U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarter Ended March 31, 2004
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
COMMISSION FILE NUMBER 1-8662
RCG COMPANIES INCORPORATED
(Exact name of registrant as specified in its charter)
DELAWARE 23-2265039
(State of Incorporation) (IRS Employer Identification No.)
6836 MORRISON BOULEVARD
SUITE 200
CHARLOTTE, NC 28211
(704) 366-5054
(Address of registrant's principal executive
offices including zip code and telephone number, including area code)
Check whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
twelve months (or for such shorter period that the Registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes |X| No |_|
Check whether the Registrant is an accelerated filer (as defined in Rule 12b-2
of the Exchange Act) Yes |_| No |X|
The number of shares outstanding of the Registrant's common stock ("Common
Stock") as of April 12, 2004: 20,407,790
RCG COMPANIES INCORPORATED AND SUBSIDIARIES
TABLE OF CONTENTS
Page No
PART I. FINANCIAL
INFORMATION
ITEM 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets at March 31, 2004 (Unaudited) and June 30, 2003..........................3
Condensed Consolidated Statements of Operations for the three and nine months ended
March 31, 2004 and 2003 (Unaudited).........................................................................4
Condensed Consolidated Statements of Cash Flows for the nine months ended
March 31, 2004 and 2003 (Unaudited).........................................................................5
Notes to Condensed Consolidated Financial Statements...........................................................6
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.........................16
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk....................................................22
ITEM 4. Controls and Procedures.......................................................................................23
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.............................................................................................24
ITEM 2. Changes in Securities.........................................................................................24
ITEM 3. Defaults Upon Senior Securities...............................................................................24
ITEM 4. Submission of Matters to a Vote of Security Holders...........................................................25
ITEM 5. Other Information.............................................................................................25
ITEM 6. Exhibits and Reports on Form 8-K..............................................................................25
Exhibit Index...........................................................................................................25
Signatures..............................................................................................................26
-2-
PART I. FINANCIAL
INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
RCG COMPANIES INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
March 31, June 30,
2004 2003
(Unaudited)
------------ ------------
ASSETS
Cash and cash equivalents ............................................... $ 1,965 $ 808
Restricted cash ......................................................... 37,666 2,655
Accounts receivable, net of allowance of doubtful accounts of $237
and $112, respectively ........................................... 3,661 1,966
Inventory ............................................................... 83 45
Investments ............................................................. 466 377
Prepaid expenses ........................................................ 7,591 2,642
------------ ------------
Total current assets .................................. 51,432 8,493
Deferred costs and other assets ........................................ 523 413
Property and equipment, net ............................................. 1,232 798
Net non-current assets of discontinued operations ....................... 54 7,753
Goodwill and other intangible assets .................................... 25,038 9,641
------------ ------------
Total assets .......................................... $ 78,279 $ 27,098
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable and other obligations - current portion ................... $ 2,352 $ 819
Notes payable and amounts due to related parties ........................ 750 495
Accounts payable and accrued expenses ................................... 21,957 5,110
Net current liabilities of discontinued operations ...................... 4,867 4,781
Unearned income ......................................................... 39,798 4,009
------------ ------------
Total current liabilities ............................. 69,724 15,214
Notes payable and other obligations ..................................... 7,643 16
Notes payable and amounts due to related parties ........................ -- 600
------------ ------------
Total liabilities ..................................... 77,367 15,830
------------ ------------
Minority interest ....................................................... -- 314
------------ ------------
Commitments and Contingencies
Shareholders' equity:
Common stock, $.04 par value, 200,000,000 shares authorized,
19,289,004 and 13,948,160 issued, respectively .................. 772 558
Additional paid-in capital ........................................ 121,171 114,329
Accumulated deficit ............................................... (120,123) (103,025)
Accumulated other comprehensive loss .............................. (276) (276)
Treasury stock at cost (131,214 shares) ........................... (632) (632)
------------ ------------
Total shareholders' equity ............................ 912 10,954
------------ ------------
Total liabilities and shareholders' equity ............ $ 78,279 $ 27,098
============ ============
The accompanying notes are an integral part of these condensed
consolidated financial statements.
-3-
RCG COMPANIES INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three months ended March 31, Nine months ended March 31,
2004 2003 2004 2003
------------ ------------ ------------ ------------
Revenue:
Services .................................................... $ 49,235 $ 15,719 $ 100,424 $ 44,887
Product sales ............................................... 3,008 1,941 9,813 7,279
------------ ------------ ------------ ------------
Total revenue ...................................... 52,243 17,660 110,237 52,166
------------ ------------ ------------ ------------
Cost of revenue:
Services .................................................... 48,431 14,876 96,135 42,075
Product sales ............................................... 2,840 1,700 8,574 6,397
------------ ------------ ------------ ------------
Total cost of revenue .............................. 51,271 16,576 104,709 48,472
------------ ------------ ------------ ------------
Gross profit ....................................... 972 1,084 5,528 3,694
------------ ------------ ------------ ------------
Selling, general and administrative expenses - other expenses
related to issuance of common stock and warrants ........ 576 -- 773 50
Selling, general and administrative expenses - other ........ 6,309 1,553 11,891 4,226
Goodwill impairment ......................................... 200 -- 1,200 --
Depreciation and amortization ............................... 287 79 549 249
------------ ------------ ------------ ------------
Operating costs and expenses ....................... 7,372 1,632 14,413 4,525
------------ ------------ ------------ ------------
Operating loss ..................................... (6,400) (548) (8,885) (831)
Interest expense, net ....................................... 232 48 522 149
Gain on investments, net .................................... -- (8) (119) (362)
Loss on disposal of assets .................................. -- 25 -- 54
Other income ................................................ -- (4) (100) (267)
Equity in earnings of joint ventures ........................ (9) (17) (18) (18)
------------ ------------ ------------ ------------
Loss from continuing operations .................... (6,623) (592) (9,170) (387)
Loss from discontinued operations net of minority interest
of $0, $280, $314 and $443, respectively ................. (1,548) (802) (7,928) (1,688)
------------ ------------ ------------ ------------
Net loss .................................................... $ (8,171) $ (1,394) $ (17,098) $ (2,075)
============ ============ ============ ============
Basic and diluted net loss per share:
Loss from continuing operations ......................... $ (0.35) $ (0.05) $ (0.54) $ (0.03)
Loss from discontinued operations ....................... (0.08) (0.06) (0.47) (0.14)
------------ ------------ ------------ ------------
Net loss ........................................... $ (0.43) $ (0.11) $ (1.01) $ (0.17)
============ ============ ============ ============
Weighted average shares outstanding ......................... 18,993,724 12,540,438 16,938,530 12,475,526
------------ ------------ ------------ ------------
Weighted average shares outstanding, assuming dilution ...... 18,993,724 12,540,438 16,938,530 12,475,526
------------ ------------ ------------ ------------
The accompanying notes are an integral part of these condensed
consolidated financial statements.
-4-
RCG COMPANIES INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
Nine months ended March 31,
2004 2003
------------ ------------
Net cash used in operating activities ........................... (3,429) 1,475
Cash flows from investing activities:
Purchase of property and equipment .................... (229) (230)
Sale of investments ................................... -- 439
Investment in joint ventures .......................... 89 --
Sale of assets ........................................ -- 221
Cash paid in connection with business acquisitions, net (240) (414)
------------ ------------
Net cash provided by (used in) investing activities (380) 16
Cash flows from financing activities:
Notes payable proceeds ................................ 36 1,092
Principal debt repayments ............................. (409) (352)
Net change in line of credit .......................... 316 --
Cash raised through LFSI transaction .................. -- 274
LFSI private placement sale of common stock ........... -- --
Sale of RCG common stock .............................. 5,023 119
------------ ------------
Net cash provided by financing activities .......... 4,966 1,133
Net increase in cash and cash equivalents ....................... 1,157 2,624
Cash and cash equivalents at beginning of period ................ 808 1,499
------------ ------------
Cash and cash equivalents at end of period ...................... $ 1,965 $ 4,123
============ ============
Nine months ended March 31,
Cash paid during the period for: 2004 2003
------------ ------------
Interest..................................................... $ 308 $ 23
Income taxes................................................. - -
Non-cash investing and financing activities:
Common stock issued for acquired business.................... $ 380 $ -
Note and Service Agreement Obligation issued for
acquired business......................................... 9,068 -
Fixed assets acquired related to new businesses.............. 644 -
Common stock and warrants issued for conversion of debt...... 768 -
Common stock issued for conversion of accounts payable -
and acrued expenses....................................... 112 -
Conveyance of RCG's LFSI common stock for services........... 119 -
The accompanying notes are an integral part of these condensed
consolidated financial statements.
-5-
RCG COMPANIES INCORPORATED AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The condensed consolidated financial statements are unaudited and include the
accounts of RCG Companies Incorporated and its subsidiaries ("RCG" or the
"Company"), substantially all of which are wholly-owned (the "Company"), except
for Lifestyle Innovations, Inc. ("LFSI") which RCG owns approximately 68%. On
November 14, 2003 the Company changed its name from eResource Capital Group,
Inc. to RCG Companies Incorporated to better reflect the nature and evolution of
the Company's business strategy. All significant intercompany accounts and
transactions have been eliminated in consolidation. These financial statements
have been prepared in accordance with accounting principles generally accepted
in the United States of America for interim financial information and the
instructions of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by such generally accepted accounting
principles for complete financial statements.
In the opinion of the management of the Company, the unaudited condensed
consolidated financial statements contain all adjustments, consisting only of
normal recurring adjustments, considered necessary for a fair statement of the
results of operations for the interim periods presented, with no material
retroactive adjustments. The results of operations for interim periods are not
indicative of the results that may be expected for a full year due to the
seasonality of the business. These interim unaudited condensed consolidated
financial statements should be read in conjunction with the audited consolidated
financial statements and notes thereto for the year ended June 30, 2003 included
in the Company's Annual Report on Form 10-KSB.
OPERATIONS AND LIQUIDITY
Certain reclassifications have been made to data from the previous period to
conform with the presentation of the current period.
The Company experienced an operating loss from continuing operations of
$9,170,000 during the first nine months of fiscal 2004 and used cash from
operations of $3,429,000 during the period. The Company's working capital
deficit of $18,292,000 is substantially due to accounts payable and accrued
expenses of $21,957,000 and unearned income of $39,798,000; these are only
partially offset by $37,666,000 of restricted cash and $7,591,000 of prepaid
expenses. A substantial portion of these amounts are from the Acquired
Businesses (see Note 2) of the travel services business which operate at a
higher volume than RCG has experienced historically.
As a result of the integration of these acquired businesses, operating
performance and negative working capital, the Company is currently exploring
additional sources of liquidity, including debt and equity financing
alternatives, to provide additional cash to support operations, working capital
and capital expenditure requirements for the next 12 months and to meet the
scheduled debt repayments. Additionally, the Company plans on negotiating with
its debt holders to extend some or all of this debt. The Company is working
diligently to reduce operating costs, including the transfer of the Travel
Service hub from Atlanta, Georgia to Orlando, Florida, negotiating with airlines
to restructure contracts, upgrading its reservation software to improve customer
service and create additional revenue sources, reduce personnel costs, and
moving to a new office location.
If (i) we are unable to grow our business or improve our operating cash flows as
expected, (ii) we suffer significant losses in our investments or operations,
(iii) we are unable to realize adequate proceeds from investments or (iv) we are
unsuccessful in extending a substantial portion of the debt repayments, then we
will need to secure alternative debt or equity financing to provide us with
additional working capital. There can be no assurance that additional financing
will be available when needed or, if available, that it will be on terms
favorable to the Company and its stockholders. If the Company is not successful
in generating sufficient cash flow from operations, or in raising additional
capital when required in sufficient amounts and on terms acceptable to the
Company, these failures would have a material adverse effect on the Company's
-6-
business, results of operations and financial condition. If additional funds are
raised through the issuance of equity securities, the percentage ownership of
its then current stockholders would be diluted.
SIGNIFICANT ACCOUNTING POLICIES
RESTRICTED CASH
All cash received from customers in advance of flight departure must be
deposited into escrow accounts in accordance with Department of Transportation
regulations. Withdrawals from such escrow accounts are allowed in order to make
required payments to air carriers at least 15 days in advance of departure.
Hotels may be paid from escrow after air carriers have been paid. Remaining
funds are released from escrow 48 hours after return date. The Company
classifies these escrow accounts as restricted cash. All escrow accounts are
maintained in one financial institution and balances exceed insurable limits.
UNEARNED INCOME AND REVENUE RECOGNITION
Revenue from the sale of tour packages to either travel agents or directly
to passengers is recognized on the departure date of the trip. Direct air and
hotel costs, other related direct costs, and commissions associated with the
tour package are also recognized on the departure date. Cash received in advance
of the departure date is deposited into escrow accounts and recorded as unearned
income.
IMPUTED INTEREST
Long-term obligations that do not state an interest rate are discounted to
net present value using the Company's estimated incremental borrowing rate. The
discount is amortized over the life of the obligation.
STOCK BASED COMPENSATION
In December 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure". SFAS 148 amends SFAS 123,
"Accounting for Stock-Based Compensation", to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS 148 amends the
disclosure requirements of SFAS 123 to require more prominent disclosures in
both annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The additional disclosure requirements of SFAS 148 were effective for
fiscal years ending after December 15, 2002. The Company has elected to continue
to follow the intrinsic value method of accounting as prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25"), to account for employee stock options. Under APB 25, no compensation
expense is recognized unless the exercise price of the Company's employee stock
options is less than the market price of the underlying stock on the date of
grant.
The Company's other significant accounting policies are the same as those
applied at June 30, 2003 and disclosed in the Company's audited consolidated
financial statements and notes thereto for the year ended June 30, 2003,
included in the Company's Annual Report on Form 10-KSB.
NOTE 2. ACQUISITIONS
RCG through its wholly-owned subsidiary Flightserv, Inc. ("Flightserv")
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.
-7-
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").
The acquisition was accounted for under the purchase method of accounting
in accordance with Statement of Financial Accounting Standards ("SFAS") No.141
"Business Combinations". The purchase price was allocated to the net assets
acquired, including the liabilities assumed as of October 31, 2003, based upon
their estimated fair values as of that date with the remainder being recorded as
goodwill. The consideration was allocated as follows (in thousands):
Current asste $25,115
Property and equipment 629
Goodwill 15,588
Other intangible assets 702
-------
Total assets acquired 42,034
Current liabilities 32,646
-------
$ 9,388
=======
On November 5, 2003, the technology solutions business completed the
acquisition of SchoolWorld Software, a Pittsburgh, PA based educational software
company. The consideration was allocated as follows (in thousands):
Property and equipment $ 14
Goodwill and other intangible assets 405
-------
$ 419
=======
In addition to the above, net funding of $9,000 was paid by the technology
solutions business in April 2004 and will be reflected next quarter in Goodwill.
Operations of the acquired businesses are included in the condensed
consolidated financial statements from the date of acquisition. The following
sets forth pro forma consolidated financial information as if the acquisitions
had taken place at the beginning of the periods presented (in thousands, except
per share data):
Three months Ended March 31, Nine months Ended March 31,
---------------------------- ---------------------------
2004 2003 2004 2003
-------- --------- --------- ---------
Revenues $ 52,243 $ 50,089 $ 165,538 $ 154,601
Net loss $ (8,171) $ (6,427) $ (24,091) $ (16,243)
Basic and diluted loss per share $ (0.43) $ (0.51) $ (1.42) $ (1.30)
-8-
The proforma information indicates that the losses for all periods presented
would have been significantly higher had the businesses been acquired at the
beginning of the periods presented. The additional proforma losses include the
months of July through October of 2003 and the nine months of July 2002 to March
of 2003. Prior to the dates of acquisition, the acquired companies were
significant customers of the travel business segment. The acquisition of the
travel businesses was completed to more vertically integrate the travel business
segment. It is the belief of management that the acquisition will result in the
Company being able to obtain better purchasing power and to increase margins in
the segment. Management believes that it will be able to operate the acquired
business at a lower cost level and accordingly the losses presented on a
proforma basis are not indicative of what they would have been had the Company
acquired the business at an earlier date and been able to influence the
operating results related thereto.
In connection with the acquisition, the Company paid a premium over the fair
value of the assets acquired ("goodwill"). It is management's belief that it
will be successful in implementing a strategy to improve operating performance
of the travel business segment. Inasmuch as the acquisition was effective
October 31, 2003, significant time has not elapsed to indicate whether such
plans will be successful. As a result, the Company has not, at March 31, 2004,
performed an impairment test with respect to the acquired goodwill. In future
periods, the Company will be monitoring the results of the acquisition to
determine if its plans are achieved. If the Company is unsuccessful in reversing
the losses of the acquired businesses, it could have significant impacts on the
company, including but not limited to the recoverability of the carrying amount
of goodwill.
NOTE 3. DISCONTINUED OPERATIONS
The Board of Directors authorized the disposition of the Company's
investment in LFSI. The Board had earlier determined that RCG would no longer
permit any additional funding to this entity. LFSI has tried to execute its
business strategies with little success and is currently seeking other
alternatives. RCG's management along with its Board is reviewing alternative
methods of disposal of its interest in LFSI. Accordingly the operations of LFSI
are included in discontinued operations for all periods presented.
NOTE 4. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets consists of the following (in thousands):
Travel Technology
Services Solutions Corporate Total
-------------------------------------- --------
Balance at June 30, 2003 $ 939 $ 7,702 $ 1,000 $ 9,641
Goodwill impairment (200) (1,000) (1,200) --
Goodwill and other intangible assets acquired
during period, net of amortization 16,192 405 -- 16,597
-------------------------------------- --------
Balance at March 31, 2004 $ 17,131 $ 7,907 $ -- $ 25,038
====================================== ========
-9-
NOTE 5. NOTES PAYABLE AND OTHER OBLIGATIONS
Notes payable and other obligations consists of the following (tabular amounts
in thousands):
March 31,
2004 June 30,
(Unaudited) 2003
----------- --------
Note payable - due in August 2003 with interest at 10% and
unsecured (1) $ -- $ 200
Note payable - due July 27, 2003 and unsecured (2) 200 250
Revolving credit facility - secured by a portion of the
accounts receivable of the technology solutions business 590 274
Capital lease obligations at various interest rates due in
monthly installments through November 2007 37 5
Capital lease obligation at 8.5% due in monthly installments
of $1,007 through November 2005 19 26
Note payable - unsecured and due on demand (3) -- 80
Service agreement obligation - with interest imputed at 12%
and unsecured (4) 3,588 --
Note payable - with interest imputed at 12%, secured by certain
RCG investment holdings (5) 5,561 --
------- -------
9,995 835
Less current maturities, including demand notes (2,352) (819)
------- -------
Long-term portion $ 7,643 $ 16
======= =======
(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, $30,000 of principal was paid. The Company
currently is negotiationg with the debt holder to extend the term or agree
on a payment schedule.
(3) RCG repaid in October, 2003.
(4) On October 31, 2003, Flightserv agreed to pay $4.5 million to MyTravel
Canada for certain services over a 3 year period beginning 11/1/03.
(5) On October 31, 2003, Flightserv purchased 2 businesses (see Note 2) for a
$10 million non-interest bearing 7 year note. Payments commence quarterly
beginning June 30, 2004.
NOTE 6. NOTES PAYABLE AND AMOUNTS DUE TO RELATED PARTIES
Notes payable and amounts due to related parties consists of the following
(tabular amounts in thousands):
March 31, June 30,
2004 2003
(Unaudited)
------------ ------------
Notes payable - due in August 2003 with interest imputed at 8%
and unsecured (1) $ -- $ 267
Note payable - $150,000 due December 31, 2003 and $600,000 due
December 31, 2004 with interest at 12% and collateralized by
certain aviation travel service business assets (2) 750 750
Note payable - unsecured and due on demand (3) -- 5
Other advances -- 73
------------ ------------
750 1,095
Less current maturities, including demand notes (750) (495)
------------ ------------
Long-term portion $ -- $ 600
============ ============
-10-
(1) The principal and accrued interest on this note payable are convertible to
shares of Common Stock at the greater of (i) $1.12 per share or (ii) a 20%
discount to the average closing price of the Common Stock for the five
days immediately preceding the conversion date. This debt , plus accrued
interest, was converted into RCG Common Stock on August 21, 2003 in
accordance with above terms.
(2) In connection with this note, the Company issued 71,429 shares of
restricted stock and 42,857 warrants to purchase its Common Stock at a
price of $2.45 and for a term of three years, both as loan origination
fees. This note is convertible into the Company's Common Stock at the
option of the debt holder at a per share price of the lesser of $2.10 or a
25% discount to the market. The Company can force the debt holder to
convert to stock at $7.00 per share under certain conditions. Discussions
have commenced with the debt holder regarding the December 31, 2003
delinquent payment.
(3) RCG repaid in October, 2003.
NOTE 7. COMMON STOCK AND PAID IN CAPITAL
The following table summarizes the Company's stock and paid in capital activity
for the nine months ended March 31, 2004 (in thousands, except for share
amounts):
Common Stock Additional
------------------------ Paid-In
Shares Amounts Capital
-------------------------------------
Balance at June 30, 2003 13,948,160 $ 558 $ 114,329
=====================================
Comprehensive loss:
Net loss September 30, 2003 - - -
Sale of Common Stock at $.25 per share to an accredited investor 200,000 8 42
Sale of Common Stock at $1.12 per share to seven accredited investors 837,502 34 904
Conversion of three debt holders and one creditor 699,103 28 852
-------------------------------------
Balance at September 30, 2003 15,684,765 $ 628 $ 116,127
=====================================
Comprehensive loss:
Net loss December 31, 2003
Issuance of 230,000 Common Stock Warrants in consideration of professional services 197
Sale of Common Stock at $1.12 per share to four accredited investors 233,927 9 253
Sale of Common Stock and Warrants at $1.60 per unit to ten accredited investors 2,500,000 100 3,607
Issuance of Common Stock at $2.18 per share for SchoolWorld Software purchase 174,312 7 373
-------------------------------------
Balance at December 31, 2003 18,593,004 $ 744 $ 120,557
=====================================
Comprehensive loss:
Net loss March 31, 2004
Sale of Common Stock at $.25 per share to an accredited investor 250,000 10 53
Issuance of 50,000 Common Stock Warrants in consideration for a $2 million credit facility 35
Exercise of warrants issued for services at $.50 per share 6,000 3
Issuance of 440,000 Common Stock Shares in consideration of professional services 440,000 18 523
-------------------------------------
Balance at March 31, 2004 19,289,004 $ 772 $ 121,171
=====================================
Accumulated Comprehensive
Deficit Loss
-------------------------------
Balance at June 30, 2003 $ (103,025) $ (276)
===============================
Comprehensive loss:
Net loss September 30, 2003 (890) -
Sale of Common Stock at $.25 per share to an accredited investor - -
Sale of Common Stock at $1.12 per share to seven accredited investors - -
Conversion of three debt holders and one creditor - -
-------------------------------
Balance at September 30, 2003 $ (103,915) $ (276)
===============================
Comprehensive loss:
Net loss December 31, 2003 (8,037)
Issuance of 230,000 Common Stock Warrants in consideration of professional services
Sale of Common Stock at $1.12 per share to four accredited investors
Sale of Common Stock and Warrants at $1.60 per unit to ten accredited investors
Issuance of Common Stock at $2.18 per share for SchoolWorld Software purchase
-------------------------------
Balance at December 31, 2003 $ (111,952) $ (276)
===============================
Comprehensive loss:
Net loss March 31, 2004 (8,171)
Sale of Common Stock at $.25 per share to an accredited investor
Issuance of 50,000 Common Stock Warrants in consideration for a $2 million credit facility
Exercise of warrants issued for services at $.50 per share
Issuance of 440,000 Common Stock Shares in consideration of professional services
-------------------------------
Balance at March 31, 2004 $ (120,123) $ (276)
===============================
Accumulated
Other
Treasury
Stock Total
---------------------
Balance at June 30, 2003 $ (632) $ 10,954
=====================
Comprehensive loss:
Net loss September 30, 2003 - (890)
Sale of Common Stock at $.25 per share to an accredited investor - 50
Sale of Common Stock at $1.12 per share to seven accredited investors - 938
Conversion of three debt holders and one creditor - 880
---------------------
Balance at September 30, 2003 $ (632) $ 11,932
=====================
Comprehensive loss:
Net loss December 31, 2003 (8,037)
Issuance of 230,000 Common Stock Warrants in consideration of professional services 197
Sale of Common Stock at $1.12 per share to four accredited investors 262
Sale of Common Stock and Warrants at $1.60 per unit to ten accredited investors 3,707
Issuance of Common Stock at $2.18 per share for SchoolWorld Software purchase 380
---------------------
Balance at December 31, 2003 $ (632) $ 8,441
=====================
Comprehensive loss:
Net loss March 31, 2004 (8,171)
Sale of Common Stock at $.25 per share to an accredited investor 63
Issuance of 50,000 Common Stock Warrants in consideration for a $2 million credit facility 35
Exercise of warrants issued for services at $.50 per share 3
Issuance of 440,000 Common Stock Shares in consideration of professional services 541
---------------------
Balance at March 31, 2004 $ (632) $ 912
=====================
NOTE 8. STOCK OPTIONS AND WARRANTS
The Company accounts for stock option grants in accordance with APB Opinion
No. 25, "Accounting For Stock Issued To Employees" and options and warrants
issued to non-employees under SFAS No. 123, "Accounting For Stock Based
Compensation". For the options and warrants issued to non-employees, the fair
value of each award has been calculated using the Black-Scholes Model in
accordance with SFAS No. 123.
-11-
During the quarter ending March 31, 2004, the Company issued 130,000 common
stock options to employees and a director at exercise prices ranging from $1.84
to $1.90. The options vest in a range of six months to three years. Using the
Black-Scholes Model, the value of these stock options was calculated to be
$129,000.
The Company's pro forma net loss and net loss per share assuming
compensation cost was determined under SFAS No. 123 for all options would have
been the following (in thousands, except per share amounts):
For the three months ended March 31, For the nine months ended March 31,
2004 2003 2004 2003
---- ---- ---- ----
Net loss, as reported $ (8,171) $ (1,394) $ (17,098) $ (2,075)
Stock-based employee compensation credit included in
reported net loss -- 468 (96) 532
------------ ------------ ------------ ------------
(8,171) (926) (17,194) (1,543)
Deduct: Total stock-based compensation expense determined
under FAS 123 for all awards (73) (1,450) 17 (2,164)
------------ ------------ ------------ ------------
Pro forma net loss $ (8,244) $ (2,376) $ (17,177) $ (3,707)
============ ============ ============ ============
Earnings per share:
Basic and diluted loss per share, as reported $ (0.43) $ (0.11) $ (1.01) $ (0.17)
============ ============ ============ ============
Basic and diluted loss per share, pro forma $ (0.43) $ (0.19) $ (1.01) $ (0.30)
============ ============ ============ ============
The above items are presented net of minority interest.
During the quarter ending March 31, 2004, the Company issued 50,000 common
stock warrants at an exercise price of $2.44 to a private investment group in
consideration for a $2 million credit facility. The warrants were issued on
March 1, 2004 and expire in three years. Using the Black-Scholes Model, the
value of these warrants was calculated to be $35,000 and was expensed during the
quarter.
NOTE 9. RELATED PARTY TRANSACTIONS
During fiscal 2002, Mr. Pruitt, President and CEO of the Company,
pledged certain of his personal assets to secure a $100,000 bank line of credit
for LFSI. Mr. Pruitt repaid the $100,000 due on the line of credit with personal
funds on August 8, 2003 in exchange for a note from LFSI. The note bears
interest at 8% per annum and is due on demand.
In addition to this note, LFSI owed Mr. Pruitt, as of March 31, 2004,
$19,000, This amount is the result of loans made to LFSI by Mr. Pruitt in fiscal
years 2003 and 2004. As of March 31, 2004, outstanding accrued interest on these
obligations was $12,000.
Mr. Pruitt owns 15% of another company that is an LFSI franchisee in the
state of Maryland. The franchise location in Maryland owed the Company and its
subsidiaries $34,000 at March 31, 2004.
The preceding amounts mentioned for Mr. Pruitt are all included in net current
liabilities of discontinued operations on the Company's Consolidated Balance
Sheet.
During fiscal year 2002, Mr. Pruitt loaned money to the Company. The note in
the amount of $5,000 was repaid on October 2, 2003.
Mr. G. David Gordon, a Company Stockholder, has an ownership interest in ten
of the Company's franchises. Mr. Gordon has an ownership interest in the three
markets in South Carolina along with Mr. Pruitt, as discussed above need to
verify; three locations in the Dallas market along with Paul B. Johnson,
President of LFSI; and four additional markets in Houston, Texas; Raleigh, North
Carolina; Wilmington, North Carolina; and Greensboro, North Carolina. These four
markets had paid the Company and its subsidiaries all amounts owed at March 31,
2004. Mr. Gordon also acts as legal counsel to the Company from time to time.
At March 31, 2004, total debt outstanding to Mr. Gordon, his spouse, and a
company in which he is the president and a 65% shareholder, is $1,700,000; this
amount is included in notes payable to related parties in the amount of $750,000
and net current liabilities of discontinued operations in the amount of $950,000
on the Company's Consolidated Balance Sheet. The loans, which arose during
-12-
fiscal 2002 through fiscal 2004, bear interest at 12%. As of March 31, 2004,
outstanding accrued interest on these obligations was $92,000, which is included
in net current liabilities of discontinued operations . These debts mature in
fiscal 2004 and 2005. The above outstanding debt includes a Note for $750,000
which is convertible into Common Stock of the Company at the lesser of $2.10 per
share or a 25% discount to the fair market value of the Company's Common Stock.
Mr. Johnson is an investor in a company, which in November 2001 became a
franchisee of LFSI in the Dallas, Texas market and purchased franchises for two
additional Dallas, Texas markets during the quarter ended March 31, 2003.
The Dallas franchise locations paid the Company and its subsidiaries all
amounts owed at March 31, 2004. In addition, Mr. Johnson was named Chief
Executive Officer and a board member of LFSI, which acquired the Company's home
technology business in September 2002. Mr. Johnson resigned as a director of the
Company effective October 31, 2002 due to his being appointed the CEO of LFSI.
Mr. Johnson resigned as CEO and as a board member from LFSI during March 2003
and remained President and Treasurer.
During fiscal 2002, Glenn Barrett resigned as President of Lifestyle
Technologies, Inc. and began LVA Technologies LLC ("LVA"), a low voltage wiring
business that operates as a Lifestyle franchisee headquartered in Charlotte, NC
to serve the commercial market. The Company waived LVA's initial franchise fee
for the commercial franchise. LVA also owns the Greenville and Columbia, SC
franchises of LFSI. LVA's low voltage wiring business pays royalties on products
purchased from LFSI at the same rate as LFSI's other franchisees, however, it
does not pay royalties on revenue generated from products purchased elsewhere as
required of the Company's other franchisees, including the Greenville and
Columbia, SC franchises. LVA and its subsidiaries owed the Company and its
subsidiaries $328,000 as of March 31, 2004. This entire amount has been reserved
at March 31, 2004.
The Company owns an equity interest in a privately held company in which
the executive vice president of the Company's travel services business is a
director and shareholder. Avenel Ventures, Inc. owned this equity interest prior
to being acquired by the Company in fiscal 2002. The amount is included in
investments on the Company's Consolidated Balance Sheet.
The Company's travel services business entered into a one-year public
relations contract with a company in which the wife of its President is an
employee.
-13-
NOTE 10. BUSINESS SEGMENT INFORMATION
Information related to business segments is as follows (in thousands):
* Prior information for the Call Center segment is now incorporated with the
Travel Services segment. The Home Technology segment was discontinued during the
quarter ended March 31, 2004.
Three months ended March 31, 2004:
Travel Technology
Services Solutions Corporate Total
-------- --------- --------- --------
Revenue $ 48,876 $ 3,367 $ -- $ 52,243
Loss from continuing operations (5,133) (407) (1,083) (6,623)
Identifiable assets 67,495 10,290 440 78,225
Capital expenditures 129 63 -- 192
Depreciation and amortization 233 50 4 287
Interest expense, net 216 16 -- 232
Three months ended March 31, 2003:
Travel Technology
Services Solutions Corporate Total
-------- --------- --------- --------
Revenue $ 15,514 $ 2,146 $ -- $ 17,660
Loss from continuing operations (39) (183) (370) (592)
Identifiable assets 6,265 9,554 1,627 17,446
Capital expenditures 10 4 -- 14
Depreciation and amortization 25 50 4 79
Interest expense (income), net 27 1 20 48
Nine months ended March 31, 2004:
Travel Technology
Services Solutions Corporate Total
-------- --------- --------- --------
Revenue $ 100,116 $ 10,121 $ -- $ 110,237
Loss from continuing operations (5,542) (574) (3,054) (9,170)
Identifiable assets 67,495 10,290 440 78,225
Capital expenditures 148 81 -- 229
Depreciation and amortization 373 164 12 549
Interest expense, net 455 59 8 522
Nine months ended March 31, 2003:
Travel Technology
Services Solutions Corporate Total
-------- ---------- ---------- ---------
Revenue $ 44,315 $ 7,851 $ -- $ 52,166
Income (loss) from continuing operations 687 (287) (787) (387)
Identifiable assets 6,265 9,554 1,627 17,446
Capital expenditures 142 67 -- 209
Depreciation and amortization 68 171 10 249
Interest expense (income), net 99 (12) 62 149
-14-
NOTE 11: SUBSEQUENT EVENT
On April 21, 2004 Robert H. Brooks, Chairman of Hooters of America, Inc.,
Hooters Air and Pace Airlines, Inc. joined the Company's Board of Directors.
Pace Airlines, Inc., a charter airline company, charters planes to the Company's
travel services division. In addition, Mr. Brooks made an investment in the
Company of $1,000,000 in cash and a waiver of the requirement of delivery of a
letter of credit in the amount of $1,000,000 to Pace Airlines. 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.
During April 2004, the Company issued an additional 50,000 restricted
shares of Common Stock and the technology solutions business paid an additional
$9,000 related to the SchoolWorld Software purchase (see Note 2).
On May 11, 2004, the Company announced that it had signed a definitive
agreement to acquire Response Personnel, Inc., RPI Professional Alternatives,
Inc., RPI Services, Inc., Response Medical Staffing of Connecticut, Inc., and
Response Medical Staffing of New Jersey, Inc. (collectively, "RPI"). The closing
of the transaction is subject to obtaining third-party consents, closing on
financing commitments, and other customary closing conditions.
NOTE 12. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
During the normal course of business, the Company is subject to various
lawsuits, which may or may not have merit. Management intends to vigorously
pursue and/or defend such suits, as applicable, and believes that they will not
result in any material loss to the Company.
The Company's aviation services business is seeking to recover through
litigation approximately $70,000 from Southeast Airlines, Inc. related to a
fiscal year 2003 charter flight program. Flightfuel, Inc. a joint venture of the
Company's travel services business is seeking to recover through litigation
approximately $360,000 in unpaid aviation fuel from Southeast Airlines, Inc. In
relation to the above, Globe Ground North America is seeking $360,000 from
Flightfuel, Inc.
Guarantee Obligation
The Company's Travel Services segment has certain guarantees with an
airline provider that agrees to a minimum number of hours during each program
year and is required to pay any shortage to the provider. The segment does not
anticipate a shortage and accordingly no amount has been accrued.
-15-
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 in other documents filed by the Company with the SEC.
Overview
The following table summarizes results of operations for the three and nine
months ended March 31, 2004 and 2003 (in thousands):
-16-
Three Months Ended Three Months Ended
March 31, 2004 March 31, 2003
----------------------- -----------------------
% of % of
Revenue Revenue
Revenue:
Services $ 49,235 94.2% $ 15,719 89.0%
Product sales 3,008 5.8% 1,941 11.0%
----------------------- -----------------------
Total revenue 52,243 100.0% 17,660 100.0%
----------------------- -----------------------
Cost of revenue:
Services 48,431 92.7% 14,876 84.2%
Product sales 2,840 5.4% 1,700 9.6%
----------------------- -----------------------
Total cost of revenue 51,271 98.1% 16,576 93.9%
----------------------- -----------------------
Gross profit 972 1.9% 1,084 6.1%
----------------------- -----------------------
Selling, general and administrative expenses - other expenses
related to issuance of stock options and warrants 576 1.1% -- 0.0%
Selling, general and administrative expenses - other 6,309 12.1% 1,553 8.8%
Goodwill impairment 200 0.4% -- 0.0%
Depreciation and amortization 287 0.5% 79 0.4%
----------------------- -----------------------
Operating costs and expenses 7,372 14.1% 1,632 9.2%
----------------------- -----------------------
Operating loss (6,400) -12.3% (548) -3.1%
Interest expense, net 232 0.4% 48 0.3%
Gain on investments, net -- 0.0% (8) 0.0%
Loss on disposal of assets -- 0.0% 25 0.1%
Other income -- 0.0% (4) 0.0%
Equity in earnings of joint ventures (9) 0.0% (17) -0.1%
----------------------- -----------------------
Loss from continuing operations (6,623) -12.7% (592) -3.4%
Loss from discontinued operations net of minority interest (1,548) -3.0% (802) -4.5%
----------------------- -----------------------
Net loss $ (8,171) -15.6% $ (1,394) -7.9%
======================= =======================
Nine Months Ended Nine Months Ended
March 31, 2004 March 31, 2003
----------------------- -----------------------
% of % of
Revenue Revenue
Revenue:
Services $ 100,424 91.1% $ 44,887 86.0%
Product sales 9,813 8.9% 7,279 14.0%
----------------------- -----------------------
Total revenue 110,237 100.0% 52,166 100.0%
----------------------- -----------------------
Cost of revenue:
Services 96,135 87.2% 42,075 80.7%
Product sales 8,574 7.8% 6,397 12.3%
----------------------- -----------------------
Total cost of revenue 104,709 95.0% 48,472 92.9%
----------------------- -----------------------
Gross profit 5,528 5.0% 3,694 7.1%
----------------------- -----------------------
Selling, general and administrative expenses - other expenses
related to issuance of stock options and warrants 773 0.7% 50 0.1%
Selling, general and administrative expenses - other 11,891 10.8% 4,226 8.1%
Goodwill impairment 1,200 1.1% -- 0.0%
Depreciation and amortization 549 0.5% 249 0.5%
----------------------- -----------------------
Operating costs and expenses 14,413 13.1% 4,525 8.7%
----------------------- -----------------------
Operating loss (8,885) -8.1% (831) -1.6%
Interest expense, net 522 0.5% 149 0.3%
Gain on investments, net (119) -0.1% (362) -0.7%
Loss on disposal of assets -- 0.0% 54 0.1%
Other income (100) -0.1% (267) -0.5%
Equity in earnings of joint ventures (18) 0.0% (18) 0.0%
----------------------- -----------------------
Loss from continuing operations (9,170) -8.3% (387) -0.7%
Loss from discontinued operations net of minority interest (7,928) -7.2% (1,688) -3.2%
----------------------- -----------------------
Net loss $ (17,098) -15.5% $ (2,075) -4.0%
======================= =======================
Nine Month Periods Ended March 31, 2004 and March 31, 2003
Effective October 31, 2003, the Company's travel services subsidiary concluded
the acquisition of substantially all of the assets and liabilities, except for
certain excluded items, of Vacation Express and SunTrips. Also effective
November 5, 2003, the Company's technology solutions subsidiary completed the
acquisition of substantially all of the assets and liabilities, except for
certain excluded items, of SchoolWorld. Accordingly the operating results of
these subsidiaries (the "Acquired Businesses") have been included in the
reported results of the Company subsequent to that date. The results of the
Company, excluding the results of the Acquired Businesses, are referred to
herein as the existing business (the "Existing Business"). Refer to Note 2 to
the financial statements for more detail on the specifics of the transactions.
The Company's consolidated revenues for the nine months ended March 31, 2004
were $110,237,000 compared to $52,166,000 in the same period a year ago, an
increase of $58,071,000 or 111.3%. The Acquired Businesses accounted for
$57,123,000 of the increase of sales in the period ending March 31, 2004. The
revenues of the Existing Business increased $948,000 from the same period a year
ago.
Gross profit for the nine months ended March 31, 2004 was $5,528,000, compared
to $3,694,000 for the same period a year ago, an increase of $1,834,000 or
49.6%. The increase is primarily attributable to the Acquired Businesses. Gross
profit, as a percentage of sales declined to 5.0% for the nine months ended
-17-
March 31, 2004 from 7.1% for the same period a year ago. Gross margin percentage
declined in both the Travel Services and Technology Solutions segments.
In the nine months ended March 31, 2004, the Company reported non-cash expense
of $773,000 related to the issuance of common stock and warrants for services.
In the nine months ended March 31, 2003, the Company reported non-cash expense
of $50,000 related to warrants issued for the settlement of contracts with two
service providers.
Selling, general and administrative expenses-other ("SG&A-other") in the nine
months ended March 31, 2004 was $11,871,000 compared to $4,238,000 in the
comparable period a year ago. The primary reason for the increase is the
addition of the SG&A-other of the Acquired Businesses. SG&A-other was 10.8% of
revenue in the nine months ended March 31, 2004 compared to 8.1% of revenue in
the same period a year ago.
In the nine months ended March 31, 2004, the Company recognized an impairment of
goodwill of $1,200,000.
The Company's depreciation and amortization expense in the nine month period
ended March 31, 2004 was $549,000 compared to $249,000 in the same period a year
ago. The increase is primarily due to fixed asset additions of the Acquired
Businesses.
In the nine month period ended March 31, 2004, the Company incurred $522,000 of
net interest expense related to its debt portfolio compared to $149,000 in the
same period a year ago. The increase in interest expense is primarily due to the
new debt related to the Travel Business segment.
In the nine month period ended March 31, 2004, the Company recognized a gain on
investments of $119,000 relating to the conveyance of LFSI stock for services.
In the nine month period ended March 31, 2003, the Company recorded a net gain
on investments of $362,000 of which $208,000 relates to the Company's sale of
LFSI stock.
In the nine month period ended March 31, 2004, the Company recorded other income
of $100,000 compared to $267,000 of other income in the same period a year ago.
The Company's technology solutions business recorded a $100,000 amount to other
income related to a prior project in the nine month period ended March 31, 2004.
The Company's travel services business received $263,000 in grant proceeds in
the nine months ended March 31, 2003 from a government assistance program
designed to provide grants to companies whose businesses were directly impacted
by the events of September 11, 2001.
In the nine month period ended March 31, 2004, the Company incurred a loss from
discontinued operations of $7,928,000 compared to $1,688,000 in the same period
a year ago. During the quarter ended March 31, 2004, the Company's Board of
Director's authorized the disposition of its investment in LFSI. Accordingly the
operations of LFSI are included in discontinued operations for all periods
presented.
Three Month Periods Ended March 31, 2004 and March 31, 2003
The Company's consolidated revenues for the quarter ended March 31, 2004 were
$52,243,000 compared to $17,660,000 in the same period a year ago. The Acquired
Businesses accounted for $34,004,000 of the increase in the period ending March
31, 2004. The revenues of the Existing Business increased $579,000 from the same
period a year ago.
Gross profit for the three months ended March 31, 2004 was $972,000, compared to
$1,084,000 for the same period a year ago. Gross profit, as a percentage of
sales, decreased significantly to 1.9% for the three months ended March 31, 2004
from 6.1% for the same period a year ago. The percentage decline is primarily
attributable to the Acquired Businesses of the Travel Segment.
In the three months ended March 31, 2004, the Company reported non-cash expense
of $576,000 related to the issuance of warrants for services compared to zero in
the comparable period a year ago.
-18-
Selling, general and administrative expenses-other ("SG&A-other") in the quarter
ended March 31, 2004 was $6,297,000 compared to $1,565,000 in the comparable
period a year ago. The primary reason for the increase is the addition of the
SG&A-other of the Acquired Businesses. SG&A-other was 12.1% of revenue in the
quarter ended March 31, 2004 compared to 8.9% of revenue in the same period a
year ago.
The Company's depreciation and amortization expense in the quarter ended March
31, 2004 was $287,000 compared to $79,000 in the same period a year ago. The
increase is primarily due to fixed asset additions of the Acquired Businesses.
In the quarter ended March 31, 2004, the Company incurred $232,000 of net
interest expense related to its debt portfolio compared to $48,000 in the same
period a year ago. The increase in interest expense is primarily due to the new
debt related to the Travel Business segment.
In the quarter ended March 31, 2004, the Company did not recognize a gain on
investments. In the quarter ended March 31, 2003, the Company recognized a net
gain on investments of $8,000 related to a loss on non-cash market adjustments
of common stock purchase warrants.
In the three month period ended March 31, 2004, the Company incurred a loss from
discontinued operations of $1,548,000 compared to $802,000 in the same period a
year ago. During the quarter ended March 31, 2004, the Company's Board of
Director's authorized the disposition of its investment in LFSI. Accordingly the
operations of LFSI are included in discontinued operations for all periods
presented.
Continuing Operations of Business Segments
The following table summarizes results of continuing operations by business
segment for the three and nine months ended March 31, 2004 and 2003 (in
thousands):
-19-
Three Months Ended March 31, 2004 Three Months Ended March 31, 2003
--------------------------------- ---------------------------------
Gross Income Gross Income
Revenue Profit (Loss) Revenues Profit (Loss)
-------- -------- -------- -------- -------- --------
Travel Services $ 48,876 $ 507 $ (5,133) $ 15,514 $ 769 $ (39)
Technology Solutions 3,367 465 (407) 2,146 315 (183)
Corporate -- -- (1,083) -- -- (370)
-------- -------- -------- -------- -------- --------
$ 52,243 $ 972 $ (6,623) $ 17,660 $ 1,084 $ (592)
======== ======== ======== ======== ======== ========
Nine Months Ended March 31, 2004 Nine Months Ended March 31, 2003
-------------------------------- --------------------------------
Gross Income Gross Income
Revenue Profit (Loss) Revenues Profit (Loss)
-------- -------- -------- -------- -------- --------
Travel Services $100,116 $ 4,204 $ (5,542) $ 44,315 $ 2,588 $ 687
Technology Solutions 10,121 1,324 (574) 7,851 1,106 (287)
Corporate -- -- (3,054) -- -- (787)
-------- -------- -------- -------- -------- --------
$110,237 $ 5,528 $ (9,170) $ 52,166 $ 3,694 $ (387)
======== ======== ======== ======== ======== ========
* Prior information for the Call Center segment is now incorporated with the
Travel Services segment. The Home Technology segment was discontinued during the
quarter ended March 31, 2004.
Travel Services
The Company's travel services business generated revenues in the third quarter
and the first nine months of fiscal year 2004 of $48,876,000 and $100,116,000
compared to $15,514,000 and $44,315,000 in the same periods a year ago. The
Acquired Businesses accounted for $33,007,000 and $55,446,000 of the increase in
the third quarter and the first nine months of fiscal year 2004, while the
Existing Business revenues increased slightly. The Existing Business increase
relates to an increase in ad hoc programs.
Gross profit for the Company's travel services business in the third quarter and
the first nine months of fiscal year 2004 were $507,000 and $4,204,000 compared
to a gross profit of $769,000 and $2,588,000 in the same periods a year ago. The
gross profit percentage decreased from 5.0% to 1.0% for the third quarter and
from 5.8% to 4.2% for the nine months ended March 31, 2004 when compared to the
same periods a year ago. The significant decrease in gross profit percentage was
primarily due to the Acquired Business' rising fuel costs and increased
competition in key markets resulting in heavily discounted vacation packages.
This business generated losses in the third quarter and the first nine months of
fiscal year 2004 of $5,133,000 and $5,542,000 compared with a loss of $39,000
and income of $687,000 in the same periods a year ago. The increase in losses is
primarily due to the Acquired Businesses.
Technology Solutions
The Company's technology solutions business generated revenues in the third
quarter and the first nine months of fiscal year 2004 of $3,367,000 and
$10,121,000 compared to $2,146,000 and $7,851,000 in the same periods a year
ago. The Acquired Business accounted for $998,000 and $1,677,000 of the increase
in the third quarter and the first nine months of fiscal year 2004. The Existing
Business generated an increase in revenues for the nine months ended March 31,
2004 of approximately $592,000 due to an increase in the number of schools
serviced and an increase in existing school orders.
Gross profit for the Company's technology solutions business in the third
quarter and the first nine months of fiscal year 2004 were $465,000 and
$1,324,000 compared to a gross profit of $315,000 and $1,106,000 in the same
-20-
periods a year ago. The gross profit percentage declined slightly from 14.1% to
13.1% for the first nine months of fiscal 2004 compared to the same period a
year ago. This decrease was due to a lower gross margin on several large orders.
This business generated losses in the third quarter and the first nine months of
fiscal year 2004 of $407,000 and $574,000 compared with losses of $183,000 and
$287,000 in the same periods a year ago. The increase in losses is primarily
from costs incurred integrating the new acquisition as well as interest expense
related to a line of credit that was in place for only one month during the nine
month period ending March 31, 2003.
Corporate
Corporate incurred losses in the third quarter and the first nine months of
fiscal year 2004 of $1,083,000 and $3,054,000 compared with losses of $370,000
and $787,000 in the same periods a year ago. The increase in loss is due
primarily to a goodwill impairment of $1,000,000 and increases in insurance,
public relations, legal fees, and salaries and benefits as well as a decrease in
gain from investments in the current fiscal year as compared to last fiscal
year.
Seasonality
The Company experiences significant seasonality in its travel services and
technology solutions businesses. The seasonality in the travel services business
is due to the higher level of charter travel to Caribbean and Mexican
destinations during the vacation season, which coincides with the Company's
first and fourth fiscal quarters. The Company's technology solutions business
generally experiences higher revenue in the first and fourth fiscal quarters,
with the largest amount being recognized in the fourth quarter, due to the fact
that the Company's year end coincides with the year end of most schools and
universities. These customers are tied to strict budgets and normally purchase
more product at the start and the end of their fiscal year.
Guarantee Obligation
The Company's Travel Services segment has certain guarantees with an airline
provider that agrees to a minimum number of hours during each program year and
is required to pay any shortage to the provider. The segment does not anticipate
a shortage and accordingly no amount has been accrued.
Liquidity and Capital Resources
The Company's net loss for the nine months ended March 31, 2004 of $17,098,000,
was offset by an increase to shareholders' equity related to the sale of Common
Stock and Warrants, with net proceeds of $5,020,000, the issuance of Warrants
for legal fees and other services valued at $773,000, the exercise of Warrants
for $3,000, the issuance of Company Stock of $380,000 for a business
acquisition, and debt and accounts payable conversions totaling $880,000,
resulting in a net decrease in shareholders' equity of $10,042,000 for the nine
months ended March 31, 2004.
For the nine months ended March 31, 2004, operations used $3,429,000 of cash
primarily due to the travel services use of cash in the scheduling of flights.
For the nine months ended March 31, 2004, net cash used by investing activities
was $380,000 due primarily to business acquisitions. For the nine months ended
March 31, 2004, net cash provided by financing activities was $4,966,000 due
primarily to the Company receiving $5,023,000 through the sale of the Company's
Common Stock. At March 31, 2004, the Company had a working capital deficit of
$18,292,000. At March 31, 2004 the Company held cash and cash equivalents of
$1,965,000 and investments of $466,000.
The Company experienced an operating loss from continuing operations of
$9,170,000 during the first nine months of fiscal 2004. The Company's working
capital deficit of $18,292,000 is substantially due to accounts payable and
accrued expenses of $21,957,000 and unearned income of $39,798,000; these are
only partially offset by $37,666,000 of restricted cash and $7,591,000 of
prepaid expenses. A substantial portion of these amounts are from the Acquired
Businesses of the travel services segment which operates at higher dollar volume
than RCG has experienced historically. The Company is currently exploring
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additional sources of liquidity, including debt and equity financing
alternatives, to provide additional cash to support operations, working capital
and capital expenditure requirements for the next 12 months and to meet the
scheduled debt repayments. Additionally, the Company plans on negotiating with
its debt holders to extend some or all of this debt. If (i) we are unable to
grow our business or improve our operating cash flows as expected, (ii) we
suffer significant losses on our investments or operations, (iii) we are unable
to realize adequate proceeds from investments or (iv) we are unsuccessful in
extending a substantial portion of the debt repayments, then we will need to
secure alternative debt or equity financing to provide us with additional
working capital. There can be no assurance that additional financing will be
available when needed or, if available, that it will be on terms favorable to
the Company and its stockholders. If the Company is not successful in generating
sufficient cash flow from operations, or in raising additional capital when
required in sufficient amounts and on terms acceptable to the Company, these
failures would have a material adverse effect on the Company's business, results
of operations and financial condition. If additional funds are raised through
the issuance of equity securities, the percentage ownership of its then current
stockholders would be diluted.
Disclosures About Contractual Obligations and Commercial Commitments
The following table summarizes contractual obligations as of March 31, 2004 (in
thousands):
Prior to April 1, 2005 April 1, 2007 April 1, 2009
Total March 31, 2005 to March 31, 2007 to March 31, 2009 and thereafter
-------------------------------------------------------------------------------------
Purchase obligations $ 49,886 $ 43,411 $ 6,475 $ -- $ --
Long-term notes payable 11,650 -- 3,675 1,500 6,475
Operating and capital lease obligations 8,107 1,449 2,524 2,719 1,415
-------------------------------------------------------------------------------------
$ 69,643 $ 44,860 $ 12,674 $ 4,219 $ 7,890
-------------------------------------------------------------------------------------
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
$237,000 and $112,000 at March 31, 2004 and March 31, 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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK:
None
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ITEM 4. CONTROLS AND PROCEDURES:
Disclosure controls and procedures
The Company has established and currently maintains controls and other
procedures designed to ensure that material information required to be disclosed
in its reports filed under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported, within the time periods specified by the
Securities and Exchange Commission. In conjunction with the close of each fiscal
quarter, the Company conducts an update and a review and evaluation of the
effectiveness of the Company's disclosure controls and procedures. It is the
opinion of the Company's principal executive officer and principal accounting
officer, based upon an evaluation as of the end of the period, that the
Company's disclosure controls and procedures are sufficiently effective to
ensure that any material information relating to the Company is recorded,
processed, summarized and reported to its principal officers to allow timely
decisions regarding required disclosures.
Changes in internal controls
There were no significant changes in the Company's internal accounting processes
and control procedures during the quarter.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
During the normal course of business, the Company is subject to various
lawsuits, which may or may not have merit. Management intends to vigorously
pursue and/or defend such suits, as applicable, and believes that they will not
result in any material loss to the Company.
The Company's aviation services business is seeking to recover through
litigation approximately $70,000 from Southeast Airlines, Inc. related to a
fiscal year 2003 charter flight program. Flightfuel, Inc. a joint venture of the
Company's travel services business is seeking to recover through litigation
approximately $360,000 in unpaid aviation fuel from Southeast Airlines, Inc. In
conjunction with the preceding, Globe Ground North America is seeking to recover
through litigation approximately $360,000 from Flightfuel, Inc.
ITEM 2. CHANGES IN SECURITIES
Common Stock
Issued and Outstanding
----------------------
Balance at December 31, 2003 18,593,004
Shares issued for investor relations 440,000
Private placement at $.25 per share to an accredited investor* 250,000
Warrants exercised at $.50 per share 6,000
----------
Balance at March 31, 2004 19,289,004
==========
* Shares issued pursuant to an agreement dated April 2003. As of March 31,
2004, 250,000 shares remain unissued.
The securities issued in connection with the above were issued without
registration under the Securities Act in reliance upon Section 4(2) of the
Securities Act. The Company based such reliance on representations made to the
Company by the recipient of such securities as to such recipient's investment
intent and sophistication, among other things.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIY HOLDERS
None
ITEM 5. OTHER INFORMATION
On May 11, 2004, the Company announced it signed a definitive agreement to
acquire Response Personnel, Inc., RPI Professional Alternatives, Inc., RPI
Services, Inc., Response Medical Staffing of Connecticut, Inc., and Response
Medical Staffing of New Jersey, Inc. The closing of the acquisition is
subject to third party consents, closing on financial commitments and other
customary closing conditions. Included in Item 6 is a copy of the agreement
(Exhibit 10.16).
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.16 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
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 Certification of Principal Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
32.2 Certification of Principal Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
(b) Financial Reports on Form 8-K and 8-K/A
(i) The Company filed the following reports on Form 8-K and 8-K/A with the
Securities and Exchange Commission ("SEC") during the quarter ended March
31, 2004:
(a) on January 9, 2004 filed a report containing financial and pro forma
financial information relating to the previously filed Asset
Purchase of "Vacation Express" and "Suntrips";
(b) on January 20, 2004 filed a report containing audited financial
information relating to the previously filed Asset Purchase of
"Vacation Express" and "Suntrips";
(c) on February 9, 2004 filed a report containing a press release
relating to the Company's update on its recent acquisition of
Vacation Express and Suntrips;
(d) on February 24, 2004 filed a report containing a press release
relating to financial results for the three and nine month periods
ending December 31 2003;
(e) on February 27, 2004 filed a report dismissing Crisp Hughes Evans
LLP as its independent auditors
(f) on March 3, 2004 filed a report amending the report in item (e) in
order to add a date; and
(g) on March 23, 2004 filed a report containing a press release relating
to the Company's letter of intent to acquire Response Personnel,
Inc., RPI Professional Alternatives Inc. and Career Advisors, Inc.
(collectively, "Response").
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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: May 20, 2004 By: /s/ Michael D. Pruitt
--------------------------------------
Michael D. Pruitt
President and Chief Executive Officer
(Principal executive officer)
By: /s/ William W. Hodge
--------------------------------------
William W. Hodge
Chief Financial Officer
(Principal financial officer)
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