to certain LFSI investors to settle certain contingent claims. LFSI
also issued other shares, which resulted in RCG's interest in LFSI being reduced
to an effective 45.5% beneficial ownership. Considering the substantial
reduction in ownership and the lack of control over LFSI, the investment in LFSI
is now recorded using the equity method and is no longer a consolidated
subsidiary. The change resulted in RCG restoring its negative carrying value
during the forth quarter.
32
RCG Companies Incorporated and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The loss from discontinued operations at June 30,2004 is summarized as follows.
2002 2003 2004
Gross revenues ......................................... $ 2,214,396 $ 2,886,074 $ 2,205,545
Cost of revenues and operating expenses ................ 1,312,848 1,861,822 6,639,657
Other, net ............................................. 4,444,844 2,208,015 (1,659,827)
----------- ----------- -----------
Loss from discontinued operations ...................... 1,385,896 - (6,093,939)
Minority interest in discontinued operations ........... 388,051 - 314,281
Gain on deconsolidation of LFSI ........................ - - 2,188,612
----------- ----------- -----------
$(4,541,141) $(1,183,763) $(3,591,046)
=========== =========== ===========
Net non-current assets of LFSI at June 30, 2003 consisted of the following.
Goodwill ............................................................................................... $ 9,282,251
Property and equipment, net ............................................................................ 591,514
Deferred costs and other assets ........................................................................ 56,829
-----------
Non-current assets ................................................................................ 9,930,594
Long-term debt and capital leases, less current portion ................................................ (2,177,552)
-----------
$ 7,753,042
===========
Net current liabilities of LFSI at June 30, 2003 consisted of:
Accounts payable and accrued expenses .................................................................. $(4,209,645)
Current portion of long-term debt and capital leases ................................................... (2,463,242)
-----------
Non-current assets ................................................................................ (6,672,887)
Cash ................................................................................................... 167,293
Accounts receivable, net ............................................................................... 893,698
Prepaid expenses and other assets ...................................................................... 12,087
Inventories ............................................................................................ 818,907
-----------
$(4,780,902)
===========
NOTE 3. INVESTMENTS
Investments at June 30, 2004 and June 30, 2003 consisted of the following.
2004 Net 2003 Net
----------------------------------------- ------------------------------------------
Unrealized Fair Unrealized Fair
Cost (Loss) Value Cost (Loss) Value
--------- --------- --------- --------- --------- ---------
Equity securities .................... $ 585,298 $(276,347) $ 308,951 $ 585,298 $(276,347) $ 308,951
Private joint ventures ............... 17,960 17,960 67,994 67,994
--------- --------- --------- --------- --------- ---------
$ 603,258 $(276,347) $ 326,911 $ 653,292 $(276,347) $ 376,945
========= ========= ========= ========= ========= =========
The unrealized loss on equity securities at June 30, 2004 and June 30, 2003
consists of unrealized accumulated losses of $321,000, offset by unrealized
accumulated gains of $45,000.
33
RCG Companies Incorporated and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 4. PREPAID EXPENSES
Prepaid expenses at June 30, 2004 and June 30, 2003 consisted of the following.
2004 2003
---------- ----------
Flight and vacation costs ................ $5,410,527 $2,375,919
Other .................................... 413,182 265,617
---------- ----------
$5,823,709 $2,641,536
========== ==========
NOTE 5. PROPERTY AND EQUIPMENT, NET
Property and equipment, net at June 30, 2004 and June 30, 2003 consisted of the
following.
2004 2003
----------- -----------
Land, buildings and improvements ......... $ 316,311 $ 78,418
Furniture and fixtures ................... 384,658 287,255
Computers and office equipment ........... 1,870,302 1,237,349
Software ................................. 571,052 248,749
----------- -----------
3,142,323 1,851,771
Accumulated depreciation ................. (1,615,577) (1,053,884)
----------- -----------
$ 1,526,746 $ 797,887
=========== ===========
NOTE 6. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets, by business segment, for the fiscal years
ended June 30, 2004 and June 30, 2003 are as follows.
Travel Technology
Services Solutions Corporate Total
------------ ------------ ------------ ------------
Balance at July 1, 2002 ............................. $ 939,088 $ 7,630,675 $ 1,000,000 $ 9,569,763
Goodwill acquired during period ..................... 74,580 74,580
Other goodwill adjustments .......................... -- (2,972) -- (2,972)
------------ ------------ ------------ ------------
Balance at June 30, 2003 ............................ 939,088 7,702,283 1,000,000 9,641,371
Goodwill and other intangible assets acquired during
period, net of $156,000 amortization .............. 15,596,524 414,202 16,010,726
Goodwill impairment ................................. -- (199,690) (1,000,000) (1,199,690)
------------ ------------ ------------ ------------
Balance at June 30, 2004 ............................ $ 16,535,612 $ 7,916,795 $ -- $ 24,452,407
============ ============ ============ ============
During fiscal year 2004, goodwill increased by $15,050,524 and other intangibles
by $702,000 as a result of the travel services acquisition (see Note 2).
Goodwill was reduced by $1,199,690 associated with the corporate and technology
solutions segments. The decline in the fair value is attributed to a decrease in
the forecasted profitability in the technology solutions segment and the
corporate segment no longer performing investment advisory services.
34
RCG Companies Incorporated and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 7. NOTES PAYABLE AND OTHER OBLIGATIONS
Notes payable and other obligations consisted of the following at June 30, 2004
and June 30, 2003.
June 30,
2004 2003
----------- -----------
Note payable - due in August 2003 with interest at 10% and unsecured (1) ......................... $ -- $ 200,000
Note payable - due July 27, 2003 and unsecured (2) ............................................... 160,000 250,000
Revolving credit facility - secured by a portion of the accounts receivable of
the technology solutions business with interest at prime plus 2% ............................... 433,311 273,807
Capital lease obligations at various interest rates due in monthly installments through
November 2007 .................................................................................. 152,713 31,063
Note payable - unsecured and due on demand (3) ................................................... -- 80,000
Service agreement obligation - with interest imputed at 12% and unsecured (4) .................... 3,128,763 --
Note payable - with interest imputed at 12%, secured by certain RCG
investment holdings (5) ........................................................................ 5,723,992 --
----------- -----------
9,598,779 834,870
Less current maturities, including demand notes .................................................. (1,941,918) (818,790)
----------- -----------
Long-term portion ................................................................................ $ 7,656,861 $ 16,080
=========== ===========
- ----------
(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; on April 6, 2004 and June 9, 2004, $30,000 and $10,000, respectively,
of principal were 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 three-year period beginning November 1,
2003.
(5) On October 31, 2003, Flightserv purchased two businesses (see Note 2) for a
$10 million non-interest bearing seven-year note. Payments commence
quarterly beginning June 30, 2004.
Future maturities of the debt and notes payable are as follows at June 30, 2004.
Fiscal Year
2005..................................................................................................... $ 1,941,918
2006..................................................................................................... 1,517,867
2007..................................................................................................... 606,408
2008..................................................................................................... 91,788
2009..................................................................................................... 101,562
Thereafter............................................................................................... 5,339,236
------------
$ 9,598,779
============
35
RCG Companies Incorporated and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 8. NOTES PAYABLE AND AMOUNTS DUE TO RELATED PARTIES
Notes payable and amounts due to related parties consisted of the following at
June 30, 2004 and June 30, 2003.
June 30,
2004 2003
----------- -----------
Notes payable - due in August 2003 with interest imputed at 8% and unsecured (1) .................. $ -- $ 267,500
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) ....... -- 750,000
Note payable - unsecured and due on demand (3) .................................................... -- 5,000
Other advances .................................................................................... -- 73,063
----------- -----------
-- 1,095,563
Less current maturities, including demand notes ................................................... -- (495,563)
----------- -----------
Long-term portion ................................................................................. $ -- $ 600,000
=========== ===========
- ----------
(1) The principal and accrued interest on this note payable is 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 terms above.
(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.
Under certain conditions, the Company can force the debt holder to convert
to stock at $7.00 per share. On May 4, 2004, all of the $750,000 debt was
converted to 450,000 shares ($1.67 per share) of Common Stock.
(3) RCG repaid in October 2003.
NOTE 9. INCOME TAXES
Deferred income tax assets and (liabilities) consisted of the following as of
June 30, 2004 and June 30, 2003.
June 30,
2004 2003
------------ ------------
Deferred income tax assets:
Warrants and stock options ................................................. $ 305,816 $ --
Net operating loss carry-forwards .......................................... 18,969,514 19,575,969
Other ...................................................................... 166,777 327,735
------------ ------------
Total deferred income tax assets ...................................... 19,442,107 19,903,704
Deferred income tax liabilities:
Property and equipment ..................................................... (167,057) (167,057)
Intangible assets .......................................................... (248,660) --
------------ ------------
Net deferred income tax assets ............................................. 19,026,390 19,736,647
Deferred income tax asset valuation allowance .............................. (19,026,390) (19,736,647)
------------ ------------
Net deferred income tax assets ........................................ $ -- $ --
============ ============
36
RCG Companies Incorporated and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A reconciliation of the Company's effective income tax rate (-0-%) to the
statutory income tax rate (34%) is as follows.
Year Ended June 30,
2004 2003 2002
------------ ------------ ------------
Federal tax benefit at statutory rate ............................ $ (3,982,412) $ (1,744,099) $ (1,460,406)
State tax benefit, net of federal ................................ (343,639) (150,497) (214,766)
Permanent differences ............................................ 963,659 700,579 303,672
IRS examination settlement ....................................... 2,303,175 -- --
Other ............................................................ 348,960 (3,541,172) 891,286
Elimination of warrants and stock options ........................ -- 18,957,496 --
Change in deferred tax asset valuation allowance ................. 710,257 (14,222,307) 480,214
------------ ------------ ------------
Income tax expense, actual ....................................... $ -- $ -- $ --
============ ============ ============
As of June 30, 2004, the Company had approximately $51,000,000 of net operating
loss carry-forwards (NOLs) for federal income tax purposes, which expire between
2020 through 2024. A deferred income tax asset valuation allowance has been
established against all deferred income tax assets, as management is not certain
that the deferred income tax assets will be realized. In addition, due to
substantial limitations placed on the utilization of net operating losses
following a change in control, utilization of such NOLs could be limited.
NOTE 10. Common Stock AND PAID IN CAPITAL
In fiscal year 2004, in connection with the acquisition of Vacation Express and
SunTrips, the Company issued 2,500,000 shares of restricted Common Stock at
$1.60 per share.
In fiscal year 2004, in connection with the acquisition of SchoolWorld, the
Company issued 224,312 shares of restricted Common Stock at $1.69 per share.
In fiscal year 2004, the Company issued 440,000 shares of restricted Common
Stock in payment of services for investor relations.
In fiscal year 2004, the Company issued an aggregate of 700,000 shares of
restricted Common Stock in connection with the Company's fourth quarter fiscal
year 2003 private placement sale of Common Stock at $0.25 per share.
In fiscal year 2004, the Company issued an aggregate of 1,071,428 shares of
restricted Common Stock in connection with the Company's private placement sale
of Common Stock at $1.60 per share.
In fiscal year 2004, the Company issued an aggregate of 1,250,000 shares of
restricted Common Stock in connection with the Company's private placement sale
of Common Stock at $0.80 per share.
In fiscal year 2004, the Company issued an aggregate of 1,149,103 shares of
restricted Common Stock in connection with the Company's conversion of debt and
accounts payable.
In fiscal year 2004, previously issued warrants were exercised by a vendor in
the amount of 6,000 Common Stock shares at $0.50 per share.
37
RCG Companies Incorporated and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In fiscal year 2003, the Company issued 89,554 shares of restricted Common Stock
in payment of certain services.
In fiscal year 2003, the Company terminated an agreement with a service
provider. The Company had granted warrants to the service provider that vested
over a year resulting in additional paid-in capital of $98,000. Upon the
cancellation of the agreement, the Company reversed the unvested warrants
resulting in a reduction of additional paid-in capital of $45,200.
In the first quarter of fiscal year 2003, the Company issued an aggregate of
177,143 shares of restricted Common Stock in connection with the Company's
private placement sale of Common Stock at $0.70 per share.
In the fourth quarter of fiscal year 2003, the Company issued an aggregate of
1,300,000 shares of restricted Common Stock in connection with the Company's
private placement sale of Common Stock at $0.25 per share.
In fiscal year 2002, the Company issued an aggregate of 1,251,429 shares of
restricted Common Stock in connection with this private placement at $0.70 per
share.
In July 2002, the Company issued 14,286 shares of restricted Common Stock from
treasury stock with the termination of a contract with a service provider.
In fiscal year 2002, the Company issued 139,365 shares of restricted Common
Stock in connection with the acquisition of LSTA and 32,738 shares of restricted
Common Stock to management of Logisoft in exchange for Logisoft reaching certain
performance criteria set forth in the purchase agreement governing the Company's
acquisition of Logisoft.
During the year ended June 30, 2002, the Company issued 54,746 shares of
restricted Common Stock in exchange for consulting and legal services and as a
reimbursement of expenses for one employee. Included in this amount are 10,884
shares issued to two directors of the Company as reimbursement for their service
to the Company as directors.
On June 17, 2002, the Company implemented a reverse stock split exchanging one
share of Common Stock for every seven shares held by the Company's stockholders
as of the close of business on June 14, 2002. As a result, an adjustment was
recorded to reduce the recorded amount of Common Stock and increase additional
paid in capital, each by $2,600,014. The reverse stock split was approved by the
Company's shareholders at its annual meeting held on May 17, 2002. All of the
share amounts in these financial statements have been adjusted for this reverse
stock split.
During fiscal year 2002, the Company received a capital contribution of $200,000
in connection with the launch of its national franchising program for its home
technology business.
During fiscal year 2002, the Company terminated a public relations contract
pursuant to which it had issued 132,000 shares of restricted Common Stock during
fiscal year 2001. Pursuant to the terms of the settlement, 89,143 shares were
returned to the Company and were placed in treasury stock as of June 30, 2002.
38
RCG Companies Incorporated and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 11. 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 FASB 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 FASB
No. 123.
At the July 11, 2000 meeting, the shareholders approved the Company's 2000 Stock
Option Plan (the "Option Plan"). The Company's Option Plan provides for the
granting of either incentive stock options or non-qualified options to purchase
shares of the Company's Common Stock to provide incentives to employees,
directors and other individuals or companies at the discretion of the Board. The
Plan allows participants to purchase Common Stock of the Company at prices set
by the Board, but in the case of incentive stock options, at a price not less
than fair market value at the date the option is granted. Unexercised options
expire 10 years or less after the date of grant unless otherwise specified by
the Board. At the January 10, 2001 annual shareholders meeting, the shareholders
increased the number of shares available for the granting of incentive stock
options under the Option Plan from 10,000,000 to 20,000,000 shares.
Stock option and warrant activity was as follows.
| Options Warrants
---------------------------------- ----------------------------------
Weighted Weighted
Average Average
Number Exercise Price Number Exercise Price
------------- ---------------- -------------- ----------------
Outstanding-June 30, 2001 .......................... 1,394,754 $ 3.48 2,238,589 $ 7.09
Granted ....................................... 255,715 0.56 203,571 0.56
Canceled or expired ........................... 329,237 0.71 0 --
--------- --------- --------- ---------
--------- --------- --------- ---------
Outstanding-June 30, 2002 .......................... 1,321,232 4.20 2,442,160 9.00
Granted ....................................... 1,372,500 0.34 0 --
Canceled or expired ........................... 283,982 4.75 112,500 6.65
--------- --------- --------- ---------
--------- --------- --------- ---------
Outstanding-June 30, 2003 .......................... 2,409,750 2.10 2,329,660 9.31
Granted ....................................... 290,000 1.15 4,135,803 1.52
Exercised ..................................... 0 -- 6,000 0.50
Canceled or expired ........................... 438,093 0.80 37,500 0.95
--------- --------- --------- ---------
--------- --------- --------- ---------
Outstanding-June 30, 2004 .......................... 2,261,657 $ 2.22 6,421,963 $ 4.91
========= ========= ========= =========
39
RCG Companies Incorporated and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following summarizes the range of exercise prices and weighted-average
remaining contractual life of outstanding options at June 30, 2004.
Options Outstanding Options Exercisable
------------------------------------------------ ---------------------------------
Range of Exercise Prices Number Weighted Weighted Number Weighted
Average Average Average
Outstanding Remaining Exercise Exercisable Exercise
June 30, 2004 Life Price June 30, 2004 Price
- ---------------------------------------- ------------------- -------------- ------------- ----------------- --------------
$ 0.55 - 1.26...................... 1,198,857 7.30 $ 0.60.60 860,138 $ 0.60
1.75 - 1.90...................... 550,000 6.30 1.78 450,000 1.76
4.90 - 5.25...................... 385,714 4.70 5.03 385,714 5.03
5.95 - 5.95...................... 23,514 3.10 5.95 21,996 5.95
7.00 - 10.06...................... 85,715 1.10 9.55 84,524 9.59
21.00 - 21.00...................... 17,857 3.50 21.00 17,857 21.00
------------------- -------------- ------------- ----------------- --------------
$ 0.55 - 21.00...................... 2,261,657 6.30 $ 2.20 1,820,229 $ 2.51
=================== ============== ============= ================= ==============
The following summarizes the range of exercise prices and weighted-average
remaining contractual life of outstanding warrants at June 30, 2004.
Warrants Outstanding Warrants Exercisable
------------------------------------------- -----------------------------
Range of Exercise Prices Number Weighted Weighted Number Weighted
Average Average Average
Outstanding Remaining Exercise Exercisable Exercise
July 30, 2004 Life Price July 30, 2004 Price
- -------------------------------------------------- ---------------- ------------- ------------ ---------------- ------------
$ 0.28 - 0.50............................... 817,768 0.60 $ 0.29 817,768 $ 0.29
1.60 - 2.45............................... 4,148,660 1.50 2.40 4,048,660 2.42
3.50 - 5.67............................... 750,535 1.50 5.12 746,963 5.12
7.00 - 7.70............................... 8,571 0.00 7.58 8,571 7.58
12.25 - 12.25............................... 96,429 4.70 12.25 89,287 12.25
21.00 - 28.00............................... 600,000 2.60 27.04 600,000 27.04
---------------- ------------- ------------ ---------------- ------------
$ 0.28 - 28.00............................... 6,421,963 1.60 $ 4.91 6,311,249 $ 4.95
================ ============= ============ ================ ============
Pro forma information regarding net loss is required by FASB No. 123, which also
requires that the information be determined as if the Company had accounted for
its employee stock options granted subsequent to July 1, 1996 under the fair
value method of that statement. The fair value for these options was estimated
at the date of grant using the Black-Scholes Model with the following weighted
average assumptions for fiscal year 2004; risk-free interest rate range of 2.72%
to 4.76%; no dividend yield; volatility factor of the expected market price of
the Company's Common Stock for 2003 and 2002 of $1.16 and $.974, respectively;
and an expected life of the option of three to five years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options and because changes in the subjective
input assumptions can naturally affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of the Company's employee stock options.
40
RCG Companies Incorporated and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 12. RELATED-PARTY TRANSACTIONS
The Company's travel services business entered into a one-year public relations
contract with a company whose president's wife is an employee of the travel
services business. This contract was terminated on August 26, 2004. During
fiscal year 2004, 19,971 was paid for services rendered.
41
RCG Companies Incorporated and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 13. BUSINESS SEGMENT INFORMATION
Information related to business segments is as follows (in thousands).
Year ended June 30, 2004: Aviation Technology Corporate Total
Travel
Services Solutions
- ---------------------------------------------------- ------------- --------------- -------------- ------------
Revenue $ 165,395 $ 15,412 $ - $ 180,807
Loss from continuing operations (4,681) (588) (3,253) (8,522)
Identifiable assets 72,258 11,171 865 84,294
Capital expenditures 638 95 - 733
Depreciation and amortization 591 204 15 810
Aviation
Travel Technology
Year ended June 30, 2003: Services Solutions Corporate Total
- ---------------------------------------------------- ------------- --------------- -------------- ------------
Revenue $ 62,607 $ 11,002 $ 1 $ 73,610
Income (loss) from continuing operations 888 (340) (1,258) (710)
Identifiable assets (1) 7,443 10,281 1,621 19,345
Capital expenditures 197 74 - 271
Depreciation and amortization 101 249 14 364
Aviation
Travel Technology
Year ended June 30, 2002: Services Solutions Corporate Total
- ---------------------------------------------------- ------------- --------------- -------------- ------------
Revenue $ 27,273 $ 10,294 $ 279 $ 37,846
Loss from continuing operations (946) (609) (1,439) (2,994)
Identifiable assets (1) 5,743 11,197 1,982 18,922
Capital expenditures 21 67 1 89
Depreciation and amortization 76 229 15 320
- ----------
(1) Excludes assets of discontinued operations
NOTE 14. CONTINGENCIES AND COMMITMENTS
Commitments
The Company leases office space under non-cancelable office leases. The future
minimum lease payments required under these leases at June 30, 2004 are as
follows (in thousands).
Fiscal Year Total
- --------------- ---------
2005..............................................................................................................$ 1,406
2006............................................................................................................... 1,355
2007............................................................................................................... 1,372
2008............................................................................................................... 1,203
2009............................................................................................................... 1,227
Thereafter......................................................................................................... 544
--------
$ 7,107
========
42
RCG Companies Incorporated and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Rent expense under operating leases aggregated $1,013,830, $398,960 and $346,983
for the years ended June 30, 2004, June 30, 2003 and June 30, 2002,
respectively.
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.
Subsequent Events
Termination of Planned Acquisition
On August 17, 2004, the Company announced that it had terminated its previously
announced (May 11, 2004) acquisition of Response Personnel, Inc. and certain
related affiliates. Response is a leading provider of professional staffing
services. RCG plans to focus its future growth and acquisition initiatives
within the leisure travel and entertainment industry.
Securities Purchase Agreement
The Company entered into a Securities Purchase Agreement, dated September 13,
2004, with institutional and accredited investors (collectively the
"Investors"). Pursuant to the terms of the Securities Purchase Agreement, the
Company is to initially issue the following securities to the Investors in
consideration for the Investors making payment to the Company in the aggregate
amount of $4,300,000: (i) 4,300 shares of Series A 6% Convertible Preferred
Stock, with a stated value of $1,000 per share, which shares are initially
convertible into shares of Common Stock of the Company at a fixed price of $0.94
per share, subject to adjustment ("Set Price") and that are, subject to certain
conditions, subject to forced conversion by the Company at any time the common
shares of the Company have a volume weighted average price ("VWAP") which
exceeds 200% of the Set Price for the preceding 10 trading days, (ii) Warrants
to purchase approximately 1,143,617 shares of Common Stock of the Company at an
exercise price of $1.20 per share, exercisable commencing 6 months after the
closing date until the date that is 3 years after such date, with anti-dilution
provisions subject to a $1 floor, and that are, subject to certain conditions,
callable by the Company at any time the common shares of the Company have a VWAP
which exceeds 200% of the exercise price for the preceding 20 trading days, and
(iii) Additional Investment Rights to purchase approximately 3,430,851 shares of
Common Stock of the Company at an exercise price of $1.03 per share, exercisable
commencing 6 months after the closing date until the earlier of (a) the later of
the date that is 6 months after the effective date of the registration statement
covering the shares and the date that is 1 year after the closing date, and (b)
September 13, 2006, with standard anti-dilution, and that are, subject to
certain conditions, callable by the Company at any time the common shares of the
Company have a VWAP greater than or equal to 160% of the exercise price for the
preceding 20 trading days.
The transaction was approved by the Company's Board on August 25, 2004, and
closed on September 14, 2004.
On September 14, 2004, the Company filed an amended Certificate of Incorporation
with the Secretary of State of the State of Delaware. The Certificate amends the
Company's Certificate of Incorporation to fix the preferences, rights, and
limitations of the Series A 6% Convertible Preferred Stock, as described above.
43
RCG Companies Incorporated and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Quarterly Financial Data (Unaudited)
(in thousands, except per-share data)
Annual
Fiscal Year 2003 Sept. 30 Dec. 31 Mar. 31 June 30 Total
- ------------------------------------------------------------------ --------- --------- --------- --------- ---------
Revenues .......................................................... $ 19,113 $ 38,881 $ 52,243 $ 70,570 $ 180,807
Gross Profit ...................................................... 1,267 3,289 972 7,752 13,280
Operating income (loss) from continuing operations ................ (328) (2,157) (6,399) 989 (7,895)
--------- --------- --------- --------- ---------
Income (loss) from continuing operations .......................... (160) (2,386) (6,623) 647 (8,522)
Income (loss) from discontinued operations ........................ (730) (5,651) (1,548) 4,338 (3,591)
--------- --------- --------- --------- ---------
Net income (loss) ................................................. $ (890) $ (8,037) $ (8,171) $ 4,985 $ (12,113)
========= ========= ========= ========= =========
Income (loss) per common share from continuing operations:
Basic ........................................................ (0.01) (0.014) (0.35) 0.04 (0.51)
========= ========= ========= ========= =========
Diluted ...................................................... (0.01) (0.014) (0.35) 0.03 (0.51)
========= ========= ========= ========= =========
Net income (loss) per common share:
Basic ........................................................ (0.06) (0.46) (0.43) 0.30 (0.72)
========= ========= ========= ========= =========
Diluted ...................................................... (0.06) (0.46) (0.43) 0.27 (0.72)
========= ========= ========= ========= =========
Annual
Fiscal Year 2003 Sept. 30 Dec. 31 Mar. 31 June 30 Total
- ------------------------------------------------------------------ --------- --------- --------- --------- ---------
Revenues .......................................................... $ 18,288 $ 16,218 $ 17,660 $ 21,444 $ 73,610
Gross Profit ...................................................... 1,412 1,061 1,084 1,536 5,093
Operating income (loss) from continuing operations ................ (25) (259) (548) (149) (981)
--------- --------- --------- --------- ---------
Income (loss) from continuing operations .......................... 359 (155) (592) (322) (710)
Income (loss) from discontinued operations ........................ (509) (376) (802) (2,854) (4,541)
--------- --------- --------- --------- ---------
Net income (loss) ................................................. $ (150) $ (531) $ (1,394) $ (3,176) $ (5,251)
========= ========= ========= ========= =========
Income (loss) per common share from continuing operations:
Basic ........................................................ $ 0.03 $ (0.01) $ (0.05) $ (0.02) $ (0.06)
========= ========= ========= ========= =========
Diluted ...................................................... $ 0.03 $ (0.01) $ (0.05) $ (0.02) $ (0.06)
========= ========= ========= ========= =========
Net income (loss) per common share:
Basic ........................................................ $ (0.01) $ (0.04) $ (0.11) $ (0.24) $ (0.42)
========= ========= ========= ========= =========
Diluted ...................................................... $ (0.01) $ (0.04) $ (0.11) $ (0.24) $ (0.42)
========= ========= ========= ========= =========
44
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
Forms 8-K confirming the change in the registrant's certifying accountants (Item
4) were filed on March 3, 2004 and April 2, 2004.
Item 9A. Controls and Procedures
The Company's Chief Executive Officer and Chief Financial Officer have concluded
that the Company's disclosure controls and procedures are effective based on
their evaluation of such controls and procedures as of June 30, 2004. There were
no changes in the Company's internal control over financial reporting identified
in connection with the evaluation that occurred during the fourth quarter of the
Company's fiscal year ended June 30, 2004 that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
Item 9B. Other Information
Not applicable.
45
- --------------------------------------------------------------------------------
PART III
- --------------------------------------------------------------------------------
Item 10. Directors and Executive Officers of the Registrant
Pursuant to General Instruction G(3) of Form 10-K, the information called for by
this item is hereby incorporated by reference from the Company's definitive
proxy statement to be filed pursuant to Regulation 14A not later than 120 days
after the end of the fiscal year covered by this report.
Item 11. Executive Compensation
Pursuant to General Instruction G(3) of Form 10-K, the information called for by
this item is hereby incorporated by reference from the Company's definitive
proxy statement to be filed pursuant to Regulation 14A not later than 120 days
after the end of the fiscal year covered by this report.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Pursuant to General Instruction G(3) of Form 10-K, the information called for by
this item is hereby incorporated by reference from the Company's definitive
proxy statement to be filed pursuant to Regulation 14A not later than 120 days
after the end of the fiscal year covered by this report.
Item 13. Certain Relationships and Related Transactions
Pursuant to General Instruction G(3) of Form 10-K, the information called for by
this item is hereby incorporated by reference from the Company's definitive
proxy statement to be filed pursuant to Regulation 14A not later than 120 days
after the end of the fiscal year covered by this report.
Item 14. Principal Accountant Fees and Services
Pursuant to General Instruction G(3) of Form 10-K, the information called for by
this item is hereby incorporated by reference from the Company's definitive
proxy statement to be filed pursuant to Regulation 14A not later than 120 days
after the end of the fiscal year covered by this report.
46
PART IV
Item 15. Exhibits, Financial Statement Schedules
(a) (1) Financial Statements
The following consolidated financial statements are incorporated by
reference in Part II, Item 8:
o Report of Independent Registered Public Accounting Firm;
o Consolidated Balance Sheets as of June 30, 2004 and June 30, 2003;
o Consolidated Statements of Operations for the years ended June 30,
2004, June 30, 2003 and June 30, 2002;
o Consolidated Statements of Changes in Shareholders' Equity for the
years ended June 30, 2004, June 30, 2003 and June 30, 2002;
o Consolidated Statements of Cash Flows for the years ended June 30,
2004, June 30, 2003 and June 30, 2002; and
o Notes to the Consolidated Financial Statements.
(a) (2) Financial Statement Schedules
o Report of Independent Accounting Firm on Financial Statement
Schedules
o Schedule II - Valuation and Qualifying Accounts
All other financial statement schedules are omitted for the reasons that
they are either not applicable or not required or because the information
required is contained in the consolidated financial statements or notes
thereto which are incorporated by reference in Part II, Item 8.
(a) (3) Exhibits
Exhibit
Number Exhibit Description
2.1 Stock Purchase Agreement dated as of August 16, 2000
between the Company, Michael Pruitt, and Darek Childress
(incorporated by reference to Exhibit 2.1 to the Company's
Current Report on Form 8-K filed on (September 22, 2000).
2.2 Stock Purchase Agreement dated as of August 11, 2000
between the Company and Caliente Consulting (incorporated
herein by reference to Exhibit 2.1 to the Company's Current
Report on Form 8-K filed on September 22, 2000).
2.3 Share Exchange Purchase Agreement dated as of November 8,
2000 between the Company and Avenel (incorporated by
reference to Exhibit 2.2 to the Company's Current Report on
Form 10-QSB for the quarter ended December 31, 2000 filed
on February 14, 2001).
2.4 Stock Purchase Agreement between the Company and the
majority of the stockholders of Lifestyle (incorporated by
reference to the Company's Current Report on Form 8-K filed
on April 18, 2001).
47
2.5 Stock Purchase Agreement dated as of March 16, 2001 between
the Company and Glenn Barrett, Jr. (incorporated by
reference to Exhibit 2.2 to the Company's Current Report on
Form 8-K filed on April 18, 2001).
2.6 Stock Purchase Agreement dated as of March 31, 2001 between
the Company and Brandon Holdings, Inc. (incorporated by
reference to Exhibit 2.3 to the Company's Current Report on
Form 8-K filed on April 18, 2001).
2.7 Agreement and Plan of Merger dated as of June 5, 2001
between the Company, Logisoft Acquisition Corporation and
the individuals listed on Exhibit A thereto (incorporated
by reference to Exhibit 2.1 the Company's Current Report on
Form 8-K filed on June 13, 2001).
2.8 Joinder to the Merger Agreement executed by Logisoft
(incorporated by reference to Exhibit 2.2 the Company's
Current Report on Form 8-K filed on June 13, 2001).
2.9 Asset Purchase Agreement dated as of June 20, 2001, by and
among Greater Atlanta Alarm Services, Inc., the Company,
Glenda Watson and David Watson (incorporated by reference
to Exhibit 2.1 to the Company's Current Report on Form 8-K
filed on August 14, 2001).
2.10 Stock Purchase Agreement dated as of May 15, 2001 between
the Company and Brikor, Inc. (incorporated by reference to
Exhibit 2.1 to the Company's Current Report on Form 8-K
filed on September 17, 2001).
2.11 Agreement and Plan of Merger dated as of August 30, 2002
among the Company, LST, Inc., Lifestyle Innovations, Inc.
and LFSI Merger Corporation (incorporated by reference to
Exhibit 2.1 of the Company's Current report on Form 8-K
filed on September 20, 2002).
3.1 Restated Certificate of Incorporation of the Company dated
as of January 19, 2001 (incorporated by reference to
Exhibit 3.1 to the Company's Quarterly report on Form
10-QSB for the quarter ended December 31, 2000 filed on
February 14, 2001).
3.2 Amended and Restated Bylaws of the Company (incorporated by
reference to the Company's Annual Report on Form 10-K for
the year ended June 30, 2000 filed on September 28, 2000).
3.3 Certificate of Amendment of Restated Certificate of
Incorporation of eResource Capital Group, Inc. dated
June 17, 2002
4.1 Registration Rights Agreement between the Company and
Worldspan, L.P. dated as of June 26, 2000 (incorporated by
reference to the Company's Annual Report on Form 10-K for
the year ended June 30, 2000 filed on September 28, 2000).
4.2 Registration Rights Agreement between the Company, Four
Corners Capital, LLC and DC Investment Partners Exchange
Fund, L.P. dated as of January 23, 2001 (incorporated by
reference to Exhibit 4.1 of the Company's Quarterly Report
on Form 10-QSB for the quarter ended December 31, 2000
filed on February 14, 2001).
48
4.3 Registration Rights Agreement between the Company and Acqua
Wellington Value Fund, Ltd. Dated as of January 23, 2001
(incorporated by reference to exhibit 4.2 of the Company's
Quarterly Report on Form 10-QSB for the quarter ended
December 31, 2000 filed on February 14, 2001).
4.4 flightserv.com 2000 Stock Option Plan (incorporated by
reference to exhibit B to the Company's Definitive Proxy
Statement on Schedule 14A filed on June 19, 2000).
4.5 Registration Rights Agreement between the Company and each
of the stockholders of Lifestyle (incorporated by reference
to Exhibit 4.2 to the Company's Current Report on Form 8-K
filed on April 18, 2001).
10.1 Form of Officer/Director Non-Qualified Option Agreement
dated as of July 2, 1999 (incorporated by reference to
Exhibit 10.9 to the Company's Annual Report on Form 10-K
for the year ended June 30, 1999 filed on September 28,
1999).
10.2 Schedule of Option Agreements granted in February, April
and July 1999 (incorporated by reference to Exhibit 10.10
to the Company's Annual Report on Form 10-K for the year
ended June 30, 1999 filed on September 28, 1999).
10.3 Form of Officer/Director Non-Qualified Option Agreement
dated December 2, 1999 (incorporated by reference to
Exhibit 10.1 to the Company's Quarterly Report on Form
10-QSB for the quarter ended December 31, 1999 filed on
February 14, 2000).
10.4 Schedule of Option Agreements granted December 2, 1999
(incorporated by reference to Exhibit 10.2 to the Company's
Quarterly Report on Form 10-QSB for the quarter ended
December 31, 1999 filed on February 14, 2000).
10.5 Employment Agreement between the Company and Todd Bottorff
(represents a compensatory plan or arrangement)
(incorporated by reference to Exhibit 10.3 to the Company's
Annual Report on Form 10-K for the year ended June 30, 2000
filed on September 28, 2000).
10.6 Agreement between the Company and Arthur G. Weiss dated as
of July 27, 2000 (represents a compensatory plan or
arrangement) (incorporated by reference to Exhibit 10.14 to
the Company's Annual Report on Form 10-K for the year ended
June 30, 2000 filed on September 28, 2000).
10.7 Agreement between the Company and C. Beverly Lance dated as
of July 27, 2000 (represents a compensatory plan or
arrangement) (incorporated by reference to Exhibit 10.15 to
the Company's Annual Report on Form 10-K for the year ended
June 30, 2000 filed on September 28, 2000).
10.8 Consulting Agreement between the Company and Todd Bottorff
dated as of January 17, 2001 (incorporated by reference to
Exhibit 10.1 to the Company's Quarterly Report on Form
10-QSB for the quarter ended December 31, 2000 filed on
February 14, 2001).
10.9 Employment Agreement between the Company and Michael D.
Pruitt dated as of November 8, 2000 (represents a
compensatory plan arrangement) (incorporated by reference
to Exhibit 10.2 to the Company's Quarterly Report on Form
10-QSB for the quarter ended December 31, 2000 filed on
February 14, 2001).
49
10.10 Employment Agreement between the Company and Ms. Melinda
Morris Zanoni dated as of November 8, 2000 (represents a
compensatory plan or arrangement) (incorporated by
reference to Exhibit 10.3 to the Company's Quarterly Report
on Form 10-QSB for the quarter ended December 31, 2000
filed on February 14, 2001).
10.11 General Release and Settlement Agreement between the
Company and Four Corners Capital, LLC and DC Investment
Partners Exchange Fund, L.P. dated as of January 23, 2001
(incorporated by reference to Exhibit 10.4 to the Company's
Quarterly Report on Form 10-QSB for the quarter ended
December 31, 2000 filed on February 14, 2001).
10.12 General Release and Settlement Agreement between the
Company and Acqua Wellington Value Fund, Ltd. dated as of
January 23, 2001 (incorporated by reference to Exhibit 10.5
to the Company's Quarterly Report on Form 10-QSB for the
quarter ended December 31, 2000 filed on February 14,
2001).
10.13 Employment Agreement between the Company and Michael D.
Pruitt dated as of November 7, 2002 (represents a
compensatory plan arrangement) (incorporated by reference
to Exhibit 10.2 to the Company's Quarterly Report on Form
10-QSB for the quarter ended December 31, 2002, filed on
February 14, 2003).
10.14 Employment Agreement between the Company and Ms. Melinda
Morris Zanoni dated as of November 7, 2002 (represents a
compensatory plan or arrangement) (incorporated by
reference to Exhibit 10.3 to the Company's Quarterly Report
on Form 10-QSB for the quarter ended December 31, 2002
filed on February 14, 2003).
10.15 Employment Agreement between the Company and Jeffery F.
Willmott dated as of April 15, 2003 (represents a
Compensatory plan arrangement (incorporated by reference to
Exhibit 10.2 of the Company's Quarterly Report on Form
10-QSB for the quarter ended March 31, 2003, filed on May
15, 2003).
10.16 Amendment to Employment Agreement between the Company and
Michael D. Pruitt dated as of April 2, 2003 (incorporated
by reference to the Company's Annual Report on Form 10-KSB
for the year ended June 30, 2003 filed on October 14,
2003).
10.17 Amendment to Employment Agreement between the Company and
Melinda Morris Zanoni dated as of April 2, 2003
(incorporated by reference to the Company's Annual Report
on Form 10-KSB for the year ended June 30, 2003 filed on
October 14, 2003).
10.18 Asset purchase agreement by and among VE Holdings, Inc.,
SunTrips, Inc., FS Tours, Inc. and FS SunTours, Inc. dated
as of October 17, 2003 (incorporated by reference to
exhibit 10.1 to the Company's current report on Form 8-k
filed on October 20, 2003).
10.19 amended and restated asset purchase agreement by and among
VE Holdings, Inc., SunTrips, Inc., FS Tours, Inc. and FS
SunTours, Inc. dated as of October 31, 2003 (incorporated
by reference to Exhibit 10.1 to the Company's Current
Report on Form 8-K filed on November 17, 2003).
50
10.20 Securities Purchase Agreement among eResource Capital
Group, Inc. and the purchasers identified on the signature
pages thereto (incorporated by reference to Exhibit 10.1 to
the Company's Current Report on Form 8-K filed on November
17, 2003).
10.21 Stock Purchase Agreement dated as of May 11, 2004 by and
among WTI Acquisition, Inc., RCG Companies Incorporated and
Stockholders of Response Personnel, Inc. and Affiliates
(incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 2004
filed on May 14, 2004).
10.22 Securities Purchase Agreement dated as of September 13,
2004, by and among RCG Companies Incorporated and the
purchasers identified on the signature pages thereto
(incorporated by reference to Exhibit 4.1 to the Company's
Current Report on Form 8-K filed on September 16, 2004).
10.23 RCG Companies Incorporated, Certificate of Designation of
References, Rights and Limitations of Series A 6%
Convertible Preferred Stock (incorporated by reference to
Exhibit 4.5 to the Company's Current Report on Form 8-K
filed on September 16, 2004).
Exhibits filed herewith:
16.1 Change in Accountants-Letter from Ernst & Young dated
February 22, 2002 (incorporated herein by reference to
Exhibit 16.1 to the Company's Current Report on Form 8-K/A
filed on February 22, 2002).
21.1 Subsidiaries of the Company
23.1 Consent of BDO Seidman, LLP
31.1 Certification of Principal Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Principal Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Principal Executive Officer and
Principal Financial Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
51
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
RCG Companies Incorporated and Subsidiaries
Charlotte, North Carolina
The audits referred to in our report dated October 8, 2004 relating to the
consolidated financial statements of RCG Companies Incorporated and
Subsidiaries, which is contained in Item 8 of this Form 10-K included the audit
of the financial statement schedules listed in the accompanying index. These
financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statement schedules based upon our audits. Our report conteins an explanetory
paragraph regarding the Company's ability to continue as a going concern.
In our opinion, such financial statement schedules present fairly, in all
material respects, the information set forth therein.
/s/ BDO Seidman
- -------------------------
BDO Seidman, LLP
Charlotte, North Carolina
Date: October 8, 2004
52
RCG COMPANIES INCORPORATED AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Balance at Charged Balance at
Beginning to Cost and Other End of
of Year Expenses Deductions (1) Adjustments Year
-------- -------- -------- -------- --------
Year Ended June 30, 2002
Allowance for Doubtful Accounts ................... $ 81,073 $ 209,497 $ 67,987 -- $222,583
Year Ended June 30, 2003
Allowance for Doubtful Accounts ................... 222,583 5,917 116,676 -- 111,824
Year Ended June 30, 2004
Allowance for Doubtful Accounts ................... 111,824 157,087 10,934 73,713 331,690
- ----------
(1) Write-off of doubtful accounts
53
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: October 13, 2004 By: /s/ Michael D. Pruitt
---------------------------------------------
Michael D. Pruitt
President and Chief Executive Officer
(principal executive officer)
Date: October 13, 2004 By: /s/ Jeffrey F. Willmott
---------------------------------------------
Jeffrey F. Willmott
Chairman of the Board
Date: October 13, 2004 By: /s/ William W. Hodge
---------------------------------------------
William W. Hodge
Chief Financial Officer
(principal accounting officer)
Date: October 13, 2004 By: /s/ Dr. James A. Verbrugge
---------------------------------------------
Dr. James A. Verbrugge
Director
Date: October 13, 2004 By: /s/ P. Roger Byer
---------------------------------------------
P. Roger Byer
Director
Date: October 13, 2004 By: /s/ J. Michael Carroll
---------------------------------------------
J. Michael Carroll
Director
Date: October 13, 2004 By: /s/ Wesley M. Jones
---------------------------------------------
Wesley M. Jones
Director
54