U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarter Ended December 31, 2001
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
eResource Capital Group, Inc.
(Exact name of registrant as specified in its charter)
Delaware 23-2265039
(State of Incorporation) (IRS Employer Identification No.)
5935 Carnegie Boulevard
Suite 101
Charlotte, NC 28209
(704)-553-9330
(Address of registrant's principal
executive offices including zip code and telephone
number, including area code)
1225 Northmeadow Parkway,
Roswell, Ga., 30076
(Former address of registrant's principal office including zip 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 issuer filed all reports required to be filed by Section 12,
13 or 15(d) of the Exchange Act after the distribution of securities under a
plan confirmed by a court. Yes [X] No [ ]
The number of shares outstanding of the Registrant's Common Stock as of February
14, 2002: 83,301,215 Transitional Small Business Disclosure Format:
Yes [ ] No[X]
eResource Capital Group, Inc.
Table of Contents
PART I FINANCIAL INFORMATION Page No
ITEM 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at December 31, 2001 and June 30, 2001.. ................3
Condensed Consolidated Statements of Operations for the three and six months ended
December 31, 2001 and 2000.....................................................................4
Condensed Consolidated Statements of Cash Flows for the six months ended
December 31, 2001 and 2000.....................................................................5
Notes to Condensed Consolidated Financial Statements...........................................6
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................19
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings....................................................................................22
ITEM 2. Changes in Securities................................................................................22
ITEM 3. Defaults Upon Senior Securities......................................................................22
ITEM 4. Submission of Matters to a Vote of Security Holders..................................................23
ITEM 5. Other Information....................................................................................23
ITEM 6. Exhibits and Reports on Form 8-K.....................................................................23
2
eResource Capital Group, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands, except share amounts)
December 31, June 30,
2001 2001
---------- -----------
(Unaudited)
ASSETS
Cash and cash equivalents...................................................... $ 1,446 $ 1,286
Accounts receivable, net....................................................... 1,978 2,018
Inventory...................................................................... 155 126
Investments.................................................................... 1,242 1,592
Prepaid expenses............................................................... 2,524 1,858
------ -----------
Total current assets..................................................... 7,345 6,880
Deferred costs and other assets................................................ 427 319
Property and equipment, net.................................................... 1,542 1,645
Goodwill ............................................................. 18,405 17,898
------ -----------
Total assets.......................................................... $ 27,719 $ 26,742
====== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable - current portion................................................ $ 2,392 $ 489
Notes and amounts due to affiliates............................................ 336 336
Accounts payable and accrued expenses.......................................... 4,717 4,730
Deposits and other liabilities................................................. 40 658
Unearned income................................................................ 1,020 1,161
------ -----------
Total current liabilities............................................... 8,505 7,374
Notes payable.................................................................. 974 179
Net liabilities of discontinued operations..................................... -- 201
Shareholders' equity:
Common stock, $.04 par value, 200,000,000 shares authorized,
80,125,717 and 75,833,728 issued, respectively............................. 3,205 3,033
Additional paid-in capital.................................................. 110,582 109,357
Accumulated deficit........................................................ (95,498) (93,479)
Accumulated other comprehensive income...................................... (41) 88
Treasury stock - at cost (24,502 and 35,930 shares, respectively)........... (8) (11)
------ -----------
Total shareholders' equity.............................................. 18,240 18,988
------ -----------
Total liabilities and shareholders' equity............................ $ 27,719 $ 26,742
====== ===========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
eResource Capital Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations (Unaudited)
(In thousands, except share amounts)
Three Months December 31, Six Months December 31,
------------------------ ----------------------
2001 2000 2001 2000
---- ---- ---- ----
Revenues .................................................. $ 7,164 $ 2,365 $ 16,770 $ 2,377
Cost of sales ............................................. 5,694 2,501 14,177 2,501
------ ----- ------ -----
Gross profit (deficit) .............................. 1,470 (136) 2,593 (124)
Selling, general and administrative expenses - compensation
related to issuance of stock options and warrants ..... 12 3,375 12 6,703
Selling, general and administrative expenses - other ...... 1,703 1,587 3,931 2,389
Provision for bad debts ................................... 7 -- 66 --
Depreciation and amortization ............................. 97 444 184 661
Interest expense (income), net ............................ 84 (21) 93 (24)
Loss on investments, net .................................. 169 -- 380 --
Gain on sale of assets .................................... -- -- (171) --
Write-off of web site development costs ................... -- 754 -- 754
Write-off of predevelopment costs ......................... -- 1,164 -- 1,164
------ ----- ----- ------
Loss from continuing operations ..................... (602) (7,439) (1,902) (11,771)
Loss of discontinued operations ........................... -- (62) -- (267)
Gain on disposal of discontinued operations................ -- -- 576 --
------ ----- ----- ------
Loss before cumulative effect of change in accounting
principle.......................................... (602) (7,501) (1,326) (12,038)
Cumulative effect of change in accounting principle........ -- -- (693) --
------ ----- ------ ------
Net loss............................................. $ (602) $ (7,501) $ (2,019) (12,038)
====== ===== ====== ======
Basic and diluted net loss per share:
Loss from continuing operations ................... $ (.01) $ (.15) $ (.03) $ (.26)
Loss of discontinued operations ................... -- -- -- (.01)
Gain on disposal of discontinued operations ....... -- -- .01 --
Cumulative effect of change in accounting principle -- -- (.01) --
------- ------- ------- -------
Net loss ....................................... $ (.01) $ (.15) $ (.03) $ (.27)
======= ======= ======= =======
Weighted average shares outstanding .................. 77,178,922 50,888,654 76,928,483 44,669.415
========== ========== ========== ==========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
eResource Capital Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
Six Months Ended December 31,
----------------------------
2001 2000
Cash flows from operating activities: ---- ----
Loss from continuing operations.................................................. $ (1,902) $ (11,771)
Adjustments to reconcile net loss to net cash used in operations:
Depreciation and amortization................................................. 184 661
Bad debt expense.............................................................. 66 --
Common stock issued for services.............................................. 36 --
Stock purchase warrants received for services................................. (73) --
Unrealized loss on stock purchase warrants.................................... 357 --
Gain on sale of assets........................................................ (171) --
Compensation expense related to stock options and warrants.................... 12 6,703
Deferred debt amortization.................................................... 3 --
Write-off of Web site development costs....................................... -- 754
Write-off of predevelopment costs............................................. -- 1,164
Changes in operating assets and liabilities:
Accounts and notes receivables.............................................. 62 (383)
Inventory................................................................... (113) --
Prepaid expenses............................................................ (627) (124)
Deferred costs and other assets............................................. (60) (492)
Accounts payable and accrued expenses....................................... 451 192
Deposits and other liabilities ............................................. (400) --
Unearned income............................................................. (142) 683
------ ------
Cash used in continuing operations ........................................ (2,317) (2,613)
Discontinued operations, net..................................................... 150 (151)
------ ------
Net cash used in operations................................................ (2,167) (2,764)
------ ------
Cash flows from investing activities:
Purchase of property and equipment............................................... (171) (63)
Sale of investments.............................................................. 87 --
Sale of assets................................................................... (53) --
Cash (paid) acquired in connection with business acquisitions, net............... (272) 416
------ ------
Net cash (used in) provided by investing activities........................ (409) 353
------ ------
Cash flows from financing activities:
Notes payable proceeds........................................................... 2,560 --
Principal debt payments.......................................................... (124) --
Capital contribution by shareholder.............................................. 50 --
Sales of common stock............................................................ 250 2,659
------ ------
Net cash provided by financing activities.................................. 2,736 2,659
------ ------
Net increase in cash and cash equivalents........................................... 160 248
Cash and cash equivalents at beginning of period.................................... 1,286 420
------ ------
Cash and cash equivalents at end of period.......................................... $ 1,446 $ 668
====== ======
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
eResource Capital Group, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements (Unaudited)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
These financial statements include the operations of eResource Capital
Group, Inc., a Delaware Corporation ("RCG"), and its subsidiaries (collectively
- "the Company"). In October 2000, RCG changed its name from flightserv.com to
reflect the new business direction of the Company. Prior to June 30, 2000, the
Company was engaged in the development of its private aviation business and
limited commercial real estate activities. In fiscal 2001, the Company acquired
several companies and businesses. The Company currently operates aviation travel
services, telecommunications call center, consulting, home technology services,
and Internet/technology solutions businesses in the United States.
All significant intercompany balances and transactions have been eliminated.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted pursuant to the rules of the Securities and Exchange
Commission (the "SEC"). Certain prior period amounts have been reclassified to
conform to the current period presentation and to reflect the commercial real
estate business segment as a discontinued operation. In the opinion of
management, all adjustments considered necessary for a fair presentation of the
financial position of the Company as of December 31, 2001 and of the results of
operations for the periods presented have been included. The financial data at
June 30, 2001 is derived from audited financial statements which are included in
the Company's Annual Report on Form 10-KSB for the year ended June 30, 2001 and
should be read in conjunction with the audited financial statements and notes
thereto. Interim results are not necessarily indicative of results for the full
year.
The Company experienced net losses in recent fiscal years and a net loss of
$2,019,000 during the six months ended December 31, 2001. The Company used cash
of $2,317,000 in continuing operations during the six months ended December 31,
2001 and has cash equivalents and investments totaling of $2,688,000 at December
31, 2001. While its operations continue to improve, the Company continues to
monitor costs in relation to revenues, and if necessary, to undertake cost
reduction measures. In addition, the Company has obtained debt and equity
financing in the six months ended December 31, 2001 and is actively pursuing
debt and equity financing alternatives to provide additional cash to support
operations and growth.
CASH AND CASH EQUIVALENTS
The Company classifies as cash equivalents any investments which can be
readily converted to cash and have an original maturity of less than three
months. At times cash and cash equivalent balances at a limited number of banks
and financial institutions may exceed insurable amounts. The Company believes it
mitigates its risks by depositing cash or investing in cash equivalents in major
financial institutions.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash, accounts receivable,
investments, and notes payable. The Company places its temporary cash with high
credit quality principal institutions. The Company performs periodic credit
evaluations of its customers' financial condition and generally does not require
collateral. Although due dates of receivables vary based on contract terms,
credit losses have been within management's estimates in determining the level
of allowance for doubtful accounts. Overall financial strategies are reviewed
periodically.
6
The Company used the following methods and assumptions in estimating its
fair value disclosures for financial instruments:
- Cash and cash equivalents: The carrying amount reported in the
balance sheet for cash approximates its fair value.
- Accounts receivable and accounts payable: Due to their short term
nature, the carrying amounts reported in the balance sheet for
accounts receivable and accounts payable approximate their fair
value.
- Marketable Securities: The fair values for available-for-sale
equity securities are based on quoted market prices.
- Notes Payable: The carrying amount of the Company's note payable
approximates its fair value.
During the three month period ended December 31, 2001, sales to
Aviation Network Services and Vacation express, customers of the Company's
Aviation Travel Services business, represented 20% and 39%, respectively, of the
Company's consolidated revenue. For the six-month period then ended, sale to
these customers represented 21% and 40%, respectively, of the Company's
consolidated revenue.
INVENTORY
Inventory is stated at cost using the first-in, first-out method. Inventory
consists primarily of finished goods.
INVESTMENTS
The Company's investments, including certificates of deposit with
maturities of greater than three months, not readily marketable equity
securities, and other marketable securities, are classified as available for
sale. Investment securities that are not readily marketable include securities
(a) for which there is no market on a securities exchange or no independent
publicly quoted market, (b) that cannot be publicly offered or sold unless
registration has been effected under the Securities Act of 1933 as amended (the
"Securities Act"), or (c) that cannot be offered or sold because of other
arrangements, restrictions, or conditions applicable to the securities or the
Company. Certificates of deposit are recorded at cost plus accrued interest.
Marketable equity securities are recorded at estimated values based on quoted
market values for marketable securities of the investee discounted for trading
restrictions. If there is no quoted market value, the recorded values are based
on the most recent transactions in the securities discounted for lack of
marketability. Investment securities transactions are recorded on a trade date
basis. The difference between cost and fair value for available for sale
securities is recorded as unrealized gain or loss on available for sale
securities as a component of comprehensive income.
Investments also include stock purchase warrants, which the Company
periodically receives as part of its compensation for services. Stock purchase
warrants from companies with publicly traded common stock are considered
derivatives in accordance with FAS 133 "Accounting for Derivative Investments
and Hedging Activities". The Company recognizes revenue at the fair value of
such stock purchase warrants when earned based on the Black - Scholes valuation
model. The Company recognizes unrealized gains or losses in the statement of
operations based on the changes in value in the stock purchase warrants as
determined by the Black - Scholes valuation model subsequent to the date
received. Unrealized losses for the three months and six months ended December
31, 2001 aggregated $146,000 and $357,000 respectively.
PREPAID EXPENSES
Prepaid expenses include insurance, deferred costs, certain taxes, and
charter flight costs. Depending upon the volume and timing of charter flight
activity, the amount of prepaid charter flight costs can fluctuate
significantly.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost, less accumulated
depreciation. Depreciation is computed on the straight-line basis over the
assets' estimated useful lives. Expenditures for maintenance and repairs are
expensed as incurred. Expenditures for improvements that extend the useful life
or add value to the asset are capitalized and then expensed over the asset's
remaining useful life.
7
Sales and disposals of assets are recorded by removing the related cost and
accumulated depreciation amounts with any resulting gain or loss reflected in
the statement of operations.
The carrying value of property and equipment is reviewed for impairment
whenever events or changes in circumstances indicate that such amounts may not
be recoverable. If such an event occurred, the Company would prepare projections
of future results of operations for the remaining useful lives of such assets.
If such projections indicated that the expected future net cash flows
(undiscounted and without interest) are less than the carrying amounts of the
property and equipment, the Company would record an impairment loss in the
period it made such determination.
GOODWILL AND INTANGIBLE ASSETS
The Company records goodwill and intangible assets arising from business
combinations in accordance with Financial Accounting Standards Board Statement
("FAS") No. 141 "Business Combinations" ("FAS 141") which requires that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001. FAS 141 also specifies the criteria applicable to
intangible assets acquired in a purchase method business combination to be
recognized and reported apart from goodwill.
The Company accounts for goodwill and intangible assets in accordance with
FAS No. 142 "Goodwill and Other Intangible Assets" ("FAS 142"). The Company
adopted FAS 142 effective July 1, 2001. In completing the adoption of FAS 142,
the Company has allocated its previously existing goodwill as of July 1, 2001 to
its reporting units, as defined in FAS 142, and performed an initial test for
impairment as of that date. The results of the initial impairment test are
summarized in Note 5 to these financial statements.
In accordance with FAS 142, the Company no longer amortizes goodwill. FAS
142 requires that goodwill and intangible assets with indefinite useful lives no
longer be amortized, but instead be tested at least annually for impairment. FAS
142 also requires that intangible assets with definite useful lives be amortized
over their respective estimated useful lives to their estimated residual values,
and be reviewed for impairment.
REVENUE RECOGNITION
Aviation Travel Services
Revenue related to the Company's aviation travel services consists of fees
for charter flights and is recognized upon completion of the related flight.
Home Technology
The Company's home technology business completes work in two phases -
wiring, then hardware installation. The Company invoices its customers and
records revenue as work is completed on each project. Also, the Company sells
contracts to customers for alarm monitoring services. The Company recognizes
revenue from alarm monitoring contracts when it sells contracts to third parties
or monthly over the contract term when the Company retains these contracts.
Sales of franchise licenses are recognized as revenue when the Company's
obligations under the franchise agreement are "substantially complete." The
Company generally defines "substantially complete" as the completion of training
by the franchisee's General Manager and the approval by the Company of the
franchise location plan.
Internet/Technology Solutions
Internet services project revenue is recognized on a percentage of
completion basis for fixed fee contracts, based on the ratio of costs incurred
to total estimated costs for individual projects. Revenue is recognized as
services are performed for time and material contracts at the applicable billing
rates.
8
Unbilled revenue represents revenue earned under contracts in advance of
billings. Such amounts are normally converted to accounts receivable within 90
days. Advanced billings represent amounts billed or cash received in advance of
services performed or cost incurred under contracts. Any anticipated losses on
contracts are charged to earnings when identified.
The Company provides e-commerce, marketing and business development services
to clients pursuant to contracts with varying terms. The contracts generally
provide for monthly payments and, in some cases, advance deposits. Revenue is
recognized over the respective contract period as services are provided.
Revenue from uncollateralized e-commerce sales or sales of hardware and
software is recognized upon passage of title of the related goods to the
customer.
NET LOSS PER SHARE
The Company computes net loss per share in accordance with FAS No. 128,
"Earnings per Share" ("FAS 128") which requires dual presentations of basic
earnings per share ("EPS") and diluted EPS.
Basic earnings per share is computed using the weighted average number of
common shares outstanding during the period. Diluted earnings per share is
computed using the weighted average number of common shares outstanding and
potentially dilutive shares during the period. Options and warrants to purchase
26,495,818 and 28,955,122 shares of the Company's common stock, par value $0.04
per share (the "Common Stock"), were outstanding at December 31, 2001 and 2000,
respectively. Such outstanding options and warrants could potentially dilute
earnings per share in the future but have not been included in the computation
of diluted net loss per share in the three months and six months ended December
31, 2001 and 2000 as the impact would have been anti-dilutive.
ADVERTISING
The Company expenses advertising costs as incurred. Advertising expense
aggregated approximately $61,000 and $460,000, respectively, for the three month
periods ended December 31, 2001 and 2000 and $181,000 and $466,000 for the six
month periods then ended.
COMPREHENSIVE INCOME
Components of comprehensive income are net loss and all other non-owner
changes in equity. The only component of other comprehensive income consists of
unrealized holding losses on securities available for sale. Total comprehensive
loss for the three and six month periods ended December 31, 2001 was $295,000
and $2,148,000, respectively, and, for the three and six month periods ended
December 31, 2000 was $7,501,000 and $12,028,000, respectively.
INCOME TAXES
The Company accounts for income taxes in accordance with the liability
method as provided under FAS No. 109, "Accounting for Income Taxes" ("FAS 109")
Accordingly, deferred income taxes are recognized for the tax consequences of
differences between the financial statement carrying amounts and the tax bases
of existing assets and liabilities. The measurement of deferred tax assets is
reduced, if necessary, by the amount of any benefits that, based on available
evidence, are not expected to be realized.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reported period. Actual results could differ from those estimates.
9
RECENT ACCOUNTING PRONOUNCEMENTS
In October 2001, the Financial Accounting Standards Board issued FAS 144
"Accounting for the Impairment or Disposal of Long-Lived Assets". FAS 144
addresses financial accounting and reporting for the disposal of long-lived
assets. FAS 144 becomes effective for financial statements issued for fiscal
years beginning after December 15, 2001 and interim periods within those fiscal
years. The Company is currently evaluating the potential impact, if any, the
adoption of FAS 144 will have on its financial position and results of
operations.
NOTE 2. CONTINUING OPERATIONS
Recent Developments
On July 10, 2001, the Company acquired certain net assets, liabilities and
the business of a home technology company located in Atlanta, Georgia for an
aggregated purchase price of $1,255,000, which was paid by delivery of a cash
payment ($275,000), Common Stock (975,556 shares) and a four-year term
promissory note ($250,000). Including direct acquisition costs, the total
purchase price aggregated $1,259,857 and the transaction was accounted for using
the purchase method of accounting. The excess value of the purchase price over
the fair value of the net assets on the acquisition date aggregated
approximately $1,184,184 which was allocated to goodwill.
Aviation Travel Services
In fiscal 2000, the Company introduced its Private Seats charter flight
program to provide Internet access to private jet flight and related travel
services and operated the business from March 2000 through June 30, 2000. Due to
limited capital availability, the Company did not actively pursue development of
the Private Seats program and, as a result, did not realize any revenue from
this business after June 30, 2000. In fiscal 2001, the Company determined that
it would not pursue further development or marketing of the Private Seats
program.
In August 2000, the Company completed the acquisition of Internet Aviation
Services, Ltd. ("IASL"). IASL was a new leisure and business travel services
company, which offered charter services. The Company now operates its charter
aviation services as part of its aviation travel services business through the
Company's subsidiary, flightserv.com, Inc., a Delaware corporation ("FSW").
In October 2000, FSW entered into a contract with Southeast Airlines to
charter two jet aircraft to provide jet shuttle service between Norfolk,
Virginia and New York City, New York and between Norfolk and Orlando, Florida.
Due to low consumer demand for this service FSW suspended its jet shuttle
operations in January 2001 and terminated its contract with Southeast for the
two aircraft.
Since December 2000, FSW has operated charter aircraft for tour operators. In
July 2001, FSW entered into an agreement with Vacation Express to create a
passenger hub in Orlando-Sanford International Airport. Pursuant to the terms of
the agreement, six commercial jet aircrafts will originate in six eastern and
midwestern cities and serve five Caribbean destinations and Orlando. The Company
began operating the service in November 2001 and at December 31, 2001 four (4)
aircraft were in operation. The two (2) remaining are scheduled to begin
operating in February and March 2002.
Telecommunications Call Center
In September 2000, the Company completed the acquisition of DM Marketing,
Inc. ("DMM"), which operates a telecommunications call center providing
telemarketing, help desk and other services for Internet related and other
companies.
Home Technology
In April 2001, the Company acquired LST, Inc. d/b/a Lifestyle Technologies
("LST"), which is a full service home technology integration company providing
builders, homeowners, and commercial customers with complete installation and
equipment for structured wiring, security, personal computer networking, audio,
video, home theater, central vacuum and accent lighting. LST also provides
similar products and services to the commercial market. LST has also secured
relationships with product manufacturers, distributors and service providers
(cable, Internet service, broadband and security).
10
In September 2001, LST commenced its national franchising program. In
connection with the franchising program, LST has completed the sale of franchise
licenses in 10 markets. Also, the Company has received a non-binding letter of
intent from a prospective franchisee for the sale of a franchise license for one
additional market. LST expects to close the sale of the remaining market on or
before March 31, 2001. Also, in July 2001, LST acquired a home technology
business located in Atlanta, Georgia. LST plans to own and operate the Charlotte
and Atlanta markets.
Internet/Technology Solutions
The Company's Internet/Technology Solutions business is the result of our
acquisitions of Avenel Alliance, Inc. ("Alliance") in February 2001 and Logisoft
Computer Products Corp., and its wholly-owned subsidiary eStorefrons.net Corp.
("Logisoft") in June 2001. Avenel Alliance was a wholly-owned subsidiary of
Avenel Ventures, Inc. ("Ventures"), which was also acquired by the Company in
February 2001.
The Company's Internet/Technology Solutions segment provides integrated
products and services to assist customers in meeting their strategic technology
and telecommunications initiatives. The Company's products and services include
software distribution to corporate and educational customers, data networking
and communications infrastructure consulting and implementation, full service
Internet development, Internet site hosting and co-location and Internet
business development services encompassing partner site management and
marketing. In its Internet business development and marketing services, the
Company generally participates in the development and implementation of the
business plan in exchange for revenue-sharing and/or equity-based arrangements.
The Company's consolidated results of operations include the results of
operation of each of the acquired companies discussed above for the period from
each respective purchase date through December 31, 2001 and 2000.
Pro Forma Results of Operations
Following is selected pro forma consolidated financial information
reflecting the Company's acquisitions of IASL, DMM, Ventures, LST and Logisoft
as if such acquisitions had occurred as of the beginning of the six month period
ended December 31, 2000 (in thousands, except share amounts):
Revenue............................................................ $ 6,922
Net loss from continuing operations................................ $ (18,036)
Net loss........................................................... $ (18,303)
Net loss per share................................................. $ (.27)
Weighted average shares............................................ 68,875,449
NOTE 3. DISCONTINUED OPERATIONS
Commercial Real Estate
In fiscal 2001, the Company discontinued its commercial real estate
business, which consisted of two strip-mall shopping centers in the Atlanta,
Georgia area. In August 2001, the Company completed the sale of all of the
outstanding shares of the capital stock of the Company's subsidiary which owned
the commercial real estate business in exchange for cash ($312,500) and a 60-day
note receivable ($62,500), which was collected in October 2001. The Company
realized a gain of approximately $576,000 on the sale in September 30, 2001. The
Company's financial statements for the periods ended December 31, 2000 have been
reclassified to reflect the commercial real estate business as a discontinued
operation.
11
Residential Real Estate
In fiscal 1999, the Company discontinued its residential real estate
development operations. Residential real estate operations include developed
lots, undeveloped land, and equity investments in residential real estate
development companies, partnerships, and joint ventures. The Company completed
the disposal of its residential real estate business in fiscal 2001.
NOTE 4. INVESTMENTS
Investments consist of the following (in thousands):
December 31, 2001 June 30, 2001
----------------- -------------
Gross Gross
Unrealized Fair Unrealized Fair
Cost Losses Value Cost Gains Value
----- ------ ----- ----- ------ ------
Equity securities $ 1,126 $ (41) $ 1,085 $ 1,020 $ 88 $1,108
Certificates of deposit 56 -- 56 99 -- 99
------- ------ ------- ------- ----- ------
$ 1,182 $ (41) 1,141 $ 1,119 $ 88 1,207
Stock purchase warrants ======= ====== 101 ======= ===== 385
------- ------
$1,242 $1,592
======= ======
The Company's certificates of deposit at December 31, 2001 are pledged as
collateral security for the Company's letters of credit for office space leases.
NOTE 5. GOODWILL
The changes in goodwill, by segment, for the six-month period ended December
31, 2001, are as follows:
Aviation Internet /
Travel Technology Home
Services Solutions Technology Corporate Total
-------- --------- --------- --------- -----
Balance at June 30, 2001 $ 939 $ 8,263 $ 7,696 $ 1,000 $ 17,898
Cumulative effect of change in accounting
principle (adoption of FAS 142) -- (693) -- -- (693)
----- ------- ------ ------ ------
Balance on July 1, 2001 939 7,570 7,696 1,000 17,205
Goodwill acquired during period -- -- 1,184 -- 1,184
Other goodwill adjustments -- 16 -- -- 16
----- ------- ------ ----- --------
Balance at December 31, 2001 $ 939 $ 7,586 $8,880 $1,000 $ 18,405
===== ======= ====== ====== ========
Goodwill was reduced by $693,000 in the Internet/Technology Solutions
segment as a result of the implementation of FAS 142. This adjustment relates
primarily to the discounting of the future net cash flows in the segment's
Internet business development activity that was acquired as a part of the
purchase of Alliance.
Goodwill allocated to the Corporate segment relates to investment banking
activities that were acquired by the Company as a part of the acquisition of
Ventures in February 2001 and integrated into Corporate.
12
In July 2001, the Company acquired a home technology business in the
Atlanta, Georgia market, which resulted in the recording of $1,184,000 in
goodwill. The other goodwill adjustments relate to resolutions of contingencies
that existed as of the dates that the related businesses were acquired by the
Company.
Reported net income adjusted for the amounts of goodwill amortization recorded
by the Company prior to the adoption of FAS 142 is as follows:
Three months December 31, Six Months December 31,
------------------------- ----------------------
2001 2000 2001 2000
---- ---- ---- ----
Reported loss before cumulative effect of change in accounting
principle .................................................. $ (602) $ (7,501) $(1,326) $ (12,038)
Add back: Goodwill amortization .............................. -- 343 -- 457
------ ------- ------ ------
Adjusted loss before cumulative effect of change in
accounting principle ................................. (602) (7,158) (1,326) (11,581)
Cumulative effect of change in accounting principle .......... -- -- (693) --
------- ------ ------- ------
Adjusted net loss ....................................... $ (602) $ (7,158) $(2,019) $ (11,581)
======= ====== ======== =========
Basic and diluted net loss per share:
Reported loss before cumulative effect of change in accounting $ (.01) $ (.15) $ (.02) $ (.26)
principle
Add back: Goodwill amortization .............................. -- .01 -- .01
------- -------- ------ --------
Adjusted loss before cumulative effect of change in
accounting principle ................................. (.01) (.14) (.02) (.25)
Cumulative effect of change in accounting principle .......... -- -- (.01) --
------- -------- ------ -------
Adjusted net loss ....................................... $ (.01) $ (.14) $ (.03) $ (.25)
======= ======== ====== =======
The effect of the adoption of FAS 142 on the quarter ended September 30,
2001, was to increase the company's reported net loss of $724,000 ($.01 per
share) by the amount of the cumulative effect of change in accounting principal
measured as of July 1, 2001, $693,000 ($.01 per share), to $1,417,000 ($.02 per
share).
13
NOTE 6. NOTES PAYABLE
Notes payable consists of the following (in thousands):
December,31 June 30,
2001 2001
---- ----
Notes payable - due on demand with an interest rate of 12% and unsecured $ 310 $ 425
Notes payable - due on demand with interest imputed at 8% and unsecured 488 57
Mortgage payable to a bank in monthly installments of $1,751, including interest at
7.96% through October 2015 and collateralized by a building 183 186
Note payable - due in monthly installments of $3,000 and a balloon payment in July
2005 with monthly interest at 8.00% and collateralized by home technology
accounts receivable 235 --
Note payable - due in July 2002 with interest at 10% and collateralized by certain
home technology assets 300 --
Note payable - due in July 2002 with interest at 12% and unsecured 200 --
Note payable - due in July 2002 with interest at 10% and unsecured 200 --
Note payable - due in September 2002 with interest at 12% and collateralized by
certain home technology accounts receivable and inventory (1) 650 --
Note payable - $200,000 due December 31, 2002 and $600,000 due December 31, 2003
with interest at 12% and collateralized by certain aviation business assets 800 --
------ ------
3,366 668
Less current maturities (2,392) (489)
------ ------
Long-term portion $ 974 $ 179
====== ======
(1) At the option of the noteholder, this note can be converted into
RCG's Common Stock at a ratio of one (1) share of
Common Stock for each $0.65 of outstanding principal and interest.
In November 2001, the Company received a commitment for a $4,000,000 term
loan. In December 2001, the loan commitment was cancelled and the Company did
not receive any funding in connection with that commitment.
NOTE 7. INCOME TAXES
As of December 31, 2001, the Company had approximately $39,700,000 of net
operating loss carry forwards ("NOLs") for federal income tax purposes, which
expire between 2019 through 2021. A deferred income tax asset valuation
allowance has been established against all deferred income tax assets as
management is not certain that the deferred income tax assets will be realized.
In addition, due to the substantial limitations placed on the utilization of net
operating losses following a change in control, utilization of such NOLs could
be limited.
In January 2002, the Company received an Internal Revenue Service report on
the Company's 1996 and 1997 and one of its subsidiary's 1994 and 1995 tax
returns, which the Company plans to appeal. At December 31 and June 30, 2001,
the Company had recorded a federal tax liability of $305,830 related to such
assessment.
NOTE 8. ISSUANCE OF COMMON STOCK
In July 2001, the Company issued 975,556 shares of restricted Common Stock
in connection with the acquisition of a home technology business.
In September 2001, the Company issued 11,428 shares of restricted Common
Stock from treasury stock in connection with the payment of certain legal fees.
In December 2001, the Company issued 795,599 shares of Common Stock with an
aggregate market value of approximately $165,000 in connection with the payment
of a loan origination fee, legal expenses, investor relation services and
general and administrative expenses. Of the $165,000, the Company recorded
approximately $133,000 as deferred debt expense, which is being amortized over
the note term of two years.
14
The Company's purchase agreements for LST and Logisoft provide for 2,000,000
and 500,000 of additional shares of Common Stock, respectively, to be issued to
certain parties, contingent upon operating performance criteria for each company
acquired. In October 2001, the Company issued 20,834 shares of Common Stock
representing additional shares earned in accordance with the Logisoft purchase
agreement. No additional shares have been earned in accordance with the LST
purchase agreements.
In December 2001, the Company's Board of Directors approved a private
placement of up to 10,000,000 shares of the Company's Common Stock at a price of
$0.10 per share. The Company is managing the private placement directly and, as
a result, will not incur any investment banking fees. The Company sold 2,500,000
shares under the private placement in December 2001, 3,200,000 shares in January
and February 2002, and expects to complete the sale of the remaining 4,300,000
shares on or before March 31, 2002.
NOTE 9. STOCK OPTIONS AND WARRANTS
The Company accounts for stock option grants in accordance with Accounting
Principles Board Opinion No. 25, "Accounting For Stock Issued To Employees"
("APB 25") and options and warrants issued to non-employees under FAS No. 123,
"Accounting For Stock Based Compensation" ("FAS 123"). 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 FAS 123.
In fiscal 2001, the Company adopted a stock compensation plan (the "Option
Plan"). The Option Plan provides for the granting of either incentive stock
options or non-qualified options to purchase shares of the Company's Common
Stock to provide incentives to employees, directors and other individuals or
companies at the discretion of the Board of Directors. The Option Plan allows
participants to purchase Common Stock of the Company at prices set by the Board
of Directors, but in the case of incentive stock options not less than fair
market value at the date the option is granted. Unexercised options expire 10
years after the date of grant unless otherwise specified by the Board of
Directors. There are 20,000,000 shares authorized for the granting of incentive
stock options under the Option Plan. In the six months ended December 31, 2001,
the Company issued qualified and non-qualified options to certain employees
under the Option Plan to purchase 1,150,000 shares of Common Stock and cancelled
options of terminated employees to purchase 462,580 shares of common stock. The
following table summarizes the Company's outstanding options:
December 31, 2001 June 30, 2001
----------------- -------------
Vesting Vesting
Exercise Term Period Exercise Term Period
Shares Price (Years) (Months) Shares Price (Years) (Months)
------ ------ ----- ------ ------ ----- ----- -------
460,000 $ 0.18 10 * 48 * -- $ -- -- --
2,940,000 0.25 10 12 2,940,000 0.25 10 12
240,000 0.27 10 48 -- -- -- --
2,900,000 0.70 10 12 to 48 3,100,000 0.70 10 12 to 48
1,000,000 0.75 10 -- 1,000,000 0.75 10 --
480,000 0.84 10 36 to 42 480,000 0.84 10 36 to 42
1,263,650 0.85 10 12 to 38 1,027,650 0.85 10 12 to 38
272,048 0.90 10 18 320,628 0.90 10 18
270,000 0.95 10 12 to 46 270,000 0.95 10 12 to 46
500,000 1.44 10 -- 500,000 1.44 10 --
125,000 3.00 10 -- 125,000 3.00 10 --
----------- ---------
10,450,698 9,763,278
=========== =========
* 250,000 non-qualified options issued to an employee in December 2001 have a
three-year term and are fully vested.
Of the outstanding options at December 31, 2001, 8,486,159 are exercisable.
15
The Company has issued warrants to purchase shares of its Common Stock in
exchange for consulting and legal services and for strategic vendor alliances
provided by outside third parties. In addition, the Company has issued warrants
in connection with Common Stock private placement and term loan financing
transactions. Certain of the warrants issued contained registration rights
provisions. In the three and six month periods ended December 31, 2000, the
Company recognized compensation expense of $3,375,000 and $6,703,000
respectively, in connection with the issuance of warrants, including $100,000
related to the re-pricing of warrants to purchase 500,000 shares of Common Stock
that were exercised in August 2000.
The following table summarizes the Company's outstanding warrants at December 31
and June 30, 2001:
December 31, 2001 June 30, 2001
----------------- -------------
Exercise Term Exercise Term
Shares Price (Months) Shares Price (Months)
------- ------ ------ -------- ------ -------
5,556,377 $ 0.04 54 5,556,377 $ 0.04 54
300,000 0.35 36 -- -- --
400,000 0.50 120 400,000 0.50 120
4,753,743 0.75 120 4,753,743 0.75 120
100,000 0.81 48 100,000 0.81 48
10,000 1.00 -- 10,000 1.00 --
50,000 1.10 36 50,000 1.10 36
675,000 1.75 -- 600,000 1.75 --
575,000 3.00 * 575,000 3.00 *
3,625,000 4.00 120* 3,625,000 4.00 120*
----------- ---------
16,045,120 15,670,120
=========== ==========
* All of the $3.00 warrants and 575,000 of the $4.00 warrants in the above table
have a term that is variable, subject to the market value of the Common Stock
and other conditions.
At December 31, 2001, all of the above warrants are exercisable, except for
555,638 with an exercise price of $0.04 which vest on December 31, 2002, 100,000
with an exercise price of $0.81 that vest over 36 months, and 50,000 with an
exercise price of $1.75 that vest upon performance of certain services.
The Company accounts for options issued to employees under APB 25 and
options and warrants issued to non-employees under FAS 123. The total
compensation cost recognized during the six month periods ended December 31,
2001 and 2000 for these awards was $12,000 and $6,703,000, respectively.
NOTE 10: GENERAL AND ADMINISTRATIVE EXPENSE - OTHER
Following is a summary of the Company's general and administrative expenses (in
thousands):
Three months Ended December 31, Six Months Ended December 31,
------------------------------ ----------------------------
2001 2000 2001 2000
----- ---- ---- ----
Compensation expense $932 $407 $2,152 $724
Legal and professional fees 77 292 250 463
Public and investor relations 17 17 74 48
Marketing and advertising 61 460 181 466
Rent expense 154 52 328 96
Insurance 97 36 196 80
Website and telecommunications 79 39 179 112
Office and printing expense 57 108 161 174
Travel and entertainment 73 46 141 67
Other 156 130 269 159
------ ------ ------ ------
$1,703 $1,587 $3,931 $2,389
====== ====== ====== ======
16
NOTE 11. RELATED PARTY TRANSACTIONS
In fiscal 2001, Michael D. Pruitt, the President, Chief Executive Officer
and a director of the Company, and a company owned by Mr. Pruitt made loans to
the Company. Also, in the quarter ended December 31, 2001, Mr. Pruitt loaned the
Company $50,000 which was repaid to Mr. Pruitt in December 2001. At December 31
and June 30, 2001, notes and advances due to affiliates of the Company consist
of the following (in thousands):
Note payable to Mr. Pruitt $ 100
Advance payable to Mr. Pruitt 20
Notes payable to a company owned by Mr. Pruitt 216
------
$ 336
======
The note payable to Mr. Pruitt indicated in the above table bears interest
at 12% per annum and is due on demand. The advance to Mr. Pruitt and notes
payable to the company owned by Mr. Pruitt bear imputed interest at 8% and are
due on demand.
Mr. Pruitt is also a minority investor in a company that in September 2001
purchased franchise licenses and business operations of the Company's home
technology business in three markets in South Carolina and in another company
that intends to become a franchisee of the Company's home technology business in
Baltimore, Maryland upon regulatory approval of the Company's franchising
program in that state.
Paul B. Johnson, a director of the Company, is an investor in a company,
which in November 2001 became a franchisee of the Company's home technology
business in the Dallas, Texas market.
NOTE 12. BUSINESS SEGMENT INFORMATION
Information related to business segments for the Company's continuing
operations is as follows (in thousands):
Three months Ended December 31, 2001:
Aviation Internet/
Travel Call Technology Home
Services Center Solutions Technology Corporate Total
-------- ------- ---------- --------- -------- ------
Revenue $ 4,311 $ 16 $ 1,795 $ 994 $ 48 $ 7,164
Income (loss) from continuing operations 255 (26) (168) 7 (670) (602)
Identifiable assets 4,178 291 10,353 10,280 2,617 27,719
Capital expenditures 6 -- -- 41 -- 47
Depreciation and amortization 11 4 57 21 4 97
17
Three months Ended December 31, 2000:
Aviation Internet/
Travel Call Technology Home
Services Center Solutions Technology Corporate Total
-------- ------- -------- ---------- --------- ------
Revenue $ 2,276 $ 89 $ -- $ -- $ -- $ 2,365
Income (loss) from continuing operations (1,008) (336) -- -- (6,095) (7,439)
Identifiable assets 2,732 5,751 -- -- 31 8,514
Capital expenditures 41 3 -- -- -- 44
Depreciation and amortization 154 290 -- -- -- 444
Six Months Ended December 31, 2001:
Aviation Internet/
Travel Call Technology Home
Services Center Solutions Technology Corporate Total
-------- ------ --------- --------- --------- -----
Revenue $ 10,353 $ 36 $4,565 $ 1,738 $ 78 $16,770
Income (loss) from continuing operations 315 (71) (506) (301) (1,339) (1,902)
Identifiable assets 4,178 291 10,353 10,280 2,617 27,719
Capital expenditures 6 -- 55 110 -- 171
Depreciation and amortization 22 9 112 37 4 184
Six Months Ended December 31, 2000:
Aviation Internet/
Travel Call Technology Home
Services Center Solutions Technology Corporate Total
-------- ------ --------- ---------- --------- -----
Revenue $ 2,276 $ 101 $ -- $ -- $ -- $ 2,377
Income (loss) from continuing operations (1,166) (460) -- -- (10,145) (11,771)
Identifiable assets 2,732 5,751 -- -- 31 8,514
Capital expenditures 41 22 -- -- -- 63
Depreciation and amortization 272 389 -- -- -- 661
Corporate includes certain investment banking activities that were acquired
by the Company primarily as a part of the acquisition of Ventures in February
2001. The Company's sales are made primarily to customers in the United States
of America. International sales are minimal.
18
Item 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
In the quarter ended September 30, 2000, the Company acquired its leisure
aviation travel services and telecommunications call center businesses. In the
third and fourth quarters of fiscal 2001, the Company acquired its home
technology and Internet/technology solutions businesses. Also, in the quarter
ended September 30, 2001, the Company acquired an additional home technology
business.
The following table summarizes results of operations by business segment for
the Company's continuing operations (in thousands):
Three Months Ended December 31, 2001 Three Months Ended December 31, 2000
------------------------------------ ------------------------------------
Gross
Gross Profit
Revenue Profit Income (Loss) Revenues (Deficit) Loss
------- ------ ---------- -------- ------- ----
Aviation Travel Services $ 4,311 $ 468 $ 255 $ 2,276 $ (225) $ (1,008)
Telecommunications Call Center 16 16 (26) 89 89 (336)
Home Technology 994 481 7 -- -- --
Internet/Technology Solutions 1,795 457 (168) -- -- --
Corporate 48 48 (670) -- -- (6,095)
------- ------ ------ ------- ------- ---------
$ 7,164 $1,470 $ (602) $ 2,365 $ (136) $ (7,439)
======= ====== ======= ======= ======= =========
Six Months Ended December 31, 2001 Six Months Ended December 31, 2000
---------------------------------- ----------------------------------
Gross
Gross Profit
Revenues Profit Income (Loss) Revenues (Deficit) Loss
-------- ------ ------------ -------- ------- ------
Aviation Travel Services $ 10,353 $ 794 $ 315 $ 2,276 $ (225) $ (1,166)
Telecommunications Call Center 36 36 (71) 101 101 (460)
Home Technology 1,738 633 (301) -- -- --
Internet/Technology Solutions 4,565 1,052 (506) -- -- --
Corporate 78 78 (1,339) -- -- (10,145)
------- ------ -------- ------- ------ ---------
$ 16,770 $2,593 $ (1,902) $ 2,377 $ (124) $ (11,771)
======== ====== ======== ======= ====== =========
Results of Continuing Operations
The Company's revenues in the three and six months ended December 31, 2001
were $7,164,000 and $16,770,000, respectively, compared to $2,365,000 and
$2,377,000, respectively, in the same periods a year ago. The increase in the
current period is due to the newly acquired businesses and the expanded charter
aviation business. These increases were partially offset by the termination of
the jet shuttle services ($784,000 in the December 2000 periods) and a decline
in the call center operations.
During the three month period ended December 31, 2001, sales to
Aviation Services and Vacation Express, customers of the Company's Aviation
Travel Services business, represented 20% and 39%, respectively, of the
Company's consolidated revenue. For the six-month period then ended, sales to
these customers represented 21% and 40%, respectively, of the Company's
consolidated revenue.
19
Gross profit in the three and six months ended December 31, 2001 was
$1,470,000 and $2,593,000 compared to a deficit of ($136,000) and $(124,000),
respectively, in the same periods a year ago. The increases in the current
period are due to the newly acquired businesses, the expanded charter aviation
business and elimination of the jet shuttle business, which operated at a gross
margin deficit.
In the three and six months ended December 31, 2000, the Company recognized
$3,375,000 and $6,703,000, respectively, of non-cash expense related to the
issuance of stock options and warrants. The Company incurred only $12,000 of any
such expense in the three and six months ended December 31, 2001 because the
Company granted fewer compensatory options and warrants in the current year.
Selling, general and administrative expenses-other in the three and six
months ended December 31, 2001 was $1,703,000 and $3,931,000, respectively,
compared to $1,587,000 and $2,389,000, respectively, in the comparable periods a
year ago. These increases are due to expenses of the newly acquired businesses
partially offset by reduced corporate expenses and by lower marketing expenses
due to the termination of the jet shuttle operations.
The Company's depreciation and amortization expense in the three and six
month periods ended December 31, 2001 was $97,000 and $184,000, respectively,
compared to $444,000 and $661,000, respectively, in the same periods a year ago.
The decrease is due primarily to the discontinuance of goodwill amortization
($457,000 for the six months ended December 31, 2000) in accordance with FAS 142
offset partially by depreciation of the fixed assets of newly acquired
businesses.
Bad debt expense in the three and six months ended December 31, 2001 is
$7,000 and $66,000, respectively, and is related to the newly acquired
businesses.
Also, in the three and six months ended December 31, 2001, the Company
recognized a net loss on investments of $169,000 and $380,000, respectively.
These losses are reported in the Corporate segment results. The results for the
six months ended December 31, 2001 includes a gain of $171,000 on the sale of
certain home technology net assets to companies that are operating these
businesses as franchises.
The Company realized a gain of $576,000 on the sale of its discontinued
commercial real estate business in the three months ended September 30, 2001.
In fiscal 2002, the Company recorded the cumulative effect of a change in
accounting principle of $693,000, increasing the Company's reported net loss, as
a result of its implementation of FAS 142. This adjustment was recorded as of
July 1, 2001.
Liquidity and Capital Resources
The net loss in the six months ended December 31, 2001 of $2,019,000 and
unrealized loss on marketable securities of $129,000 were partially offset by
increases in shareholders' equity related to a business acquisition, a capital
contribution, and sale of common stock resulting in a net decrease in
shareholders' equity of $748,000. This decrease was $55,000 excluding the impact
of the adoption of FAS 142.
In the six months ended December 31, 2001, continuing operations used
$2,317,000 of cash and discontinued operations provided $150,000 of cash. Note
payable proceeds of $2,560,000 and sale of common stock offset this decrease
resulting in a net cash increase of $160,000 for the six months ended December
31, 2001. At December 31, 2001, the Company has a working capital deficit of
$1,160,000, including cash and cash equivalents of $1,446,000 and investments of
$1,242,000.
The Company's aviation travel service business was cash flow positive in
the current quarter. The Company expects cash flow from this business to
increase in the third quarter of fiscal 2002 when it realizes the full benefit
of its new leisure charter contract, which is projected to generate $40,000,000
in annual revenues and $1,600,000 of annual cash flow. Four (4) aircraft were in
operation under contract at December 31, 2001 and two (2) additional aircraft
will begin operating in the quarter ending March 31, 2002.
20
The Company's 35-seat telecommunication call center is currently
underutilized. The success of the telecommunication call center is dependent
upon securing service contracts with third parties. To date, DMM has been unable
to secure sufficient contracts to utilize its call center in a consistent and
profitable manner and currently none of the seats in the call center are being
utilized. However, the Company continues to pursue service contracts in an
attempt to generate revenue from its call center.
In the quarter ended September 30, 2001, the Company implemented its
national franchising program for its home technology business and sold 10
geographic markets to franchisees. During the December 2001 quarter, the Company
recognized the sale of seven of the 10 franchises sold and recorded $332,000 in
revenue from franchise sales and royalties. As a result of the franchise sales,
royalty income and cost control, the home technology business reported net
income of $7,000 in the quarter ended December 2001. In the last two quarters of
fiscal 2002 the Company will continue to pursue sales and start-up of new
franchises, addition of new builder relationships, new products and commercial
work in owned markets while maintaining its focus on cost control and margin
improvement.
In fiscal 2002, the Company has proceeded with the development of its
Internet/technology solutions business through the expansion of its products,
services and its sales force while reducing its operating expenses. The
Company's Internet/Technology solutions business has reduced its loss from
operations in the last three (3) months by half to $168,000 and the Company
expects these improvements in operating results to continue through higher
revenue and cost control.
Also, the Company's corporate expense in the current six months decreased
from a year ago due to the issuance of fewer stock options and warrants, staff
reductions and other costs saving measures. The Company expects to realize
additional corporate savings during the last two quarters of fiscal 2002.
In addition to the operational improvements discussed above, the Company in
December, 2001 obtained an $800,000 term loan and commenced a $1,000,000 private
placement sale of Common Stock of which the Company received $250,000 in
December 2001 and $320,000 in January and February 2002 and expects to receive
the remaining $430,000 on or before March 31, 2002. The Company continues to
actively pursue debt and equity financing alternatives to provide additional
cash to support operations. The Company believes its existing balances of cash
and cash equivalents and investments combined with operating cash flows and the
proceeds from the private placement sale of Common Stock will be sufficient to
meet working capital and capital expenditure requirements of our continuing
operations. The Company may need additional debt or equity financing depending
upon its ability to grow its businesses or improve cash flow from operations.
There can be no assurance that additional financing will beavailable when needed
or, if available, that it will be on terms favorable to the Company and its
stockholders. If the Company is not successful in generating sufficient cash
flow from operations, or in raising additional capital when required in
sufficient amounts and on terms acceptable to the Company, these failures would
have a material adverse effect on the Company's business, results of operations
and financial condition. If additional funds are raised through the issuance of
equity securities, the percentage ownership of its then-current stockholders
would be diluted.
The Company's business, results of operations, and financial condition are
subject to many risks. In addition, statements in this quarterly 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
"expects", "intends", "believes", "may", "will" 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, including the Company's Annual
Report on Form 10-KSB filed on October 4, 2001.
21
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company and its subsidiaries are involved from time to time in various
claims and legal actions in the ordinary course of business. In the opinion of
management, the Company and its subsidiaries are not party to any legal
proceedings, the adverse outcome of which, would have any material adverse
effect on the Company's business, its assets, or results of operations.
ITEM 2. CHANGES IN SECURITIES
Since July 1, 2001, the Company has issued 7,503,417 shares of restricted
Common Stock in connection with the following transactions:
(i)In July 2001, the Company issued 975,556 shares of restricted Common
Stock in connection with the acquisition of a home technology business
located in Atlanta, Georgia.
(ii) In September 2001, the Company issued 11,428 shares of restricted
Common Stock from treasury stock in exchange for legal services
rendered to the Company;
(iii)In October 2001, the Company issued 20,834 shares of restricted Common
Stock to former shareholders of Logisoft in exchange for Logisoft
reaching certain performance criteria set forth in the purchase
agreement governing the Company's acquisition of Logisoft;
(iv) In December 2001, the Company issued 129,630 shares of restricted
Common Stock in exchange for investor relations services rendered to
the Company;
(v) In December 2001, the Company issued 100,000 shares of restricted
Common Stock in exchange for legal services rendered to the Company;
(vi) In December 2001, the Company issued 500,000 shares of restricted
Common Stock as a loan origination fee;
(vii) In December 2001, the Company issued 65,969 shares of restricted Common
Stock to an employee as reimbursement of general and administrative
expenses; and
(viii) In December 2001, January 2002 and to February 14, 2002, the Company
issued an aggregate of 5,700,000 shares of restricted Common Stock in
connection with a private placement sale of Common Stock.
The securities issued in connection with the Company's acquisition of
Logisoft, the home technology businesses and the private placement sale
of Common Stock referenced above were issued without registration under the
Securities Act in reliance upon the exemption in Regulation D promulgated
under Section 4(2) of the Securities Act. The Company based such reliance on
factual representations made to the Company by the recipients of such securities
as to such recipients' investment intent and sophistication, among other things.
The securities issued in connection with the legal services, investor
services, loan fees and other general and administrative services rendered to
the Company were issued without registration under the Securities Act in
reliance upon Section 4(2) of the Securities Act. The Company based such
reliance on representations made to the Company by the recipient of such
securities as to such recipient's investment intent and sophistication, among
other things.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
2.1 Stock Purchase Agreement between the Company and
the majority of the stockholders of LST
(incorporated by reference to Exhibit 2.1 to the
Company's Current Report on Form 8-K filed on Form
8-K filed on April 18, 2001).
2.2 Stock Purchase Agreement dated as of March 16, 2001
between the Company and Glenn Barrett, Jr.
(incorporated by reference to Exhibit 2.2 to the
Company's Current Report on Form 8-K filed on April
18, 2001).
2.3 Stock Purchase Agreement dated as of March 31, 2001
between the Company and Brandon Holdings, Inc.
(incorporated by reference to Exhibit 2.3 to the
Company's Current Report on Form 8-K filed on April
18, 2001).
2.4 Agreement and Plan of Merger dated as of June 5,
2001 between the Company, Logisoft Acquisition
Corporation and the individuals listed on Exhibit A
thereto (the "Logisoft Merger Agreement")
(incorporated by reference to Exhibit 2.1 the
Company's Current Report on Form 8-K filed on June
13, 2001).
2.5 Joinder to the Logisoft Merger Agreement executed
by Logisoft (incorporated by reference to Exhibit
2.2 to the Company's Current Report on Form 8-K
filed on June 13, 2001).
2.6 Asset Purchase Agreement dated as of June 20, 2001,
by and among Greater Atlanta Alarm Services, Inc.,
the Company, a wholly-owned subsidiary of the
Company, Glenda Watson and David Watson
(incorporated by reference to Exhibit 2.1 to the
Company's Current Report on Form 8-K filed on
August 14, 2001).
2.7 Stock Purchase Agreement dated as of May 15, 2001
between the Company and Brikor, Inc. (incorporated
by reference to Exhibit 2.1 to the Company's
Current Report on Form 8-K filed on September 17,
2001).
(b) Financial Reports on Form 8-K
The Company has filed the following reports on Form 8-K and
8-K/A with the SEC since September 30 , 2001:
(i) The Company filed a Current Report on Form
8-K/A with the SEC on October 19, 2001 amending
Item 7 of the Commercial Real Estate 8-K to set
forth the pro forma financial information of
the Company as of June 30, 2001.
(ii) The Company filed a Current Report on Form 8-K
with the SEC on February 7, 2002 reporting
under Item 4 of such report the change in the
Company's certifying accountant .
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SIGNATURE
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
eResource Capital Group, Inc.
Date: February 14, 2002 By: /s/ William L. Wortman
----------------------
William L. Wortman
Vice President, Treasurer
Chief Financial Officer
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Exhibit Index
2.1 Stock Purchase Agreement between the Company and
the majority of the stockholders of LST
(incorporated by reference to Exhibit 2.1 to the
Company's Current Report on Form 8-K filed on Form
8-K filed on April 18, 2001).
2.2 Stock Purchase Agreement dated as of March 16, 2001
between the Company and Glenn Barrett, Jr.
(incorporated by reference to Exhibit 2.2 to the
Company's Current Report on Form 8-K filed on April
18, 2001).
2.3 Stock Purchase Agreement dated as of March 31, 2001
between the Company and Brandon Holdings, Inc.
(incorporated by reference to Exhibit 2.3 to the
Company's Current Report on Form 8-K filed on April
18, 2001).
2.4 Agreement and Plan of Merger dated as of June 5,
2001 between the Company, Logisoft Acquisition
Corporation and the individuals listed on Exhibit A
thereto (the "Logisoft Merger Agreement")
(incorporated by reference to Exhibit 2.1 the
Company's Current Report on Form 8-K filed on June
13, 2001).
2.5 Joinder to the Logisoft Merger Agreement executed
by Logisoft (incorporated by reference to Exhibit
2.2 to the Company's Current Report on Form 8-K
filed on June 13, 2001).
2.6 Asset Purchase Agreement dated as of June 20, 2001,
by and among Greater Atlanta Alarm Services, Inc.,
the Company, a wholly-owned subsidiary of the
Company, Glenda Watson and David Watson
(incorporated by reference to Exhibit 2.1 to the
Company's Current Report on Form 8-K filed on
August 14, 2001).
2.7 Stock Purchase Agreement dated as of May 15, 2001
between the Company and Brikor, Inc. (incorporated
by reference to Exhibit 2.1 to the Company's
Current Report on Form 8-K filed on September 17,
2001).
25