UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549-0001
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED: SEPTEMBER 30, 2004.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
From the Transition Period From to .
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 (I.R.S. Employer
of incorporation or organization) Identification Number)
6836 MORRISON BOULEVARD, SUITE 200, CHARLOTTE, NC 28211-2668, (704) 366-5054
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(Address of registrant's principal executive offices including zip code, and
telephone number, including area code)
Check whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
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 [ ]
Check whether the Registrant is an accelerated filer (as defined in Rule 12b-2
of the Exchange Act).
YES [ ] NO [X]
The number of shares outstanding of the Registrant's common stock ("Common
Stock") as of November 18, 2004: 21,170,290
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TABLE OF CONTENTS
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Page
PART I. FINANCIAL INFORMATION.....................................................................................2
Item 1. Condensed Consolidated Financial Statements.....................................................2
Condensed Consolidated Balance Sheets at September 30, 2004 (Unaudited)
and June 30, 2004...........................................................................................2
Condensed Consolidated Statements of Operations for the Three Months
Ended September 30, 2004 and September 30, 2003 (Unaudited).................................................3
Condensed Consolidated Statements of Cash Flows for the Three Months
Ended September 30, 2004 and September 30, 2003 (Unaudited).................................................4
Notes to the Condensed Consolidated Financial Statements....................................................6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..........14
Item 3. Quantitative and Qualitative Disclosures About Market Risk.....................................21
Item 4. Controls and Procedures........................................................................21
PART II. OTHER INFORMATION.......................................................................................22
Item 1. Legal Proceedings..............................................................................22
Item 2. Changes in Securities..........................................................................22
Item 3. Defaults Upon Senior Securities................................................................22
Item 4. Submission of Matters to a Vote of Security Holders............................................22
Item 5. Other Information..............................................................................23
Item 6. Exhibits.......................................................................................23
Signatures.......................................................................................................23
1
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PART I. FINANCIAL INFORMATION
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ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
RCG COMPANIES INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
Sept. 30,
2004 June 30,
(Unaudited) 2004
-------------- --------------
ASSETS
Cash and cash equivalents ....................................................... $ 2,640 $ 6,596
Restricted cash ................................................................. 19,210 40,387
Accounts receivable, net of allowance of doubtful accounts of $328 and $332,
respectively .................................................................. 3,679 4,532
Due from affiliates ............................................................. 6 69
Inventory ....................................................................... 73 72
Investments ..................................................................... 322 327
Prepaid expenses ................................................................ 3,371 5,824
-------------- --------------
Total current assets .................................................. 29,301 57,807
Property and equipment, net ..................................................... 1,751 1,527
Deferred costs and other assets ................................................. 459 508
Goodwill and other intangible assets ............................................ 24,394 24,452
-------------- --------------
Total assets ........................................................... $ 55,905 $ 84,294
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable and other obligations-current portion ............................. $ 2,148 $ 1,942
Accounts payable and accrued expenses ........................................... 21,857 28,466
Unearned income ................................................................. 20,914 38,519
-------------- --------------
Total current liabilities .............................................. 44,919 68,927
Warrant obligations ............................................................. 2,802 1,520
Notes payable and other obligations ............................................. 7,279 7,657
-------------- --------------
Total liabilities ...................................................... 55,000 78,104
-------------- --------------
Commitments and Contingencies
Shareholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares authorized, 4,300 and -0-
issued, respectively ..................................................... -- --
Common stock, $.04 par value, 200,000,000 shares authorized, 21,301,504 and
21,289,004 issued, 21,170,290 and 21,157,790 outstanding, respectively ... 850 849
Additional paid-in capital ................................................. 123,832 121,386
Accumulated deficit ........................................................ (122,869) (115,137)
Accumulated other comprehensive loss ....................................... (276) (276)
Treasury stock at cost (131,214 shares) .................................... (632) (632)
-------------- --------------
Total shareholders' equity ............................................. 905 6,190
-------------- --------------
Total liabilities and shareholders' equity ............................. $ 55,905 $ 84,294
============== ==============
The accompanying notes are an integral part of these Condensed Consolidated
Financial Statements.
2
RCG COMPANIES INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except share data)
Three months ended
September 30,
2004 2003
-------------- --------------
Revenue:
Services ................................... $ 52,283 $ 15,701
Product sales .............................. 4,517 3,412
-------------- --------------
Total revenue ..................... 56,800 19,113
-------------- --------------
Cost of revenue:
Services ................................... 53,484 14,822
Product sales .............................. 4,016 3,024
-------------- --------------
Total cost of revenue ............. 57,500 17,846
-------------- --------------
Gross (loss) profit ............... (700) 1,267
-------------- --------------
Selling, general and administrative expenses 6,791 1,493
Depreciation and amortization .............. 213 102
-------------- --------------
Operating costs and expenses ...... 7,004 1,595
-------------- --------------
Operating loss .................... (7,704) (328)
Interest expense, net ...................... (278) (49)
Gain on investments, net ................... -- 119
Other income ............................... 250 97
-------------- --------------
Loss from continuing operations ... (7,732) (161)
Loss from discontinued operations, net ..... -- (729)
-------------- --------------
Net loss ................................... $ (7,732) $ (890)
============== ==============
Basic and diluted net loss per share:
Loss from continuing operations ....... $ (0.37) $ (0.02)
Loss from discontinued operations ..... -- (0.05)
-------------- --------------
Net loss .......................... $ (0.37) $ (0.07)
============== ==============
Weighted average shares outstanding ........ 21,166,198 14,292,798
The accompanying notes are an integral part of these Condensed Consolidated
Financial Statements.
3
RCG COMPANIES INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
Three months ended
September 30,
2004 2003
------------ ------------
Cash flows from operating activities:
Net loss .................................................................. $ (7,732) $ (890)
Loss on discontinued operations ........................................... -- 729
------------ ------------
Loss from continuing operations ....................................... (7,732) (161)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ......................................... 213 93
Gain on sale of investments ........................................... -- (119)
Amortization of unfavorable airline contract .......................... (1,205) --
Change in fair value of warrants ...................................... (256) --
Deferred debt cost amortization ....................................... 256 9
Changes in operating assets and liabilities:
Restricted cash .................................................. 21,177 1,235
Accounts receivable .............................................. 853 375
Inventory ........................................................ (1) (19)
Prepaid expenses ................................................. 2,453 946
Deferred costs and other assets .................................. 49 (12)
Accounts payable and accrued expenses ............................ (6,081) (1,143)
Due to affiliates ................................................ 63 --
Unearned income .................................................. (17,605) (1,844)
------------ ------------
Net cash used in continuing operating activities ............. (7,816) (640)
Net cash used in discontinued operations ..................... -- (239)
------------ ------------
Net cash used in operating activities .................... (7,816) (879)
Cash flows from investing activities:
Purchase of property and equipment ........................................ (120) (24)
Sale of investments ....................................................... -- 135
------------ ------------
Net cash provided by (used in) continuing investing activities ........ (120) 111
Net cash used in discontinued operations .............................. -- (11)
------------ ------------
Net cash provided by (used in) investing activities .............. (120) 100
Cash flows from financing activities:
Notes payable proceeds .................................................... -- 5
Principal debt repayments ................................................. (185) (4)
Net change in line of credit .............................................. 168 (259)
Issuance of RCG equity securities ......................................... 3,997 988
------------ ------------
Net cash provided by continuing financing activities .................. 3,980 730
Net cash provided by discontinued operations .......................... -- 233
------------ ------------
Net cash provided by financing activities ........................ 3,980 963
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Net increase (decrease) in cash and cash equivalents ...................... (3,956) 184
Cash and cash equivalents at beginning of period .......................... 6,596 808
------------ ------------
Cash and cash equivalents at end of period ..................................... $ 2,640 $ 992
============ ============
The accompanying notes are an integral part of these Condensed Consolidated
Financial Statements.
4
RCG COMPANIES INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
(Unaudited, in thousands)
Three months ended
September 30,
2004 2003
------------ ------------
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest .................................................. $ 83 $ 40
Income taxes .............................................. -- --
Non-cash investing and financing activities:
Common stock and warrants issued for conversion of debt ... -- 810
Common stock and warrants issued for conversion of accounts
payable and accrued expenses ......................... -- 70
Conveyance of RCG's LFSI Common Stock for services ........ -- 119
The accompanying notes are an integral part of these Condensed Consolidated
Financial Statements.
5
RCG COMPANIES INCORPORATED AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The Condensed Consolidated Financial Statements are unaudited and include the
accounts of RCG Companies Incorporated and its subsidiaries ("RCG" or the
"Company"). All significant intercompany accounts and transactions have been
eliminated in consolidation. These financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America for interim financial information and the instructions of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by such generally accepted accounting principles for complete financial
statements.
In the opinion of the management of the Company, the unaudited Condensed
Consolidated Financial Statements contain all adjustments, consisting only of
normal recurring adjustments, considered necessary for a fair statement of the
results of operations for the interim periods presented, with no material
retroactive adjustments. The results of operations for interim periods are not
indicative of the results that may be expected for a full year due to the
seasonality of the business. These interim unaudited Condensed Consolidated
Financial Statements should be read in conjunction with the audited Consolidated
Financial Statements and notes thereto for the year ended June 30, 2004 included
in the Company's Annual Report on Form 10-K.
OPERATIONS AND LIQUIDITY
Certain reclassifications have been made to data from the previous period to
conform to the presentation of the current period.
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 September 30, 2004 had a working capital deficit of
$15,618,000. 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. 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 sales of debt and
equity securities or sale of certain assets or portions of the business, 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
6
RCG COMPANIES INCORPORATED AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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.
SIGNIFICANT ACCOUNTING POLICIES
WARRANT OBLIGATION
In accordance with Emerging Issues Task Force Issue 00-19, or EITF 00-19,
"Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company's Own Stock", the fair value of warrants issued in certain
private placements has been initially accounted for as a liability because the
Company will incur a substantial penalty if it cannot comply with the warrant
holders' registration rights or have other net-cash settlement features. As of
the closing date of the private placements, the fair value of the warrants was
approximately $3,058,000, calculated utilizing the Black-Scholes option pricing
model. Changes in the market value of the Company's common stock from the
closing date until the warrants are exercised or expire will result in non-cash
charges or credits to operations to reflect the change in fair value of the
warrants during this period. To reflect the change in market value of the
warrants, the Company recorded a credit to operations of approximately $256,000
during the three-month period ended September 30, 2004.
STOCK-BASED COMPENSATION
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 three months ended September 30, 2004 and September 30, 2003
(in thousands, except share amounts).
2004 2003
-------------- --------------
Net loss, as reported ................................................ $ (7,732) $ (890)
Stock-based employee compensation credit included in reported net loss -- --
-------------- --------------
(7,732) (890)
Deduct: Stock-based compensation expense determined under FAS 123 .... (31) (45)
-------------- --------------
Pro forma net loss ................................................... $ (7,763) $ (935)
============== ==============
Earnings per share:
Basic and diluted loss per share, as reported ........................ $ (0.37) $ (0.07)
============== ==============
Basic and diluted loss per share, pro forma .......................... $ (0.37) $ (0.07)
============== ==============
7
RCG COMPANIES INCORPORATED AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Company's other significant accounting policies are the same as those
applied at June 30, 2004 and disclosed in the Company's audited Consolidated
Financial Statements and notes thereto for the year ended June 30, 2004,
included in the Company's Annual Report on Form 10-K.
NOTE 2. 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. The 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").
Effective November 12, 2004, the Company entered into an agreement to amend the
terms and amount of both the Promissory Note and the Service Agreement
Obligation (see Note 8, "Subsequent Events").
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, which is deductible for tax purposes. The consideration, which
included acquisition costs of $314,091, was allocated as follows (in thousands).
Current assets....................................... $ 25,116
Property and equipment............................... 629
Goodwill............................................. 15,050
Other intangible assets.............................. 702
------------
Total assets acquired........................... 41,497
Current liabilities.................................. 32,646
------------
Net assets acquired............................. $ 8,851
============
8
RCG COMPANIES INCORPORATED AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 224,312 shares valued at $380,000, was allocated as follows (in
thousands).
Property and equipment.................................... $ 14,500
Goodwill and other intangible assets...................... 414,202
--------------
Total assets acquired................................ $ 428,702
==============
NOTE 3. DISCONTINUED OPERATIONS
During the third quarter of 2004, the Board authorized the disposition of the
Company's investment in Lifestyle Innovations, Inc. ("LFSI"). Accordingly, the
operations of LFSI were reclassified to discontinued operations for all periods
presented. During the fourth quarter of 2004, 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 fourth quarter, which was
recognized as a gain on deconsolidation of LFSI.
The loss from discontinued operations for the three months ended September 30,
2003 is summarized as follows (in thousands).
Gross revenues.......................................$ 480
Cost of revenues and operating expenses.............. (1,493)
-------------
Net loss per LFSI financials......................... (1,013)
Minority interest.................................... 284
-------------
Loss from discontinued operations....................$ (729)
=============
9
RCG COMPANIES INCORPORATED AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4. NOTES PAYABLE AND OTHER OBLIGATIONS
Notes payable and other obligations consisted of the following at September 30,
2004 (unaudited, in thousands) and June 30, 2004 (in thousands).
Sept. 30, June 30,
2004 2004
-------------- --------------
Note payable - in the amount of $9,850, less unamortized discount of $4,109, imputed
at 12%, secured by certain investment holdings (1) .................................. $ 5,741 $ 5,724
Service agreement obligation - in the amount of $3,000, less unamortized discount of
$445 imputed at 12% and unsecured (2) ............................................... 2,655 3,129
Revolving credit facility (maximum borrowing $1 million)- secured by substantially all
assets of the Technology Solutions business with interest at prime-plus-2% (6.75% at
September 30, 2004) ................................................................. 601 433
Capital lease obligations at interest rates ranging from 4.2% to 17.1%, due in monthly
installments through November 2007 ................................................. 285 153
Note payable - due July 27, 2003 and unsecured (3) .................................... 145 160
-------------- --------------
9,427 9,599
Less current maturities, including demand notes ....................................... (2,148) (1,942)
-------------- --------------
Long-term portion ..................................................................... $ 7,279 $ 7,657
============== ==============
(1) 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. See Note 8, "Subsequent Events", for
amended amounts and terms, effective November 12, 2004.
(2) 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. See Note 8, "Subsequent Events", for amended amounts and terms,
effective November 12, 2004.
(3) The Company currently is negotiating with the debt holder to extend the
term or agree on a payment schedule.
NOTE 5. 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 issued 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; the 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 ten trading days, (ii) Warrants to purchase
approximately 1,143,617 shares of Common Stock of the Company at an exercise
10
RCG COMPANIES INCORPORATED AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
price of $1.20 per share, exercisable commencing six months after the closing
date (September 14, 2004) until the date that is three years after such date,
with anti-dilution provisions subject to a $1.00 floor, and that are subject to
certain conditions, callable by the Company at any time the common shares of the
Company have a VWAP that 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 six months after the closing date until the
earlier of (a) the later of the date that is six months after the effective date
of the registration statement covering the shares and the date that is one 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.
On September 14, 2004, the Company filed an amended Certificate of Incorporation
with the Secretary 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.
In connection with the aforementioned Securities Purchase Agreement, the
Exercise Price to holders of 2.5 million Common Stock Purchase Warrants (dated
October 31, 2003) has been reduced from $2.442 per share to $0.94 per share,
pursuant to the Warrant Agreement.
NOTE 6. RELATED-PARTY TRANSACTIONS
The Company's Travel Services business entered into a one-year public relations
contract. The wife of a former president of the Travel Services business is an
employee of the public relations firm. This contract was terminated on August
26, 2004. During three months ended September 30, 2004, $14,730 was paid for
services rendered.
G. David Gordon, a Company stockholder, also occasionally acts as legal counsel
to the Company.
On April 19, 2004, Robert H. Brooks, Chairman of Hooters of America, Inc.,
Hooters Air and Pace Airlines, Inc. joined the Company's Board of Directors. In
addition, Mr. Brooks made a $1,000,000 cash investment in the Company, and
provided a waiver of the requirement of delivery of a letter of credit in the
amount of $1,000,000 to Pace Airlines, Inc., a charter airline company that
charters planes to the Company's Travel Services division. In exchange, the
Company issued 1,250,000 restricted shares of Common Stock and a warrant to
purchase 1,250,000 restricted shares of Common Stock at an exercise price of
$2.44 per share. On August 2, 2004, Mr. Brooks resigned from the Company's Board
of Directors.
Company Director K. Wesley M. Jones, Sr. has a 25% ownership stake in a private
investment group that has secured certain letters of credit issued by the
Company in the amount of $2 million. During the three months ended September 30,
2004, the Company paid the private investment group $60,000.
11
RCG COMPANIES INCORPORATED AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 7. BUSINESS SEGMENT INFORMATION
Information related to business segments is as follows (in thousands).
Corporate Total
Three months ended September 30, 2004: Travel Technology Services Solutions
- ------------------------------------------------- ------------ --------------- ------------- ------------
Revenue....................................... $ 52,178 $ 4,622 $ -- $ 56,800
Gross margin.................................. (1,302) 602 -- (700)
Loss from continuing operations............... (7,175) (68) (489) (7,732)
Three months ended September 30, 2003:
- -------------------------------------------------
Revenue....................................... $ 15,578 $ 3,535 $ -- $ 19,113
Gross margin.................................. 828 439 -- 1,267
Income (loss) from continuing operations...... 157 (9) (309) (161)
NOTE 8. SUBSEQUENT EVENTS
In connection with the acquisition of substantially all of the assets and
liabilities of VE Holdings, Inc. ("Vacation Express") and SunTrips, Inc.
("SunTrips") (the "Acquired Companies") (as described in Note 2), 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. 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").
Effective November 12, 2004, the Company entered into an agreement to amend the
terms and amounts of both the Promissory Note and the Service Agreement
Obligation as follows.
(1) Reduced the non-interest-bearing Promissory Note to $1 million, discounted
to $555,000 at 12.00% per annum for imputed interest payable in: (i) four
(4) equal yearly payments of $100,000, commencing on October 31, 2006 and
continuing on the last day of each October through October 31, 2009, and
(ii) a final balloon payment in the amount of $600,000 on October 31,
2010.
(2) Extended the Service Agreement Obligation four additional years to now
expire on October 31, 2010. The Agreement provides for additional payments
of $4.9 million, discounted to $3.0 million at 12.00% per annum for
imputed interest over the new term of the agreement.
12
RCG COMPANIES INCORPORATED AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 9. COMMITMENTS AND CONTINGENCIES
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.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company's business, results of operations and financial condition are
subject to many risks. In addition, statements in this report relating to
matters that are not historical facts are forward-looking statements based on
management's belief and assumptions based on currently available information.
Such forward-looking statements include statements relating to estimates of
future revenue and operating income, cash flow and liquidity. Words such as
"anticipates", "expects", "intends", "believes", "may", "will", "future" or
similar expressions are intended to identify certain forward-looking statements.
In addition, any statements that refer to expectations, projections or other
characterizations of future events or circumstances are forward-looking
statements. Although the Company believes that the expectations reflected in
such forward-looking statements are reasonable, it cannot give any assurances
that these expectations will prove to be correct. Such statements involve a
number of risks and uncertainties, including, but not limited to, those
discussed herein or included in the Company's Annual Report on Form 10-K, filed
registration statements, and other documents filed by the Company with the SEC.
OVERVIEW
Effective October 31, 2003, the Company's Travel Services subsidiary concluded
the acquisition of substantially all of the assets and liabilities, except for
certain excluded items, of Vacation Express and SunTrips. Also effective
November 5, 2003, the Company's Technology Solutions subsidiary completed the
acquisition of substantially all of the assets and liabilities of SchoolWorld,
except for certain excluded items. Accordingly, the operating results of these
subsidiaries (the "Acquired Businesses") have been included in the reported
results of the Company subsequent to that date. The results of the Company,
excluding the results of the Acquired Businesses, are referred to herein as the
existing business (the "Existing Business"). Refer to Note 2 to the financial
statements for more detail on the specifics of the transactions.
14
The following table summarizes the consolidated results of operations (in
thousands).
Three Months Ended Sept. Three Months Ended Sept.
30, 2004 30, 2003
% of % of
Amount Revenue Amount Revenue
-------------- -------------- -------------- --------------
Revenues:
Services .............................. $ 52,283 92.0% $ 15,701 82.1%
Product sales ......................... 4,517 8.0% 3,412 17.9%
-------------- -------------- -------------- --------------
Total revenue ..................... 56,800 100.0% 19,113 100.0%
-------------- -------------- -------------- --------------
Cost of revenue:
Services .............................. 53,484 94.1% 14,822 75.6%
Product sales ......................... 4,016 7.1% 3,024 15.8%
-------------- -------------- -------------- --------------
Total cost of revenue ............. 57,500 101.2% 17,846 93.4%
-------------- -------------- -------------- --------------
Gross profit (loss) ....................... (700) (1.2%) 1,267 6.6%
-------------- -------------- -------------- --------------
Selling, general and administrative expenses 6,791 12.0% 1,493 7.8%
Depreciation and amortization .............. 213 0.4% 102 0.5%
-------------- -------------- -------------- --------------
Operating cost and expenses ....... 7,004 12.4% 1,595 8.3%
-------------- -------------- -------------- --------------
Operating loss .................... (7,704) (13.6%) (328) (1.7%)
Interest expense, net ...................... (278) (0.4%) (49) (0.2%)
Gain on investments, net ................... -- -- 119 0.6%
Other income ............................... 250 0.4% 97 0.5%
- -------------------------------------------- -------------- -------------- -------------- --------------
Loss from continuing operations ............ $ (7,732) (13.6%) $ (161) (0.8%)
============== ============== ============== ==============
Information related to business segments is as follows (in thousands).
Travel Technology
Three months ended September 30, 2004 Services Solutions Corporate Total
- ------------------------------------------- -------------- -------------- ------------ --------------
Revenue ................................... $ 52,178 $ 4,622 $ -- $ 56,800
Gross margin .............................. (1,302) 602 -- (700)
Loss from continuing operations ........... (7,175) (68) (489) (7,732)
Three months ended September 30, 2003:
- -------------------------------------------------
Revenue ................................... $ 15,578 $ 3,535 $ -- $ 19,113
Gross margin .............................. 828 439 -- 1,267
Income (loss) from continuing operations .. 157 (9) (309) (161)
15
THREE-MONTH PERIOD ENDED SEPTEMBER 30, 2004 COMPARED TO THREE-MONTH PERIOD ENDED
SEPTEMBER 30, 2003
OPERATIONS OF BUSINESS SEGMENTS
Travel Services
The following table summarizes results of continuing operations of the Travel
Services segment (in thousands).
Three Months Ended:
September 30, 2004 September 30, 2003
% of % of
Amount Revenue Amount Revenue
-------------- -------------- -------------- --------------
Revenues ................................... $ 52,178 100.0% $ 15,578 100.0%
Cost of revenue ............................ 53,480 102.5% 14,750 94.7%
-------------- -------------- -------------- --------------
Gross (loss) profit ................... (1,302) (2.5%) 828 5.3%
Selling, general and administrative expenses 5,435 10.4% 617 4.0%
Depreciation and amortization .............. 175 0.3% 34 0.2%
-------------- -------------- -------------- --------------
Operating cost and expenses ........... 5,610 10.7% 651 4.2%
-------------- -------------- -------------- --------------
Operating (loss) profit ............... $ (6,912) (13.2%) $ 177 1.1%
============== ============== ============== ==============
For the three months ended September 30, 2004, the revenues of the Company's
Travel Services business were $52,178,000 compared to $15,578,000 for in the
same period a year before, which is an increase of $36,600,000. The increase
from the prior year is primarily attributable to the acquisition of Vacation
Express and SunTrips; however, revenues were less than expected. The Travel
Services business is in an intensely competitive market with adverse market
conditions due significantly to excess capacity of available passenger's seats.
Increased competition has created aggressive sales promotions with significantly
discounted fares. The implementation of SunTrips' new online reservation system
has severely hindered bookings for the quarter. We estimate that $6,000,000 of
revenues were missed as a direct result of implementation problems and delays.
For the three months ended September 30, 2004, the gross loss for the Company's
Travel Services business was ($1,302,000) compared to $828,000 for the same
period a year before. Gross margins declined as a direct result of the reduced
revenues and not being able to absorb air cost. The majority of our air cost is
fixed and is difficult to reduce when bookings decline. The price of jet fuel
continues to increase. Competitive market conditions have prevented us from
passing increases, in the form of surcharges, to our customers. Even though none
of our destinations were significantly impacted by the severe Caribbean
hurricane season, we incurred significant costs associated with the hurricanes,
in the form of delays, temporary hub relocations, and re-routing of passengers..
16
For the three months ended September 30, 2004, selling, general and
administrative ("SGA") expenses was $6,791,000, or 12.0% of sales, compared to
$1,493,000, or 7.8%, for the same period a year before. The increase from the
prior year is primarily attributable to the acquisition of Vacation Express and
SunTrips.
Technology Solutions
The following table summarizes results of continuing operations of the
Technology Solutions segment (in thousands).
Three Months Ended:
September 30, 2004 September 30, 2003
% of % of
Amount Revenue Amount Revenue
-------------- -------------- -------------- --------------
Revenues:
Services .............................. $ 106 2.3% $ 124 3.5%
Product sales ......................... 4,516 97.7% 3,411 96.5%
-------------- -------------- -------------- --------------
Total revenue ..................... 4,622 100.0% 3,535 100.0%
-------------- -------------- -------------- --------------
Cost of revenue:
Services .............................. 4 0.1% 72 2.0%
Product sales ......................... 4,016 86.9% 3,024 85.6%
-------------- -------------- -------------- --------------
Total cost of revenue ............. 4,020 87.0% 3,096 87.6%
-------------- -------------- -------------- --------------
Gross profit .............................. 602 13.0% 439 12.4%
-------------- -------------- -------------- --------------
Selling, general and administrative expenses 613 13.2% 464 13.1%
Depreciation and amortization .............. 36 0.8% 61 1.7%
-------------- -------------- -------------- --------------
Operating cost and expenses ....... 649 14.0% 525 14.8%
-------------- -------------- -------------- --------------
Operating loss .................... $ (47) (1.0%) $ (86) (2.4%)
============== ============== ============== ==============
For the three months ended September 30, 2004, the Company's Technology
Solutions business recorded revenues of $4,622,000, compared to $3,535,000 for
the same period a year before. The increase in revenues is primarily due to the
acquisition of SchoolWorld, partially offset by a decrease in revenues from the
Existing Business because of the timing of two large contract renewals during
fiscal year 2004.
In the three months ended September 30, 2004, gross profit for the Company's
Technology Solutions business was $602,000, compared to $439,000 in the same
period a year before. The increase in gross profit is attributable to an
increase from the acquisition, as well as an increase in gross profit percentage
from 12.4% to 13%.
In the three months ended September 30, 2004, selling, general and
administrative expenses for the Company's Technology Solutions business was
17
$613,000, compared to $464,000 in the same period a year before. The increase in
SGA is primarily attributable to the acquisition. Overall, the percentage of SGA
to revenue remained relatively unchanged.
DEPRECIATION AND AMORTIZATION
In the three-month period ended September 30, 2004, the Company's depreciation
and amortization expense was $213,000, compared to $102,000 in the same period a
year before. The increase is primarily due to depreciation of the fixed-asset
additions of the Acquired Companies.
INTEREST EXPENSE, NET
In the three-month period ended September 30, 2004, the Company incurred
$278?,000 of net-interest expense related to its debt portfolio, compared to
$49,000 in the same period a year before. This increase is primarily from the
Travel Services debt discussed in Note 5 of the Consolidated Financial
Statements.
OTHER INCOME
For the three-month period ended September 30, 2004, the Company's other income
was $250,000, compared to $97,000 in the same period a year before. The
three-month period ended September 30, 2004 includes $256,000 credit relating to
the change in market value of the warrant obligation offset by other costs. In
the three months ended September 30, 2003, the Company's Technology Solutions
business recorded a $100,000 amount to other income in the prior quarter related
to a prior project offset by other costs.
Corporate
For the three months ended September 30, 2004, Corporate incurred losses of
$489,000, compared to losses of $309,000 in the same period a year before. The
increase in loss is due primarily to increases in insurance, public relations,
professional fees, salaries and benefits.
SEASONALITY
The Company experiences significant seasonality in its Travel Services and
Technology Solutions businesses. The seasonality in the Travel Services business
is due to the higher level of charter travel to Caribbean and Mexican
destinations during the vacation season, which coincides with the Company's
first and fourth fiscal quarters. The Company's Technology Solutions business
generally experiences higher revenue in the first and fourth fiscal quarters,
with the largest amount recognized in the fourth quarter, due to the Company's
fiscal year end coinciding with the year end of most schools and universities.
These customers are tied to strict budgets and normally purchase more product at
the start and the end of their fiscal year.
GUARANTEE OBLIGATION
The Company's Travel Services segment has certain guarantees with an airline
provider that agrees to a minimum number of hours during each program year and
is required to pay any shortage to the provider. The segment does not anticipate
a shortage, and accordingly, no amount has been accrued.
18
LIQUIDITY AND CAPITAL RESOURCES
Assuming the Company will continue as a going concern, the accompanying
financial statements have been prepared. The Company has suffered recurring
losses from operations, and as of September 30, 2004, had a working capital
deficit of $15,618,000. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. Management recognizes that
additional funding is necessary in order to meet the Company's capital
requirements and continue to operate. The Company is exploring additional
sources of liquidity through debt and equity financing alternatives.
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 sales of debt and equity securities or sale of certain assets or
portions of the business, 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 $2,640,000 and $6,596,000 at September 30, 2004
and September 30, 2003, respectively. At September 30, 2004, the Company had
current assets of $29,301,000, as compared to $44,801,000 of total current
liabilities at September 30, 2003, resulting in a working capital deficit of
$15,500,000. At June 30, 2004, the Company had current assets of $57,807,000, as
compared to $68,927,000 of total current liabilities at September 30, 2004,
resulting in a working capital deficit of $11,120,000.
For the three months ended September 30, 2004, cash and cash equivalents
decreased by $3,956,000. Cash of $3,980,000, primarily from the sale of
Preferred Stock, was provided by financing activities. This amount is offset by
$7,816,000 used in operating activities and $120,000 used in investing
activities.
During the three months ended September 30, 2004, $7,816,000 in cash was used in
operating activities. The net loss of $7,732,000 for the quarter was offset by
other non-cash credits of $992,000 and an increase of $908,000 from the net
operating assets and liabilities.
Non-cash credits of $992,000 consist primarily of $213,000 in depreciation and
amortization charges, offset by $1,205,000 of amortization of an unfavorable
airline contract.
The net increase of $908,000 in operating assets and liabilities is due
primarily to a decrease of $17,605,000 in unearned income and a decrease of
$6,081,000 in accounts payable and accrued expenses, offset by an increase of
$21,177,000 in restricted cash.
19
DISCLOSURES ABOUT CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following table summarizes contractual obligations as of September 30, 2004
(in thousands).
Prior to 10/1/05- 10/1/07- 10/1/09 &
Total 9/30/05 9/30/07 9/30/09 thereafter
------------ ------------ ------------ ------------ ------------
Purchase obligations .................. $ 83,161 $ 33,251 $ 43,507 $ 6,403 $ --
Long-term notes payable ............... 7,183 -- 1,673 198 5,312
Operating and capital lease obligations 7,238 1,556 2,935 2,247 500
------------ ------------ ------------ ------------ ------------
$ 97,582 $ 34,807 $ 48,115 $ 8,848 $ 5,812
============ ============ ============ ============ ============
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 $328,000 and $332,000 at
September 30, 2004 and June 30, 2004, 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.
20
ITEM 3. 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
September 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.
ITEM 4. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
The Company has established and currently maintains controls and other
procedures designed to ensure that material information required to be disclosed
in its reports filed under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported, within the time periods specified by the
Securities and Exchange Commission. In conjunction with the close of each fiscal
quarter, the Company conducts an update and a review and evaluation of the
effectiveness of the Company's disclosure controls and procedures. It is the
opinion of the Company's principal executive officer and principal accounting
officer, based upon an evaluation as of the end of the period, that the
Company's disclosure controls and procedures are sufficiently effective to
ensure that any material information relating to the Company is recorded,
processed, summarized and reported to its principal officers to allow timely
decisions regarding required disclosures.
CHANGES IN INTERNAL CONTROLS
There were no significant changes in the Company's internal controls over
financial reporting procedures during the quarter that materially affected, or
are reasonably likely to materially affect, the Company's internal controls over
financial reporting.
21
- --------------------------------------------------------------------------------
PART II. OTHER INFORMATION
- --------------------------------------------------------------------------------
ITEM 1. LEGAL PROCEEDINGS
During the normal course of business, the Company is subject to various
lawsuits, which may or may not have merit. Management intends to vigorously
pursue and/or defend such suits, as applicable, and believes that they will not
result in any material loss to the Company.
ITEM 2. CHANGES IN SECURITIES
For the three months ended September 30, 2004, 12,500 shares of Common Stock
were issued upon exercise of previously granted options.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
22
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
(a) Exhibits
31.1 Certification of Principal Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002 Certification of Principal
Financial
31.2 Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certifications of Chief Executive Officer and Chief Financial
Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
- --------------------------------------------------------------------------------
SIGNATURES
- --------------------------------------------------------------------------------
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
RCG COMPANIES INCORPORATED
Date: November 22, 2004 By: /s/ Michael D. Pruitt
----------------------------------------
Michael D. Pruitt
President and Chief Executive Officer
(principal executive officer)
Date: November 22, 2004 By: /s/ William W. Hodge
----------------------------------------
William W. Hodge
Chief Financial Officer
(principal accounting officer)
23